From “Yam Seng” to Divorce: Navigating (in good faith) joint venture agreements in construction projects.1
Kelvin Teo2 and Chen Zhihui3
- Given the size, complexity and risk of large infrastructure projects, it is not uncommon for contractors, and now increasingly consultants, engineers, architects and even lawyers, to pool together in a marriage of convenience (by way of a joint venture or “JV”).
- Mutual attraction is driven by the perception that a consortium is more likely able to pool resources and complementary expertise, and thereby mitigate risk and obtain a competitive advantage.
- JVs, whether by way of incorporating a corporate structure4 or by way of a contractual arrangement between JV partners, are commonly used to tender for some of the most significant infrastructure projects in Singapore.5 Consortiums are used to carry out mega-projects in the region and in the Middle East, particularly in the nuclear, oil & gas and renewables spaces.
- The story of a JV often goes as follows:
- The JV relationship starts off rosy. Each of the parties thinks that they have a pretty good idea of their risks, responsibilities and obligations.
- Sometimes, however, the relationship hits a rough patch. This can be, if a project falls into severe delay with the risk of liquidated damages; the true cost of the project has been severely underestimated; or one or more JV partners fails to pull its weight.
- It is the beginning of the end, and lawyers are brought in to try and unwind the position and re-allocate losses.
- There is a divorce. It is then that the parties realise the full import of the terms of the JV that they signed up for.
- The doctrine of good faith, when it can be implied into a contract, and what good faith means, has come up for discussion in a line of recent English cases. The Singapore Courts have thus far rejected attempts to imply a duty of good faith into contracts governed by Singapore law, but have not backed off from applying an express duty, but the English cases may be an impetus to revisit the issue.
- In the context of a construction contract in common law jurisdictions, it has been said that it is not easy to see what the duty of good faith adds to the implied duty to cooperate6 and/or other express contractual obligations which already exist in some standard forms.7 We agree, and think that it is more in the context of a JV contractual arrangement, that questions as to good faith and what that means to the parties will arise for debate.
- This article highlights some key legal points and considerations relating to good faith, that parties may wish to pay attention to whenever a JV agreement is being considered. For convenience and ease of use, the key takeaways are summarised in bold below. Appendix A sets out what we think are key factors to look for to determine when a duty of good faith may be implied.
Express duty of good faith
- The law recognises and will generally give effect to an express duty of good faith, just like any other contractual term. However, what such a duty requires to be done, will depend on the contractual wording that the parties have chosen and the commercial context. In practice, each case will have to be resolved on its facts.
- For example, obligations to “act in utmost good faith towards each other”8 or to “co-operate with each other in good faith and … take all reasonable action as is necessary”9 have been upheld by the English Courts. This was notwithstanding a level of uncertainty as to what rights and responsibilities flow from such obligations. The courts have generally interpreted these to mean the parties have agreed to be honest and to adhere to the spirit of their deal, to observe reasonable commercial standards and standards of fair dealing; and not to withhold vital information or provide false information.
- Various standard form10 and bespoke contracts in the construction industry also contain good faith obligations, although the wording tends to vary and will need to be construed carefully on a case-by-case basis.
- Closer to home, the Singapore Court of Appeal has upheld a clause where parties had agreed to “in good faith endeavour to agree on the prevailing market rental value”11 for a leased property. The Court of Appeal explained that where there was an express obligation to act in good faith, parties ought to act with circumspection and ensure that they complied with ethical commercial standards. There was often no clear line between seeking an advantageous but legitimate position in business dealings and negotiations on the one hand, and offending the basic standards of commercial fair play on the other. Parties ought to err on the side of caution and reveal their cards openly. The Court of Appeal therefore found, on the facts of that case, that there was a breach of the duty of good faith, where one party had failed to disclose material information (in the form of valuation reports).
- In a recent English case12, an express duty to "act as stated in this contract and in the spirit of mutual trust and co-operation” was said to even require a party to “go further than the negative obligation not to do or say anything that might mislead; it would extend to a positive obligation on the part of the defendant to correct a false assumption obviously being made by the claimant.”
- Such an interpretation of good faith is consistent with a general principle of honesty that runs through the law of Singapore, where it has been said that the “function of the court is to try as far as practical experience allows, to ensure that the reasonable expectations of honest men are not disappointed.”13.
- Takeaway: If there is a clear, express duty of good faith, behave ethically and honestly, do not mislead nor lull the other party into a false belief. In good faith negotiations, this may require the disclosure of material information, or even to correct a false assumption obviously being made by the other party. However, this is unlikely to extend to a duty generally to act in good faith.14
Duty of good faith will be implied into “Relational contracts”, if the facts allow
- The position used to be that the law does not impose an implied duty to act in good faith. It was said that “[i]n many civil law systems, and perhaps in most legal systems outside the common law world, the law of obligations recognises and enforces an overriding principle that in making and carrying out contracts parties should act in good faith. … English law has, characteristically, committed itself to no such overriding principle [as good faith] but has developed piecemeal solutions in response to demonstrated problems of unfairness.”15
- The then-orthodox position was challenged in Yam Seng which held, in the context of an agreement for the distribution of aftershave, that there was “no difficulty, following the established methodology of English law for the implication of terms in fact, in implying [a duty of good faith] in any ordinary commercial contract based on the presumed intentions of the parties.”16 On the facts of that case, good faith was used to imply (in fact) a term not to knowingly provide false information on which the other would rely, as well as a duty not to undercut the other party’s prices. Particularly, in “relational” contracts or contracts which involve a longer term relationship and a substantial commitment, such as joint venture agreements, franchising agreements and long-distribution agreements, there is “an expectation that the parties will share information relevant to the performance of the contract such that a deliberate omission to disclose such information may amount to bad faith.” Legatt J then gave 6 reasons why “the traditional English hostility towards a doctrine of good faith in the performance of contracts, to the extent that it still persists, is misplaced”.17
- Yam Seng would herald a line of cases in England where a duty of good faith was implied into joint venture cases. In a more recent case involving 2 shareholders in a hotel business which ran into financial difficulties (and Legatt LJ),18 the Court held that conducting negotiations behind the other’s back to sell shareholdings to a third party whilst allowing the JV partner to believe otherwise, was a breach of an implied duty of good faith. It was found that there was a “relational” contract and good faith duties would be implied, where:
- the shareholders had intended a long-term collaboration;
- their interests were inter-linked;
- they saw themselves commercially as a partnership (even though it was not one in law);
- their collaboration was formed and conducted based on a personal friendship;
- it involved much greater mutual trust than is inherent in an ordinary contractual bargain between shareholders in a company;
- strategic decisions were taken jointly and could only be reached by consensus; and
- they did not attempt to formalise the basis of their cooperation in any written contract but were content to deal with each other entirely informally on the basis of their mutual trust and confidence that they would each pursue their common project in good faith.
- In this case, it was said also that “‘good faith’ and ‘fair dealing’ are concepts that at root seem entirely appropriate to very many joint venture relationships”. Legatt LJ held on the facts of that case the JV parties “naturally and legitimately expected of each other greater candour and cooperation and greater regard for each other’s interests than ordinary commercial parties dealing with each other at arm’s length”.
- However, in another English case19 involving a JV agreement for a property development business, the joint venture agreement contained an express term of good faith with regards only to the procurement of business. The Court held that whilst on the facts this was a “relational” contract, it would instead apply the conventional test for the implication of terms to determine whether there was a more general duty of good faith. The exercise of implying such a term was an objective one rather than one based on the parties’ subjective intentions. Applying the business efficacy and obviousness tests, and where the precise nature of the general good faith obligation could not be clearly expressed by the party, the duties of good faith were limited to the express term and there was no implied general duty of good faith.
- In a 2019 English case, it was held that “there is a specie of contracts, which are most usefully termed “relational contracts”, (which is also termed “fair dealing” in some of the cases). This means that the parties must refrain from conduct which in the relevant context would be regarded as commercially unacceptable by reasonable and honest people. An implied duty of good faith does not mean solely that the parties must be honest.”. The case then went on to say that there is no general duty of good faith in all commercial contracts, but that such a duty could be implied into relational contracts, where it was in accordance with the presumed intention of the parties. It noted that whether any contract is relational is heavily dependent upon context, and listed 9 characteristics (see Appendix A) that may be used to determine whether a contract is relational.
- The law in England thus appears to have moved closer towards recognising a general implied duty of good faith in “relational” contracts such as JV agreements, although it would still turn on the specific context and facts. It is likely that the 2019 English case will be relied upon by any party seeking to establish on the facts that an implied duty of good faith exists.
- The position under Singapore law since 200920 however has been that there is no general duty of good faith implied at law, and certainly no ‘across the board’ implied duty of good faith for JV agreements. That said, it is possible that such a duty may be implied on the facts of a specific case. The Singapore Court of Appeal21 has more recently reiterated this position. It also commented that the English position was really not that different from the Singapore position, and that the law in this sphere “continues to be in a state of flux”.
- The Singapore Court of Appeal in that case also observed that one key issue is what the relationship is (if any) between a duty on the part of contracting parties to cooperate on the one hand and a doctrine of good faith on the other, but left this issue to be debated in a future case. We fully agree, and we think that one key question is what the parties have agreed that is over and above their express obligations and a general duty to cooperate.
- Takeaway: Singapore law does not recognise that “relational” contracts or JV agreements are automatically subject to an implied duty of good faith. The rules for the implication of terms in Singapore are also significantly stricter than in England.22 Any implied term of good faith will have to be proven on the facts and must meet those rules.
What the duty of “good faith” means
- In Yam Seng, Legatt J (as he then was) held that:
- “it is hard to envisage any contract which would not reasonably be understood as requiring honesty in its performance”; and
- “there are other standards of commercial dealing which are so generally accepted that the contracting parties would reasonably be understood to take them as read without explicitly stating them in their contractual document”.
- What was required was:
- “fidelity to the parties’ bargain”; and that
- “the language must accordingly be given a reasonable construction which promotes the values and purposes expressed or implicit in the contract”.
- In Al Nehayan, Legatt J then explained that a good faith duty did not require “the loyal subordination by one party of its own interests to those of another.” Instead, it is “trust that the other party will act with integrity and in a spirit of cooperation.” In this regard, it is different from a fiduciary duty. He also said that the obligation “is not a demanding one and does no more than require a party to refrain from conduct which in the relevant context would be regarded as commercially unacceptable by reasonable and honest people”.
- It has also been said that if a party held an honest belief, acting on unreasonable grounds or acting carelessly or unwisely would not breach the implied duty of good faith, as reasonable and honest people would not regard such conduct as lacking fidelity to the parties' bargain or "commercially unacceptable".23
- Takeaway: Under Singapore law, there is clearer guidance as to what needs to be done where there is an express duty to conduct good faith negotiations. Outside of an express obligation to conduct good faith negotiations, it remains to be seen what a duty of good faith adds to a contract, although it seems that the core content of that duty is to be honest and to not act in a commercially unacceptable manner.
Contractual limits to the duty of good faith
- An express duty of good faith will more likely than not be limited to the specific task or obligation that the parties chose to apply it to.
- Hence, a duty in an out-sourcing contract to "co-operate with each other in good faith and … take all reasonable action as is necessary for the efficient transmission of information and instructions and to enable [X] to derive the full benefit of the Contract”, did not apply to other obligations in the contract, but was limited only to the specific objective spelled out in the underlined part of that clause.24
- In one English case involving a partnering contract for building services25, the parties had expressly agreed to “work together and individually in the spirit of trust, fairness and mutual co-operation” with aspirations of “dedication to agreed common goals and an understanding of each other’s expectations and values”. The agreement however contained an express provision to terminate the contract for convenience (or without any reason at all) upon the giving of 3 months’ notice. The Court considered that there was no implied term of good faith restricting the exercise of the termination for convenience clause, and even if there were, it would not circumscribe or restrict what the parties had expressly agreed.
- In a recent case26 involving a popular football club (that many think should win the Premiership title this year), the parties were in agreement that a duty of good faith would be implied, but it was held that the scope of any such implied duty of good faith must take into account the express terms of the agreement.
- This is really expressing the well-known rule of contractual interpretation that any implied term must not contradict or cut across an express term of the contract.
- Takeaway: Any general duty of good faith must take into account the express limits and boundaries within the contract.
- While the English Courts appear to have moved closer to accepting a general doctrine of good faith in “relational” contracts, getting a Court or tribunal to accept that a duty of good faith should be implied under Singapore law, remains a task that will not be straightforward.
- This is particularly the case, for any professionally drawn JV agreement negotiated at arm’s length between well-resourced parties, to carry out a multi-million or multi-billion-dollar construction project, with clear limits as to the applicability of any duties of good faith. In this scenario, it will not be easy to meet the requirements for the implication of terms under Singapore law.
- That said, one cannot discount the possibility of deals struck under the influence of beer goggles or the initial flush of mutual admiration.
- We hope that this article goes some way in de-mystifying the good faith doctrine and its implications in relation to joint venture agreements in Singapore.
- No marriages were harmed in the making of this article.
The court in Bates & Ors v Post Office Ltd (No. 3)  EWHC 606 (QB) laid down a list of 9 factors to look out for to determine whether a duty of good faith may be implied. S/no 10 to 14 below are some additional factors that we think should be considered.
|1.||“There must be no specific express terms in the contract that prevents a duty of good faith being implied into the contract.”|
|2.||“The contract will be a long-term one, with the mutual intention of the parties being that there will be a long-term relationship.”|
|3.||“The parties must intend that their respective roles be performed with integrity, and with fidelity to their bargain.”|
|4.||“The parties will be committed to collaborating with one another in the performance of the contract.”|
|5.||“The spirits and objectives of their venture may not be capable of being expressed exhaustively in a written contract.”|
|6.||“They will each repose trust and confidence in one another, but of a different kind to that involved in fiduciary relationships.”|
|7.||“The contract in question will involve a high degree of communication, co-operation and predictable performance based on mutual trust and confidence, and expectations of loyalty.”|
|8.||“There may be a degree of significant investment by one party (or both) in the venture. This significant investment may be, in some cases, more accurately described as substantial financial commitment.”|
|9.||“Exclusivity of the relationship may also be present”|
|10.||What did the parties agree to do that is over and above their express obligations and a general duty to cooperate|
|11.||High degree of mutual reliance and partnership|
|13.||Express contractual boundaries or limits for how good faith may operate|
|14.||Parties did not formalise the detailed terms of their cooperation in a contract, but were content to deal with each other informally based on mutual trust and confidence (i.e. in good faith.)|