London Calling ... Good faith – not without boundaries

Good faith – not without boundaries

Background

The Respondents (minority shareholders) argued that that they had been unfairly prejudiced when 2 directors were forced to resign. At first instance, the judge found that the shareholders' agreement and Company's articles amounted to a "constitutional settlement" reached between the shareholders under which 2 individuals were entrenched in office as directors so that if the majority shareholders voted in favour of removing the directors this would be a breach of contract.

The Appellants (majority shareholders) argued that the High Court interpreted the “good faith” clause in the shareholders’ agreement too widely and that the good faith clause did not impose upon them any duties of procedural fairness or require them to take into account the interests of the minority shareholders when deciding how to exercise their right to vote as majority shareholders.

Decision

The CA decided in favour of the Appellants / majority shareholders and adopted a more restrictive interpretation of good faith than the list of "minimum standards" previously discussed by the High Court in Unwin v Bond.

Central to the CA's view of good faith was that an express clause in a contract requiring a party to act in “good faith” must take its meaning from the context in which it is used. Casting doubt on an easy to use list of applicable "minimum standards" for good faith, the court stated that:

"the core meaning of an obligation of good faith is an obligation to act honestly, [but] it is very far from obvious why it is logical or appropriate to attempt to analyse other cases, decided on other facts, in order to deduce a number of further “minimum standards” of conduct that a defendant must be taken to have agreed to comply with in every case in which a good faith clause has been used in a contract… 

apart from the “core” duty of honesty and (depending on the context) a duty not to engage in conduct that could be characterised as bad faith, any further requirements of an express duty of good faith must be capable of being derived as a matter of interpretation or implication from the other terms of the contract in issue in the particular case."

Among other issues, for the case being considered, the court did not consider that a duty of good faith included broad duties of fair/open dealing which added anything to the statutory regime regarding removal of a director.

In the circumstances the court considered that the conduct of the Appellants did not unfairly prejudice the Respondents. 

 Comment

This is an important case which determined that duties of good faith must be carefully considered in the context of the contract as a whole. If the duty of good faith is important to a party, it should carefully set out in the contract what such duties involve.

Mark Faulkner et al v Vollin Holdings Limited et al [2022] EWCA Civ 1371