Updated: Jul 30, 2020
Fiduciary duties and implied duties of good faith, when is it applicable?
In a recent High Court decision, it looked at the relationship between director-shareholders in a property joint venture ("JV"). It was held that the parties to a property joint venture did not owe each other a general obligation to act in good faith, whether express or implied. A duty of good faith between joint ventures is generally not implied and the case illustrates the dangers of dealing with questions of good faith and to take this into consideration in the JV agreement.
The case involved a property joint venture that was established in 2011 by 4 individuals to develop properties. The partners entered into a joint venture agreement which obliged them to act with good faith towards each other. The JV took the form of a UK company which each individual was a director, each of them held 25% of the shares.
The joint venture developed two sites and identified a third opportunity when in 2013 relations between the directors turned sour and the Claimant sought to leave. It was agreed that a settlement deed would be drawn up and under the terms of the deed the Claimant was to retain an interest in the two property developments that were underway and the price that he received for his shares in the JV to reflect this.
Shortly after the deed was executed, the Defendants entered into a lucrative development project that the Claimant was not aware of or provided him with an opportunity to participate in, matters quickly escalated to court proceedings.
The Claimant claimed he was wrongfully excluded by the dishonest actions of the other parties and the claim alleged;
· Breach of fiduciary duty
· Breach of express/implied terms of the joint venture agreement
· Fraudulent non-disclosure
· Unlawful means of conspiracy
For the Claimant to succeed the following needed to be demonstrated;
(a) The existence of duties of good faith and disclosure prior 31 March 2014
(b) The duties continued between 31st March and 1st July 2014
(c) The Defendants knew they were subject to such duties
(d) The failure to disclose the third project transaction during the period in breach of those duties was dishonest and;
(e) Had the Claimant been informed of the third project he would not have entered into the Settlement Deed.
The Claims all failed.
The Judge (Falk J), found that the relationship between the parties was one that they treated as a partnership, recomposing complete trust and confidence in one another. The Judgement found there was no breach of contractual or other duties, conspiracy to injure by unlawful means and no fraudulent non-disclosure or failure to correct a misunderstanding.
The following points were interesting from the judgement;
1. Fiduciary duties
Falk J rejected the argument that the joint venture agreement gave rise to fiduciary duties in nature as fiduciary duties arise other than in certain settled categories of relationship, one of which is partnerships, however the parties in this case were not partners but shareholders.
2. Implied duty of faith
Based on the terms of the Joint Venture agreement the Judge did not accept that any of the terms imposed obligations on the Defendants to the Claimant and agreed with earlier authority that rather than trying to identify whether the contract was a ‘relational contract’ the better test was the application of the conventional tests for the implication of contractual terms [Marks and Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd and another  AC 742 (“Marks and Spencer”).
3. Comprehensive release
The terms of the Settlement Deed contained a comprehensive release, replacing the Claimant’s existing rights with the terms of the Settlement Deed. Once the Settlement Deed was entered into the Claimant was obliged to proceed to completion, if he had been induced to enter by fraudulent misrepresentation or non-disclosure, he could seek rescission, but no subsequent misrepresentation or non-disclosure would be relevant 
The Judge applied a two stage test confirmed in Ivey v Genting Casinos (UK) Ltd  AC 39 at  in order to establish dishonesty the first stage is to determine the actual state of the individuals knowledge or belief as to the facts. The second stage is to determine whether the individual’s conduct was honest or dishonest by reference to the (objective) standards of ordinary decent people.
In this case, Faulk J confirmed the test failed at the first stage since there was no awareness of any duty to disclose .
How does the Judgement impact future Joint Venture Agreements?
Generally, in constructing commercial terms, the courts are interested in giving effect to express terms within the agreement. The courts have occasionally been prepared to imply a duty of good faith in specific circumstances such as ‘relational contracts’, however these are limited in scope.
The Courts will continue take a restrictive, non-intrusive approach and will apply the tests as per the case above and the facts of each case
Under English law the position is;
· There is no doctrine of good faith in English law
· The courts will only imply a duty of good faith into specific relational contracts and
· The terms of the contract including duty of good faith are commercially and practically coherent with the rest of the agreement.
How can Serenity Law Support You?
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