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Why mutual trust and confidence is no panacea when parties don’t get on

It is a far cry from the frenzied atmosphere surrounding world football at present, but in the middle of May 2015, as the initial rumbles preceding the FBI’s seismic investigation into FIFA began, the High Court gave judgment in a case concerning Qatari and US interests in a very different context*.  The case will cause barely any ripples in legal circles by comparison, but it represents a clear rejection by the court of an interesting attempt to extend the implied term of mutual trust and confidence into commercial contracts.

Background

In 2009, a company established to manage development projects in the UK for the Qatari sovereign wealth fund, Qatari Diar Real Estate Company (UK) Limited (QDDC), entered into a contract with the US Government for the purchase of the site of the US embassy in Grosvenor Square.  The US embassy is due to move to new premises in 2018, and the contract provided for the site to be leased back to the US Government in the meantime.

Also in 2009, QDDC entered into a fees agreement with Chelsfield Advisers LLP, a firm involved in development of major property assets in London and Paris.  The fees agreement required QDDC and Chelsfield to negotiate and enter into a management agreement for Chelsfield’s provision of management and other services in connection with the embassy site development.  The fees agreement also provided for an expert to be appointed to determine the terms of the management agreement if the parties failed to agree matters between them.

By as late as May 2014, the negotiations between the Qatari entities and Chelsfield were continuing, albeit not well.  It had become clear to QDDC and Chelsfield that they could not agree the terms of the management agreement, so an expert was duly appointed.  Other disputes had also arisen and things were not boding well for a blossoming commercial relationship.

Then, before the expert had issued his determination, QDDC took a controversial step:  They stated that they had lost all trust and confidence in Chelsfield’s ability to deliver what was contemplated under the agreements and were therefore treating the fees agreement as at an end.  In the proceedings which followed, QDDC argued that the continuation of the fees agreement (and the project as a whole) must have been intended to be conditional upon the continued existence of a relationship of trust and confidence.  Were they right?

Mutual trust and confidence

The implied term of mutual trust and confidence is implied by default into employment contracts.  It provides that each party shall not conduct itself in such a way as is likely to destroy or seriously damage the trust and confidence that is required if the relationship of employer and employee is to continue.  The obligation developed with the evolution of the employee relationship away from a notion of “master and servant” towards striking a balance between the employer’s interest in managing his business as he sees fit, and the employee’s interest in not being unfairly and improperly exploited.

Unfortunately for QDDC, the implied term of mutual trust and confidence is not implied into contracts between commercial entities by default, even if one party believes that the personal nature of the relationship is fundamental to the commercial arrangement being workable.  The same point applies to a duty of good faith in commercial contracts.  If the parties wish to impose such a duty, they must do so by the inclusion of express terms in their agreements.

QDDC argued that the relationship between a project promoter on the one hand, and the project professionals (such as development manager) on the other, requires close co-operation at a personal level, and which is only possible if the parties have mutual trust and confidence in each other.  They posed the question, conversely, as to whether Chelsfield could reasonably be compelled or expected to continue working for QDDC if the relationship of trust and confidence had broken down.  The judge rejected such arguments, making it clear that implying such a term into a commercial contract, where otherwise no breach of contract has occurred, would be going too far.

Not only could the parties have included express terms dealing with a loss of trust and confidence had they intended, but a range of other terms existed to address the consequences of a relationship breakdown between the parties, and which might be said to highlight the contrast with an employment scenario.  The parties could (as they did in this case) make express provision for what should ultimately happen so as to continue the relevant transaction when the parties had fallen out, whether that be through an ability to terminate upon the occurrence of a particular event, or upon an independent third party being appointed to make a binding decision where otherwise co-operation would not be possible.  Any manner of financial incentives could also be laid down to encourage the parties not to allow a loss of confidence to defeat the overall objectives.

The practical result of the court’s decision in the Chelsfield case is that the fees agreement was declared to be still in existence so that, for the time being at least, the parties may be expected to submit to the terms of their commercial deal.

The implication of a term of mutual trust and confidence conferring a right to treat a contract as repudiated in the event of breach remains a basic principle of employment law, but it seems safe to predict that a World Cup is likely to have taken place in Qatar before the concept is applied generally in a commercial setting.

For more information, email blogs@gateleyplc.com.

*Chelsfield Advisers LLP v Qatari Diar Real Estate Investment Company, Qatari Diar Development Company (UK) Limited [2015] EWHC 1322 (Ch)


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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.