A recent High Court ruling highlights the current willingness of some judges to try and achieve commercial fairness, and their capacity to imply ‘good faith’ obligations into written contracts. Anyone seeking to rely on a consent right in a commercial contract should be aware of this.
English contract law, as implemented by the courts in England, has generally been based around a reluctance to interfere with the wording of agreements made between parties, providing the wording is sufficiently clear. Although there are exceptions, judges have historically been reluctant to imply obligations and provisions into contracts which the parties themselves have not provided for.
That general policy has sometimes operated in a way which might be considered unfair in some respects (and possibly even produced results which are contrary to what the parties might have intended at the time, if not what they actually recorded in writing); then it has at least provided the advantage of certainty.
In recent years however there has been a suggestion that the courts in England are shifting more towards recognising, and being willing to imply, concepts of ‘good faith’ between parties when interpreting their rights and obligations. The precise extent of this shift is unclear, but the recent Watchfinder case seems to be a further step in that direction.
The claimants had bought an action for specific performance of a share option agreement. The defendant had refused to permit the exercise of the share option, on the basis that the agreement contained a provision in the following terms:
"The Option may only be exercised with the consent of a majority of the board of directors of the Company."
The case considered whether that provision constituted an absolute or a discretionary right to veto the exercise of the share option, and if discretionary, whether the discretion had been legitimately exercised and consent properly refused.
The Court held that the right of veto was not unconditional, on the basis that a construction like that would render the option ineffective for practical purposes, as it would be entirely at the defendant’s discretion as to whether the option could be exercised. The feeling of the Court was that the option was part of the claimant’s overall package of remuneration for the deal in question; implying an absolute discretion would effectively put the claimant in a position no different to anyone who wanted to acquire shares in the company.
Furthermore, the Court also held that the exercise of the veto was subject to an implied duty not to exercise it unreasonably, capriciously, or arbitrarily. The exact extent of this type of duty will presumably differ from case to case, but it seems that it would at least include considering all relevant material points through some form of proper decision making process.
The Court’s approach
This case does suggest that courts are more willing to try and introduce some concept of fairness into contractual relations. And suggests that anyone considering this type of obligation needs to take care both to ensure that the relevant clause is drafted as explicitly as possible (query whether the defendant would still have won in this case if the clause had been clearly drafted as an absolute discretion), but also that if relying on this type of provision, there is a record of how the decision was arrived at.