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Court of Appeal Confirms There is No General Duty of Good Faith in Irish Contract Law

AUTHOR(S): Tony O’Grady, Karen Reynolds
PRACTICE AREA GROUP: Commercial Litigation and Dispute Resolution, Corporate Restructuring and Insolvency, Corporate
DATE: 15.03.2017

Significance and application of decision

A recent Court of Appeal decision has restored certainty that, under Irish law, there is no general duty of good faith in the context of commercial contracts.  The decision at first instance represented a significant departure from established principles of Irish contract law which could have had significant consequences, not only for shareholders’ agreements, but other long-term commercial contractual relationships, had it not been overturned on appeal. The Court of Appeal decision has wide application and is of interest to all parties across the entire spectrum of commercial contractual arrangements. It clarifies important questions in relation to the proper approach to the interpretation of and implication of terms into a commercial contract. 

Summary

On 8 March 2017, the Court of Appeal delivered its judgment in the appeal of a High Court decision which held, amongst other things, that there was an implied duty of good faith and fair dealing in a shareholders’ agreement relating to Blackrock Clinic.  This was the first time an Irish court implied a general duty of good faith into a commercial contract.  The Court of Appeal overturned the High Court judgment, holding that the shareholders’ agreement in question was not an agreement of a type to which any general duty of good faith applies.

Dispute

Breccia, a shareholder in Blackrock Clinic, acquired the loans, which were long overdue for repayment, of another shareholder, Benray Limited. Benray's loans were secured on its shareholding in Blackrock. All of the shareholders in Blackrock had provided cross-security for Benray’s loans such that the continued failure by Benray to repay its loans could have resulted in the enforced sale of all of their shares in Blackrock.  Breccia made demand of Benray for repayment, and when Benray failed to discharge the demand, appointed a receiver to Benray’s shareholding in Blackrock.  Benray sought to restrain Breccia and the receiver from selling its shareholding on a number of grounds, including, that there were implied terms in the shareholders’ agreement that (i) each of the shareholders owed each other a duty of good faith and fair dealing; and / or, (ii) they would not take any step which would cause any other shareholder’s shares to be sold other than in accordance with the shareholders’ agreement.

The High Court held that the shareholders’ agreement should be interpreted to include such implied terms and granted Benray a permanent injunction restraining Breccia from calling in the loans and / or appointing a receiver to sell Benray’s shareholding in Blackrock.  

Court of Appeal Finding

The Court of Appeal’s main judgment applied the well-established principles of contractual interpretation to the shareholders’ agreement and ultimately finding in favour of Breccia, held that:

  • the shareholders’ agreement did not contain an implied term which restricted Breccia from calling in Benray’s loan;
  • the shareholders’ agreement did not limit a shareholder’s right to recover outstanding loan monies, pursuant to another shareholder’s loan which had been validly assigned to it;
  • the relationship between the shareholders was purely commercial and that the shareholders’ agreement did not constitute a “relational contract”; and
  • the shareholders’ agreement was not the type of contract to which any general duty of good faith applies in accordance with established Irish authority.

The Court of Appeal’s main judgment notes that Irish contract law does not recognise a general principle of good faith and fair dealing, although there are certain, limited categories of contractual relationships which imply a duty of good faith, such as partnerships and in relation to insurance contracts.   It also considers English jurisprudence which has held that a duty of good faith and fair dealing could be implied into ‘relational contracts’.  However, given the findings, it was not necessary for the Court of Appeal to decide whether the English jurisprudence should be followed in this particular case.

Conclusion

The judgment is to be welcomed by all parties involved in commercial contractual arrangements as restoring certainty that, under Irish law, there is no general duty of good faith in the context of commercial contracts. The decision provides a helpful, and welcome, reaffirmation of established principles of contractual construction in a commercial context and restores certainty in the area. The detailed reasoning of the Court of Appeal is summarised here.

The decision leaves open the possibility of a future finding by the Irish Courts that a duty of good faith and fair dealing could be implied into the limited circumstances of ‘relational contracts’.  Such a finding would, however, represent a significant development of Irish contractual law.

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