Duty of Good Faith

26 June 2020

What is the Courts’ position on good faith?

Unlike in many foreign jurisdictions including France, Germany, the United States and Australia, there is no overriding principle of good faith in English contract law. This is primarily due to the need for certainty in contract law and the concept of freedom of contract.

Naturally, there are specific types of contract in which duty of good faith will be implied –employment contracts and those governing fiduciary relationships such as insurance contracts are key examples of this.

Yet, when it comes to dealings between commercial parties, Courts in England and Wales have historically been reluctant to imply a duty of good faith. As such, English lawyers have commonly advised their clients against reliance on an implied good faith principle when acting on business disputes.

What is “good faith”?

Because there is no universally accepted definition of good faith under English law, cases must be judged individually in absence of clear contractual definition.

In terms of what the term “good faith” actually means, it seems that this depends upon the context but it has been described as “observing reasonable commercial standards of fair dealing, being faithful to the agreed common purpose, and acting consistently with the justified expectations of the parties”.

In general, a duty of good faith will not require a party to subvert its own commercial interests or be forced to give up its contractual rights in favour of the counterparty. Beyond

this, the level of duty and whether it is enforceable depends on the specific circumstances and surrounding context.

Recent developments in English Law

In recent years, the English Courts’ views on good faith have evolved. Increasingly, good faith provisions that have been ‘deliberately and expressly’ agreed have been held to be enforceable – though such provisions tend to be interpreted strictly in accordance with their context.

However, a string of cases in recent years has seen the Courts begin to show a willingness to imply a duty of good faith into contracts (besides employment or insurance contracts) if it is clear that this was the intention of the parties entering the contract.  The leading case here is the first instance judgment of Leggatt J in Yam Seng [Yam Seng Pte Ltd v International Trade Corp Ltd [2013] EWHC 111 (QB)]

In this case, the Judge identified a type of contract which he referred to as ‘relational contracts’ – those that require

a high degree of communication, cooperation and predictable performance based on mutual trust and confidence which are not legislated for in the express terms of the contract but are implicit in the parties’ understanding and necessary to give business efficacy to the arrangements”.

In his judgement, he set out three examples of such “relational contracts”:

  • Distribution agreements
  • Franchise agreements
  • Joint ventures

In his judgement, Leggatt J described the refusal of English law to recognise a general of duty of good faith between contracting parties as “swimming against the tide”, considering the contrasting approach in most European Civil Law jurisdictions. An underlying duty of “good faith and fair dealing” was applied as the hallmark upon which to interpret the contract in this case.

The result of interpreting the contract with an underlying duty of good faith firmly in mind was that the Judge found that two terms reflecting that duty should be implied. The decision was described extra-judicially by Arden LJ at the time as “a welcome tour de force on good faith, and an important case to watch”.

Implied good faith: a step forward in English contract law?

While the Sam Yeng case was a turning point in English law with regards to implied good faith, it did not provide a blanket rule for all contractual disputes. Rather, it acknowledged that in certain categories of long-term contracts, the Courts will be more inclined to recognise an obligation of good faith.

As pointed out by Lord Neuberger in Marks and Spencer v BNP Paribas [2015] UKSC 72, “a term should not be implied into a detailed commercial contract merely because it appears fair or merely because one considers that the parties would have agreed it if it had been suggested to them.”

While Sam Yeng and more recent cases have brought to light particular circumstances in which a duty of good faith can be implied such as distribution agreements, franchise agreements and joint venture agreements, the Court of Appeal has discouraged this trend, stating that it still prefers the traditional piecemeal solution to unfairness in specific contracts whereby cases are judged on the specific circumstances and contractual obligations.

Duncan Gillespie | 360 Business Law Counsel

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