Unwin v Bond

An express contractual duty of good faith is construed in its contractual and commercial context. Where it applies to a significant decision affecting a business partner, it may require honesty, fidelity to the parties’ common purpose, avoidance of ulterior purposes, fair and open dealing, and regard for the other party’s legitimate interests. Fair dealing may require fair warning, a proper investigation, an opportunity to respond, and open-minded consideration of remedial alternatives. A decision-maker cannot avoid liability by showing that the same outcome might have been achieved through a procedurally fair process.

The claimant was a minority shareholder, director and senior employee in companies controlled by the defendant. The shareholders’ agreement required the parties to act in good faith and to give effect to its spirit and intention. Following serious operational problems, the defendant terminated the claimant’s employment without prior warning or a proper opportunity to respond. That termination triggered provisions requiring the claimant’s shares to be transferred at the issue price.

The claimant alleged that the defendant had acted in bad faith to acquire his shares cheaply. The court rejected that alleged ulterior motive, but considered whether the manner of termination nevertheless breached the contractual duty of good faith and, if so, what loss followed.

1. Construction and scope. The good-faith obligation in clauses 19.2 and 19.3 of the shareholders’ agreement applied to significant decisions concerning the business, including termination of the claimant’s employment. The parties had entered the agreement as business partners pursuing a common commercial purpose. The defendant’s majority shareholding did not remove the obligation.
2. Content of the obligation. Once engaged, the obligation required the defendant to act honestly, remain faithful to the agreed common purpose, avoid using contractual powers for an ulterior purpose, deal fairly and openly with the claimant, and have regard to his legitimate interests. In context, fair and open dealing required fair warning of the proposed termination, proper investigation of the complaints, an opportunity to respond, and open-minded consideration of remedial measures.
3. Application. The defendant had authority to terminate the employment and had not acted dishonestly or for the ulterior purpose of acquiring the claimant’s shares. Nevertheless, he breached the duty of good faith. The claimant received no proper warning, investigation or opportunity to address the complaints. The defendant did not consider the claimant’s personal circumstances or whether performance could be improved. The availability of a possible appeal did not cure the breach because no realistic appeal process remained.
4. Loss and disposal. The claimant’s loss was assessed by reference to a hypothetical negotiation between the parties on 5 September 2016. The fair value of the shares was assessed at £197,626.80. The court concluded that £150,000 would have been agreed in the hypothetical negotiation, producing loss of £135,800 after credit for the £14,200 issue price. The separate salary claim failed for want of a sufficient causal link. Judgment was entered for the claimant in the principal sum of £135,800.