Last year a joint venture between friends was held to be subject to an implied duty of good faith. This duty, said the High Court, required the parties to work with greater mutual trust than would be the case for an ordinary contractual bargain. The parties were entitled to expect greater candour and co-operation than would be the case when contracting at arm's length.
The parties had entered into a joint venture to develop and run luxury hotels in Greece. One, a member of the Royal Family of Abu Dhabi, provided the majority of the investment. The other, a Greek businessman, provided the rest of the financing and ran the business. The two men became great friends. However, the business ran into financial difficulties and the parties entered into a demerger agreement and a promissory note.
This action saw the investor claim for money allegedly owed under these two documents. By way of counterclaim, the businessman argued (amongst other things) that the investor's behaviour had breached a fiduciary duty which was owed to him and/or had breached an implied contractual duty of good faith.
The court held that the joint venture contract was a classic “relational” contract giving rise to a duty of good faith and that it satisfied the “business necessity” test needed in order to imply this term into a contract. It is important to appreciate that not all joint ventures would be deemed “relational” contracts. In this case the parties were friends entering into a long term collaboration in which their interests were interlinked. Their collaboration involved greater mutual trust than in an ordinary contractual bargain and they could expect greater candour and co-operation than would be the case when contracting at arm's length. The investor had breached his duty of good faith when he tried to sell his part of the business to a third party covertly. Using his position as a shareholder to obtain a financial benefit at the expense of the businessman also breached this duty.
The businessman had less success arguing that the investor owed him a fiduciary duty. It is exceptional for such duties to arise outside of well-established fiduciary relationships. Typically where the relationship is fiduciary one party undertakes to, and is entrusted with authority to, manage the property or affairs of another and make decisions on behalf of that other (eg. an agent). Conversely the Greek joint venture relationship was a commercial one, albeit one that was subject to good faith.
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