We have been asked to advise our clients and colleagues on numerous recent occasions whether a commercial contract can be terminated because of a breakdown of trust and confidence. Unfortunately, for all of those who sought that advice, the answer is no. Two recent English cases have confirmed that the courts will not generally imply a duty of mutual trust and confidence into commercial contracts. While such a term is implied into employment contracts, the courts have held that there is no justification for extending this to other types of commercial contract.
Chelsfield Advisers LLP v Qatari Diar Real Estate Investment Company
In Chelsfield Advisers LLP v Qatari Diar Real Estate Investment Company (a summary judgment application in the Chancery Division), the court refused to imply a term into a fees agreement, in circumstances where the parties had subsequently failed to conclude a management agreement for the US embassy site at Grosvenor Square, to the effect that the fees agreement would continue in existence only for so long as a relationship of mutual trust and confidence existed between the parties.
The fees agreement provided that the parties would enter into a subsequent agreement for the provision of development management services in relation to the property and would develop it, and provided for various fees to be paid to the claimant for services. It also provided that in the event that the terms of the development agreement could not be agreed within five months, they would be determined by an expert.
In this case, the defendant had given notice to terminate the fees agreement based on the fact that it had lost trust and confidence in the claimant’s ability to deliver under the agreements. The claimant sought:
- A declaration that the fees agreement remained in existence.
- Orders to the effect that the terms of the development agreement should be determined by an expert.
- Damages.
Richard Spearman QC said at paragraph 62 of his judgment that it was not appropriate to imply such a term in this case, where:
- The contract was not a class of contract in respect of which any such implication has previously been recognised (most of the case law referred to concerned employment contracts).
- The implication of such a term in this case did not depend on one party conducting itself in breach of any implied promissory obligation (the claimant had not breached any specific express or implied term of the fees agreement), and implying such a term would give rise to a right to terminate the contract not on the basis of any objective criteria, but instead on the subjective basis that the other party genuinely considered that trust and confidence had broken down.
Mr H TV Ltd v ITV2 Ltd
This judgment was subsequently applied in the Commercial Court in Mr H TV Ltd (formerly known as Can Associates TV Ltd) v ITV2 Ltd, where the court held that the defendant, ITV2 had wrongfully terminated an agreement with a production company for the production of a reality television show featuring Peter Andre, after the sole director and shareholder of the claimant production company, Mr Hendricks, had made various tweets about Mr Andre. ITV2 terminated the production agreement on the basis that the claimant, through Mr Hendricks, had breached an “implied term” to not act in a way which would damage the production company’s relationship of trust and confidence with Peter Andre.
The court said that it was “striking” that ITV2 was not arguing for such a term to be implied as between the parties. The court further commented, at paragraph 43 of the judgment, that even where the alleged implied term of trust and confidence was said to arise between the parties to the contract, there has been a reluctance to permit this type of implied term in a commercial contract other than where there is a “clear lacuna”, as the parties have taken the trouble to spell out precise and detailed terms which govern their contractual relationship, and therefore should not be subjected by implication to broad and imprecise contractual terms.
Limiting the concept of “good faith”?
These cases appear to be an example of the courts imposing limits on the application of the concept of “good faith” being applied to commercial relationships. The approach of the courts in both cases supports the view that sophisticated commercial parties will generally spell out the terms that they wish to be included within their business contracts, and therefore the court should be reluctant to impose additional terms, particularly where these are couched in fairly general, highly subjective and unspecific terms.
