A recent High Court decision has considered the interpretation of express good faith obligations in a joint venture context. The case provides a rare example of such obligations being shown to have been breached and an even rarer example of a claim for such a breach failing for the absence of any provable loss. The principles set out in this case are likely to be of relevance in other disputes over express good faith clauses and may cause some joint venture parties to seek enhancements to express good faith obligations within their joint venture agreements.
Good faith obligations and joint venture agreements
English law does not imply obligations of good faith generally into commercial contracts, unlike many civil law systems. However, such obligations are implied into certain specific classes of contract, such as insurance contracts. There is currently a debate as to whether “relational contracts” are another such class of contract into which good faith obligations will readily be implied. Such contracts are said to be ones which “involve a longer term relationship between the parties [to] which they make a substantial commitment” (Yam Seng v ITC). In Sheikh Tahnoon v Kent, an informal joint venture was categorised by Leggatt J (now a Justice of the Supreme Court) as “a classic instance of a relational contract”. Obligations of good faith were implied as a consequence.
Although other first instance decisions have supported the implication of such terms for relational contracts, doubts have also been cast as to the strength of such a rule. In the only appellate decision commenting on the issue, in Globe Motors v TRW, the Court of Appeal commented that, “even in the case of such agreements, … the position will depend on the terms of the particular contract”, and that, “an implication of a duty of good faith will only be possible where the language of the contract, viewed against its context, permits it. It is thus not a reflection of a special rule of interpretation for this category of contract.”
Perhaps as a result of these developments, and the unsettled state of the law, many joint venture agreements now include express good faith obligations, as do many standard form contracts such as the NEC and JCT construction industry forms. As noted in Hewitt on Joint Ventures (8th Ed) the consequence is:
“it is likely that the number of claims involving good faith will continue to escalate. Many will simply be put forward as claims of last resort in disputes when specific provisions in the contract do not assist. Yet, good faith and fair dealing are concepts that at root seem entirely appropriate to very many joint venture relationships and their application in this area will continue to be ripe for further judicial analysis and development.”
This Law-Now considers a recent example of just such a case where express good faith obligations in a joint venture were found to have been breached.
Matière SAS v ABM Precast Solutions
Matière and ABM formed a joint venture to bid for sub-contract work in relation to the High-Speed 2 rail project (“HS2”). The work was for the manufacture, supply and installation of three cut-and-cover tunnels along the HS2 route. Matière was to provide design and installation services, whilst ABM would be responsible for the manufacture of the tunnels themselves. The joint venture was unincorporated and was not financially integrated, meaning that each party would take whatever profit was made on their part of the works.
Both parties entered into a Professional Services Contract (the “PSC”) with the main contractor to assist with the preparation of stage two proposals for submission to the employer. Just prior to this contract, ABM and Matière entered into a Consortium Agreement containing the following clause 3.1:
“ABM and Matière shall co-operate and collaborate with one another in accordance with the terms of this Agreement and in the course of their performance of their obligations pursuant to any associated PSC each of ABM and Matière shall act in good faith toward the other and use reasonable endeavours to forward the interests of the co-operative enterprise.”
The original proposal made by the two parties involved the construction by ABM of a bespoke factory at Scunthorpe to allow it to manufacture the pre-cast concrete required for the tunnels. ABM’s existing factory was not big enough to accommodate the proposed work and the construction of a new factory was part of its broader business expansion plans.
The main contractor expressed concerns to Matière over the proposal for the Scunthorpe factory, citing cost implications, but later also expressed concerns about ABM as a contracting party. The main contractor wished to maintain Matière’s role on the project, however. Matière then began working with the main contractor on two strategies. The first, “Plan B”, was to reduce the scope of ABM’s work by producing the pre-cast concrete at other sites. The second, “Plan C”, was to replace ABM entirely.
Matière worked on these two strategies without ABM’s knowledge. As part of Plan B, it attempted to persuade ABM to abandon the Scunthorpe factory proposal. ABM was unwilling to compromise over the factory plans and ultimately the main contractor terminated the PSC. Matière entered into a new PSC with the main contractor on its own the following month.
ABM claimed that Matière’s conduct in pursuing Plans B and C without ABM’s knowledge was a breach of the good faith obligations in clause 3.1 of the Consortium Agreement.
The express good faith obligations
The court emphasised the heavily contextual nature of good faith clauses and summarised the following principles of interpretation from previous cases:
- The core meaning of a duty of good faith is to act honestly. However, bad faith may include conduct which would be regarded as commercially unacceptable to reasonable and honest people, even if not necessarily dishonest.
- The content of the duty is heavily conditioned by its context. When considering the interpretation of an express good faith clause in context, cases from other areas of law and commerce turning on their own particular facts may be of limited value and should be treated with considerable caution.
- An obligation of good faith might comprehend fidelity to the bargain between the parties or adherence to the spirit of the agreement where the common purpose and aims of the parties could be objectively ascertained from the express or implied terms of the contract. In such cases, the obligation might be said to prohibit a “cynical resort to the black letter” or conduct which “undermines the bargain entered or the substance of the contractual benefit bargained for”.
The court considered that all three of the above good faith manifestations were included within clause 3.1:
“I am satisfied that Clause 3.1 contained a requirement that each of ABM and Matière would act honestly with each other and would not conduct themselves in a manner which would be regarded as commercially unacceptable to reasonable and honest people. I am also satisfied that this is a contract in which the obligation includes keeping fidelity to the bargain. That is because the common purpose and aim of the parties is apparent from the other terms of the contract, namely the requirement to submit a joint bid to [the main contractor] that formed part of the overall Services and which complied with the terms of the PSC.”
The court also rejected a submission that merely acting in self-interest or without fidelity to the bargain would not amount to a breach of the obligation unless the effect was to undermine or substantially reduce the value of the contract. In the court’s view:
“in circumstances where fidelity to the bargain, or adherence to the spirit of the agreement, falls within the ambit of the good faith obligation, a relevant consideration may be whether the action complained of might, at the time, be expected to render the contract worthless or less valuable. Consideration of the subsequent actual effect would not be material to the question of breach.”
The court accepted a separate submission by Matière that the scope of clause 3.1 was limited to the performance of the parties’ obligations under the PSC and did not extend to the entire collaboration over the project. However, this did not mean that the process of negotiation and bid preparation as between the parties and with the main contractor fell outside the clause. Such activities were indistinguishable from the preparation of the stage two proposals required by the PSC.
Breach upheld but no loss proved
Although Plans B and C had been instigated by the main contractor, Matière was nevertheless held to be in breach of its good faith obligations in actively co-operating, without ABM’s knowledge, in those strategies. The court considered that Matière’s conduct was either dishonest or was of a type that would be regarded as commercially unacceptable to reasonable and honest people. The court also found that Matière did not keep fidelity to its bargain with ABM and that its actions had the potential to render that bargain worthless or significantly less valuable.
Although successful on breach, ABM’s claim failed on causation. ABM had claimed for the loss of a chance that the joint venture would have secured a sub-contract with the main contractor. Whilst the joint venture had a reasonable chance of such work at the point the PSC had been entered into, those chances became non-existent in the lead up to the termination letter for reasons other than Matière’s breach. In particular, the main contractor was the moving force behind Plans B and C and Matière had merely been doing its bidding in the hope of retaining a unilateral sub-contract in the event the joint venture was not awarded the work. Various other factors mentioned in the termination letter also meant that the main contractor was unlikely to have proceeded with the joint venture. ABM also appeared to have been unable to fund the construction of the Scunthorpe factory in any event.
Conclusions
This decision provides a helpful analysis of the approach to be taken to the interpretation of express good faith obligations and provides a rare example of a breach of such a clause being upheld. The decision illustrates the complex issues which often beset such claims. In particular:
- The relevance of implied terms. Whilst not an issue which arose in this case, the existence of express good faith obligations may not always rule out the application of implied good faith obligations. One previous case (Sheikh Tahnoon v Kent) has suggested that implied good faith obligations in joint venture agreements may arise “in law”. Terms implied in law do not depend on a case-by-case analysis and can apply to fill any gaps left by express terms covering the same ground. Whether this suggestion is followed in subsequent cases remains to be seen.
- The extent of the express good faith obligations. In this case, the obligations were held to be limited to a sub-set of the parties’ overall commercial relationship (i.e. the performance of obligations under the PSC).
- The content of the good faith obligations. Do they merely require honesty or do they also prohibit behaviour commercially unacceptable to reasonable and honest people? Do they go further and require fidelity to the bargain?
- Do the facts support an allegation of breach? Allegations of a breach of good faith usually require a broad assessment of events often over many years. The court’s analysis of the relevant facts in this case extended over 172 paragraphs.
- Has the breach caused any loss? As this case demonstrates, proving a breach of good faith does not automatically provide a remedy. Proving loss will often require a claimant to engage in complex counter-factual exercises designed to establish the chances of certain outcomes occurring in the absence of the breach. However, a breach of good faith within a joint venture setting rarely occurs without events first putting strain on the commercial relationship. These events may have been likely to prevent the venture from being successful regardless of any breach of good faith.
Matière appears to have been faced with a difficult decision in this case. It had committed itself to a joint venture partner who became unwilling to compromise over the initial joint venture proposals despite mounting evidence that those proposals would not be accepted. Faced with pressure from the main contractor, Matière faced the choice of complying with its good faith obligations and in all likelihood losing any chance of work from the main contractor in relation to the project. Alternatively, it could act to preserve its relationship with the main contractor by breaching its good faith obligations toward its joint venture partner. Ultimately, Matière’s decision to breach good faith appears to have been commercially prudent. It was able to continuing working with the main contractor and successfully defended a claim from its joint venture partner.
The outcome in this case may cause joint venture parties to consider strengthening good faith clauses within their joint venture agreements to avoid situations where one of the joint venture partners finds itself commercially incentivised to act in bad faith. Careful drafting will be needed if such clauses are to provide a remedy where none could be found in the present case.
References:
Yam Seng PTE Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB)
Globe Motors, Inc v TRW Lucas Varity Electric Steering Ltd [2016] EWCA Civ 396
Sheikh Tahnoon Bin Saeed Bin Shakhboot Al Nehayan v Kent [2018] EWHC 333 (Comm)
Matière SAS v ABM Precast Solutions Ltd [2025] EWHC 1434 (TCC)
