In a recent High Court case involving, amongst other things, a claim for breach of a shareholders’ agreement, the trial judge held that it was appropriate to imply a duty of good faith and fair dealing in a shareholders’ agreement.
The parties were both shareholders of Blackrock Hospital Limited (BHL), the company which owns and controls the Blackrock Clinic in Dublin. The Plaintiff had taken out a loan from Anglo in order to purchase its shares in BHL. The Defendant subsequently acquired this loan from NAMA and sought to call in the loan by issuing letters of demand and appointing a receiver. The Plaintiff challenged this as an attempt by the Defendant to seize control of its stake in BHL in breach of an implied term of good faith in the shareholders’ agreement.
In recognising the existence of a duty of good faith, the judge drew heavily on the context in which the agreement came to be executed. In particular, the agreement demonstrated elements of a “relational” contract, which involves a longer term relationship and requires parties to communicate effectively and cooperate with each other in its performance.
Furthermore, while the parties themselves were businessmen, this was not a simple commercial agreement between two “hard nosed businessmen”. There were other shareholders who were first and foremost doctors, and whose motivation was a mixture of friendship, professional achievement, family investment and altruism. Although not a partnership, this was a venture that was not purely commercial but was motivated in part by other considerations.
Although its acquisition of the loan was valid, the implied term of good faith meant that the Defendant was not entitled to demand or recover monies otherwise than in accordance with the shareholders’ agreement.
This decision could have implications not just for shareholders’ agreements, but also for other long-term relational contracts, such as distribution agreements and joint ventures. The courts have generally been reluctant to imply terms into agreements negotiated between two parties at arm’s length, but this case demonstrates that a court may be willing to imply terms such as good faith and fair dealing in certain circumstances, particularly where the relationship is not purely one of business.
Contributed by Adam Synnott.
