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Keeping the (good) faith: duty of good faith implied into an oral joint venture

Sophie Nettleton

The High Court (Leggatt LJ) has implied a duty of good faith into an oral joint venture, which it has classified as a “relational contract”. Building upon his use of the term in Yam Seng, Leggatt LJ defined a “relational contract” as one where “the parties are committed to collaborating with each other… in ways which respect the spirit and objectives of their venture”. The joint venture contract in Al Nehayan v Kent was oral: being personal friends, the joint venturers did not take the time to agree the express terms, and were instead content to proceed informally.

This trust and reliance caused the court to classify the contract as “relational”, and accordingly as requiring a duty of good faith to be implied to give effect to the parties’ reasonable expectations. The court did not elaborate on how, on the facts, the stringent test of necessity in Marks & Spencer v BNPP had been met. Moreover, Leggatt LJ also held (obiter) that, he would have reached the same conclusion on the basis that the nature of the contract, as a “relational contract”, itself implicitly requires an obligation of good faith.

It remains to be seen how much of Al Nehayan v Kent will be tightly confined to its facts: parties with a very personal relationship and/or how clearly one party falls short of acting in good faith. Judicial treatment of the decision will be of practical importance for any parties who wish to know the scope of any implied duty of good faith in potentially “relational” contracts. Leggatt LJ himself noted it is “perhaps impossible” to exhaustively describe what this obligation involves. To reduce the risk of such considerations, parties should be sure to record their agreement in writing and give thought to contingencies and exit mechanics.

Comments published on Compact Contract do not necessarily reflect the views of Allen & Overy or its clients.

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