No Implied Duty of Good Faith and Fair Dealing in Commercial Contract
In Flynn v Breccia the Court of Appeal overturned a High Court ruling that there was a general principle of good faith in Irish commercial contract law.
Haughton J in the High Court had held that there was an implied duty of good faith and fair dealing in a shareholders' agreement relating to the Blackrock Clinic. This was the first time an Irish court implied a general duty of good faith into a commercial contract. However, the Court of Appeal held that the shareholders' agreement in question was not an agreement of a type to which any general duty of good faith applies.
Breccia, a shareholder in Blackrock Clinic, acquired the loans, which were long overdue for repayment, of another shareholder, Benray Limited. Benray's loans were secured on its shareholding in Blackrock. All of the shareholders in Blackrock had provided cross-security for Benray's loans such that the continued failure by Benray to repay its loans could have resulted in the enforced sale of all of their shares in Blackrock. Breccia made demand of Benray for repayment, and when Benray failed to discharge the demand, appointed a receiver to Benray's shareholding in Blackrock. Benray sought to restrain Breccia and the receiver from selling its shareholding on a number of grounds, including, that there were implied terms in the shareholders' agreement that (i) each of the shareholders owed each other a duty of good faith and fair dealing; and / or, (ii) they would not take any step which would cause any other shareholder's shares to be sold other than in accordance with the shareholders' agreement.
The High Court agreed to imply a duty of good faith and fair dealing into the shareholders' agreement.
Court of Appeal
On appeal, the Court of Appeal applying well-established principles of contractual interpretation to the shareholders' agreement made three primary findings:
- The shareholders' agreement did not include an implied term that the parties owe each other mutual general duties of good faith and fair dealing.
- The trial judge's interpretation of the shareholders' agreement as limiting a shareholder's right to recover outstanding loan monies, pursuant to another shareholder's loan which had been validly assigned to it could not be upheld.
- The relationship between the shareholders was purely commercial and that the shareholders' agreement did not constitute a "relational contract".
In the High Court, the trial judge had found that the relationship between the shareholders was not purely commercial and that the shareholders' agreement constituted a "relational contract". On that basis, Haughton J. held that it was appropriate to follow what he described as "the ground breaking judgment …in Yam Seng Pte Limited v International Trade Corporation", in which the English High Court held that a duty of good faith and fair dealing could be implied into 'relational contracts' and he implied a duty of good faith and fair dealing into the shareholders' agreement.
Finlay Geoghegan J. disagreed with the trial judge. In her view, the shareholders' agreement was commercial in nature and it expressly included a "no partnership" clause. The judge held that the shareholders' agreement was not the type of contract to which any general duty of good faith applied in accordance with established Irish authority.
Additionally, even if Yam Seng were to be followed in this jurisdiction – which the judge stated she was not deciding – the conditions necessary to imply terms into a commercial contract did not exist in this case so there was no basis for implying a duty of good faith and fair dealing into the shareholders' agreement.
The judgment noted that Irish contract law does not recognise a general principle of good faith and fair dealing, although there are certain, limited categories of contractual relationships which imply a duty of good faith, such as partnerships and in relation to insurance contracts.
The case confirms that a shareholder's agreement or any commercial agreement (save for partnerships and in relation to insurance contracts) should not be construed to impose duties of good faith and fair dealing on the parties.
The controversial High Court decision which had raised the possibility that all commercial contracts had an implied term of fair dealing has been firmly rejected by the Court of Appeal which will bring a welcome measure of certainty for practitioners within the commercial space.
For further information please contact Ciaran Joyce or your usual contact in A&L Goodbody.
Date Published: 21 March 2017