A recent case raised whether and in what circumstances a contract may be subject to an implied term or condition that it will only continue in existence for so long as a relationship of mutual trust and confidence subsisted between the parties.
In the High Court case of Chelsfield Advisers LLP v Qatari Diar Real Estate Investment Company & Qatari Diar Development Company (UK) Limited  the claimant (“Chelsfield”), the First Defendant (“QDREIC”) and the Second Defendant (“QDDC”) entered into a “Development Fees Agreement” (“DFA”) relating to the relocation of the US Embassy. The DFA provided that Chelsfield and QDDC would enter into a “Development Management Agreement” (“DMA”) for the provision of development management services.
It said that in the event that Chelsfield and QDDC (acting reasonably and with all due expediency and in good faith) had not agreed the terms of the DMA within 5 months they were to be determined by an Expert.
On the same day, QDDC entered into a contract with the US government for the purchase of the old embassy and its leaseback pending relocation of the embassy in 2018.
QDREIC and QDDC later gave notice that:
– they intended to treat their relationship with Chelsfield under the DFA, and the DFA, as at an end; and
– they would not enter into the DMA; and
stated that they had lost all trust and confidence in Chelsfield’s “ability to deliver what is contemplated of [Chelsfield] under the DFA and the DMA” on the following grounds:
(1) “[We] have become increasingly concerned about your capability to deliver the development management services on the terms contemplated by the DFA or at all”;
(2) “Our attempts to agree the terms of the DMA with you have been frustrated such that we had to refer the determination of the terms to an independent expert”; and
(3) “Your financial position is poor and you also have not been able to satisfy us that your organisation currently has the capability to manage the development of this world renowned listed building”.
The court said applying an objective as opposed to a subjective test to those grounds, they were no basis for there having been such a breakdown of trust and confidence as would justify QDREIC and QDDC treating the relationship between the parties or the DFA as being at an end, or refusing to enter into the DMA.
Ground (2) was covered by the express terms of the DFA. Under Clause 3.2, both QDDC and Chelsfield were obliged to negotiate reasonably, with all due expediency and in good faith; and, in the event that such negotiations did not enable them to agree all the outstanding terms of the DMA within 5 months, each of them could refer the matter to an Expert for him to decide.
Chelsfield’s failure to agree terms, which resulted in the invocation of the agreed contractual mechanism for resolving the matter, was not said to be unreasonable, tardy, or lacking good faith, so it was difficult to see how it could reasonably be regarded as giving rise to such a breakdown.
Similarly with the first part of Ground (3), the financial position of Chelsfield was expressly addressed in the DFA. If Chelsfield’s covenant strength deteriorated materially, Clause 4.2 obliged it to provide QDDC with reasonable security for the potential repayment of the Advance Planning Payment; and also Clause 13 entitled QDDC to terminate the DFA based on various insolvency events concerning Chelsfield. Also, requirements concerning Chelsfield’s ongoing financial strength were matters that the parties could seek to address in the terms of the DMA, and, in default of agreement, put to the Expert for him to determine (Clause 3.3).
– the parties had delineated those protections, and
– no breach of any term of the DFA was alleged,
it was difficult to see how Chelsfield’s allegedly poor financial position could reasonably be regarded as giving rise to such a breakdown.
As to the second part of Ground (3) viewed objectively, any such concerns could be met by the terms of the DMA, either being resolved by agreement between QDDC and Chelsfield, or, failing agreement, determined by the Expert.
Given the large potential for protections for QDDC in the DMA concerning Chelsfield’s capabilities: (a) objectively, trust and confidence should not be lacking; and (b) all reasonable grounds on which they might break down could be catered for by those terms.
This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.