Good Faith Obligations ' Context Is Everything

• Published date: 08 November 2022
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Corporate and Company Law, Trials & Appeals & Compensation, Shareholders
• Law Firm: Gowling WLG
• Author: Mr Sean Adams, Emma Carr and Christopher Richards

In a judgment with potentially far-reaching implications, the Court of Appeal has given a restrictive reading of the scope of an express duty of good faith in a shareholders' agreement. In doing so, it reiterated that such clauses must be read in their context, and discouraged attempts to define a set of minimum standards applicable to all good faith clauses. We look at what this means for good faith under English law.

Good faith under English law

Unlike in many civil law systems, there is no general doctrine of good faith in English contract law. A duty of good faith will be implied into certain categories of contracts, such as insurance, employment and partnership contracts. The courts have also implied a duty of good faith in so-called 'relational' commercial contracts - typically those where the parties enter into a long-term relationship, such as joint venture, distribution or franchise agreements. However, the Court of Appeal has previously discouraged judges from looking for "some 'general organising principle' [of good faith] drawn from cases of different kinds", preferring instead to continue developing "piecemeal solutions in response to demonstrated problems of unfairness". While the court will not imply a duty of good faith into a commercial contract lightly, parties are free to include express obligations of good faith in their contracts - but in the event of dispute, it is likely to fall to the courts to determine the scope of that clause, as happened in Compound Photonics Group Ltd, Re [2022] EWCA Civ 1371.

The clause in dispute

In this case, minority shareholders brought a petition under s.994 Companies Act 2006. The minority claimed that they had been unfairly prejudiced by the majority investors' actions, which led to the removal and resignation of two key directors - the company's CEO and chairman. The minority claimed that the intent of the company's constitution was that these personnel should have been effectively entrenched as permanent directors, that the majority investors had signed up to that bargain and that the removal of the directors constituted a breach of the good faith obligation in the shareholders' agreement. That clause provided: "Each Shareholder undertakes to the other Shareholders and the Company that it will at all times act in good faith in all dealings with the other Shareholders and with the Company in relation to the matters contained in this Agreement".

At trial, the judge agreed with the minority...