There is generally no implied duty of good faith in a joint venture (JV) agreement arising by default, the High Court has held

(Russell v Cartwright & Ors [2020] EWHC 41 (Ch))

For a duty of good faith to be implied into a contract, the applicable test is the same as for the implication of any essential term into a contract:

• It must be necessary to give business efficacy to the contract (i.e. without it, the contract would lack commercial or practical coherence) or that its need for inclusion is so obvious that it “goes without saying”.
• It must be capable of clear expression.
• It must not contradict any express term of the contract.
• Reasonable parties would have agreed that the term was needed.
• It must pass the officious bystander test: if an officious bystander suggested to the parties that they include the term in the contract, they would respond "oh of course".

Generally, in construing contractual terms, the courts are interested in giving effect to the express terms; they tend to avoid being unnecessarily intrusive. 

The courts have, occasionally, been prepared to imply a duty of good faith in very specific circumstances. These include "relational contracts", involving longer-term relationships with substantial commitments, a high degree of communication and co-operation and predictable performance based on mutual trust, confidence and loyalty. However, these scenarios are limited in scope.

The default position remains that: 

• There is no general doctrine of good faith in English law; 
• The courts will only imply a duty to act in good faith into specific kinds of relational contract (such as employment contracts and contracts between parties with a fiduciary relationship) - and only where it satisfies the requirements for implied terms, set out above; and
• In any case, a term (including a duty to act in good faith) will only be implied into a contract to fill in gaps, where the contract would otherwise be commercially or practically incoherent.

Key facts

The case involved a JV company established by 4 individuals to develop properties in London. Each individual was a director and 25% shareholder of the JV company.

The individuals entered into a JV agreement which regulated the affairs of the JV. 

The JV company acquired two sites and had identified a third opportunity. However, relations with one of the individuals (C) and the others began to sour, which ultimately resulted in C offering to resign from the JV.

The terms of C's exit were then discussed. They included that C would retain an interest in the 2 ongoing projects and receive fees if those projects enjoyed success.

Whilst the exit discussions were ongoing, the JV was engaged in discussions about a 4th investment opportunity, being the purchase of a site in Wembley. C had no knowledge of these discussions, nor of the opportunity to develop the site in Wembley. The events unfolded as follows:

• 14 July 2014 - the JV made progress toward acquiring the site in Wembley.
• 16 July 2014 - C's exit agreement was finalised and agreed.
• 22 July 2014 - the JV exchanged contracts on the purchase of the Wembley site.
• 19 August 2014 – the JV completed its purchase of the Wembley site.

The Wembley site turned out to be very lucrative for the JV, following C's exit. C found out about the site and issued a claim against the 3 other individuals. C's claim included the argument that, by failing to inform him of the Wembley opportunity, the other individuals had breached the implied duty of good faith that they owed to him.

It is worth noting that the JV agreement included express duties of good faith, such as requiring the individuals “at all times to act in good faith as regards the procurement of the business of [the JV]” and to “act in good faith with respect to each other and the [JV] with respect to” obligations not to acquire any property in competition with the JV.

Decision

The Court decided that, whilst the JV agreement contained express obligations of good faith, they were limited to specific matters, such as procuring property for the JV and not competing with the JV. Accordingly, there was no breach of any of the express duties of good faith.

As for whether a duty of good faith could be implied into the JV agreement, the Court determined this with a resounding "no". Based on the requirements for implying a term into a contract (set out above), it was not essential to imply a duty of good faith into the contract to give it business efficacy, and it was not so obvious that it would go without saying.

The Court was further persuaded by the fact that limited good faith clauses had been inserted into the contract regarding specific matters. This indicated that the parties had considered the duty of good faith and decided to impose it only in limited circumstances

Practical considerations

This follows a line of case law which reinforces that (a) there is no doctrine of good faith in English law and (b) to imply a duty of good faith (or any term), the Court will take a restrictive, non-intrusive approach and apply the same test (set out above) on the facts of each case.

Accordingly, parties should shy away from reliance on implied terms, and should not assume that a relational contract (e.g. involving a joint venture) will necessarily give rise to implied good faith obligations. Parties should instead ensure that all relevant terms and duties such as good faith are expressly included in a contract, if they are intended to be binding. Alternatively, if it is not intended that good faith should apply, the parties should expressly insert a provision into the contract which excludes the application of good faith.

Ensuring greater reliance on express terms (and that there are no perceived "gaps" in contractual drafting) will put the parties on surer footing, help avoid unnecessary disputes about each party's rights and assist decision-making as to the enforcement or non-enforcement of contractual obligations.