20 February 2023
In the recent case of Re Compound Photonics Group Ltd; Faulkner v Vollin Holdings Ltd [2022] EWCA Civ 1371, the Court of Appeal has provided clarification on the meaning of a contractual duty of good faith, in the context of an unfair prejudice petition.
The Issue for Determination
The issue before the Court of Appeal was whether the High Court had been correct to find that two minority shareholders had been unfairly prejudiced when their appointed directors had been removed from office in breach of an express good faith provision in the shareholders’ agreement.
At first instance, the High Court had found that a contractual obligation to act in good faith, was based upon the principles set out in Unwin v Bond [2020] EWHC 1768, which the High Court considered to offer a settled definition of what constituted good faith.
Court of Appeal Decision
The Court of Appeal unanimously allowed the appeal.
Snowden LJ confirmed that a duty of good faith, in general, encompassed a duty to act honestly and a duty to not act in bad faith. However, any further interpretation of ‘good faith’ should be determined by the specific context and facts of each case. Snowden LJ cast doubt on whether it was appropriate to apply concepts from other cases, including Unwin in a formulaic way.
On these facts, the Court found that the duty of good faith did not amount to an obligation prohibiting the shareholders to vote in favour of removing the directors.
Comment
Re Compound presents a significant departure from Unwin. Following Re Compound the position appears to be that the scope of a good faith obligation is really a question of touch and feel. That said, Re Compound does make clear that to show ‘good faith’ will always require (i) honesty and (ii) an absence of bad faith. It appears clear that the Court will favour a narrower definition of good faith.
When entering into any agreement which includes a good faith obligation, parties need to be aware that the scope of this obligation is far from clear and could be subject to change depending on the factual context. Practitioners should take care to consider the scope of a good faith provision in the context of each case, and whether it provides adequate protection in light of the narrow interpretation favoured by the Court in this case. In our view, the Court is likely to continue to adopt narrow definition of good faith and parties should take care not to view good faith provisions as ‘catch-all’ provisions which function as a sort of ‘get out of jail free card’. Any such approach is unlikely to be treated favourably by a Court.
If you require any further information or advice please get in touch with Nick Scott on nxs@blasermills.co.uk.