Legal

Faithless? Good Faith and Fair Dealing in Irish Contract LawThe Court of Appeal (the "Court") has overturned an earlier decision of the High Court and refused to imply a term of good faith and fair dealing into a shareholders' agreement.

The Court also upheld the position that there is no general principle of good faith and fair dealing in Irish contract law.

On 8 March 2017, the Court handed down its ruling in the matter of John Flynn and Benray v Breccia and Michael McAteer. The case centred on a dispute around the acquisition and sale of shares in Blackrock Clinic and the correct interpretation of a 2006 shareholders' agreement between the parties (the "Shareholders' Agreement"). The Plaintiffs had successfully argued before the High Court that (among other things) there was an implied term in the Shareholders' Agreement that the shareholders owed each other mutual duties of good faith and fair dealing. As a result, the High Court accepted that the Shareholders' Agreement restricted how shares in Blackrock Clinic could be dealt with outside of that agreement.

The question of whether or not a duty of good faith could be implied into the Shareholders' Agreement was only one of the matters to be considered by the Court. In her decision, Justice Finlay Geoghegan accepted that while there are certain types of agreements to which a duty of good faith applies (such as partnership agreements and insurance contracts), there is no general principle of good faith and fair dealing in Irish contract law.

In refusing to imply a duty of good faith into the Shareholders' Agreement, the judge noted that the agreement expressly included a "no partnership" clause. A partnership would have bound the parties by obligations of good faith. She also pointed to the fact that the agreement contained a single specific clause requiring the parties to "negotiate in good faith" in the event that any provision of the agreement was found to be void or unenforceable, but didn’t contain any more general provisions on good faith. Looking at the circumstances in which a term can be implied in a contract, she noted that in this case an implied term of good faith and fair dealing:

  • Was not necessary to give business efficacy to the Shareholders' Agreement
  • Could not be considered so obvious that "it goes without saying", and
  • Lacked certainty

It is a common misconception among parties to a commercial agreement that there is a mutual duty of good faith or fair dealing in existence between them, whether or not this is expressly stated. However, this decision makes it clear that this is not the case under Irish contract law. Where a party to a contract wants to rely on a good faith or fair dealing provision, then they must ensure that it is expressly included in the agreement.

Contributed by Deirdre O'Donovan of William Fry.