UK: Good Faith Obligations In Contract: Are The English Courts Going Soft?

Last Updated: 30 May 2013
Article by Stuart Shepherd, Reema Shour and Ruaridh Guy

Traditionally, English law does not recognise a general duty of good faith applicable to contracts (with certain limited exceptions, such as insurance contracts). Rather, the English courts recognise the right and freedom of commercial contracting parties to enter into an agreement on whatever terms they see fit and to prioritise their own self-interest (subject obviously to the usual constraints imposed by considerations of public policy, illegality etc.). This is so irrespective of whether or not the courts might otherwise consider that one or other party has made a bad bargain or compromised itself commercially by what it has agreed to. The overriding principle is that the English courts will not rewrite the parties' contract for them. Therefore, where it is intended that one or both parties should perform any or all of their obligations under a contract in good faith, this should be provided for expressly in the contract.

There have, however, been some recent cases in which the courts have considered whether a duty of good faith should be implied into certain types of contract, primarily long-term, "relational" (i.e. involving mutual co-operation) contracts and whether, in fact, English law should be (or is already) moving towards the attitude adopted in some other jurisdictions, mainly civil law systems, which recognise such an implied duty. This bulletin reviews these recent decisions and considers what, if any, future impact they may have on parties' obligations under English law commercial contracts.

Yam Seng Pte Ltd v. International Trade Corporation Ltd [2013] EWHC 111 (QB)

This decision has attracted a good deal of comment and some controversy, based on the expressed view of Mr Justice Leggatt that English law may be "swimming against the tide" in refusing to recognise a general implied duty of good faith and that "...the traditional English hostility towards a doctrine of good faith in the performance of contracts, to the extent that it still persists, is misplaced." At first blush, this seems to be a radical statement from a first instance judge bound by precedent. Nonetheless, a closer analysis of the judgment suggests that, whilst it may advocate a slightly greater willingness to imply a duty of good faith into certain categories of contract, this is based on the presumed intention of the parties, an established principle for interpreting English contracts, rather than any wholesale and general adoption of an implied duty of good faith into all commercial contracts.

The contract in question was a distributorship agreement, providing exclusive rights to the distribution of certain products in specified overseas markets. The parties fell out and the distribution agreement was eventually terminated, amid allegations of repudiatory breach of contract and claims for damages. One of the arguments put forward by the claimant was that the contract contained an implied term that the parties would deal with each other in good faith and that the defendant was in breach of that term.

The Judge, whilst expressing some sympathy with the civil law position on this issue, doubted that English law had reached the stage where it was ready to recognise a requirement of good faith as a duty implied by law into all commercial contracts. He saw, however, no difficulty in implying such a duty into any ordinary commercial contract based on the presumed intention and shared understanding of the parties. Whilst a detailed review of English law on the implication of terms into a contract is beyond the remit of this bulletin, in broad terms the governing principles are those set out by the Privy Council in A-G of Belize v. Belize Telecom [2009] UKPC 10, which characterised the issue as a question of construction, namely what would the contract, read as a whole against the relevant background, reasonably be understood to mean? The "relevant background" to a contract was said to include various, unstated, shared understandings.

One such shared understanding forming the basis for implying terms into a contract is honesty, which Mr Justice Leggatt acknowledged is very rarely made an express term of a contract, notwithstanding that "...it is hard to envisage any contract which would not reasonably be understood as requiring honesty in its performance." Such duties of honesty and fair dealing have been implied by the English courts in the past where appropriate, so there is nothing new about this concept. The Judge also referred to the concept of "fidelity to the parties' bargain". In circumstances in which, as is often the case, a contract does not expressly provide for every eventuality, the court should construe the language of the agreement in a way that gives effect to the purposes and values implicit in the contract.

As the Judge acknowledged, however, the requirements of good faith are very sensitive to context. For example, in longer-term, relational contracts, (such as the distributorship agreement in Yam Seng) a failure to disclose certain information might amount to bad faith, even in the absence of actual dishonesty, because such contracts require a high degree of communication and cooperation, based upon mutual trust and confidence, if they are to work. That is assumed to be the mutual understanding of the parties. He distinguished such contracts from shorter-term or one-off contracts and commented that a duty to disclose information may well arise in the context of the former, but not the latter.

The subsequent Court of Appeal decision in the Mid Essex case has endorsed this view, whilst making it clear that the position remains that there is no general duty of good faith in English law. In Mid Essex, there was an express good faith provision in the contract, but the Court of Appeal was also asked to consider whether there was an implied term to exercise a contractual discretion in good faith.

Mid Essex Hospital Services NHS Trust v. Compass Group UK and Ireland Ltd (t/a Medirest) [2013] EWCA Civ 200

This case concerned a contract for the provision of cleaning and catering services to two hospitals. Two questions arose: (i) what was the effect of an express obligation to "cooperate in good faith"?; and (ii) was there an implied term that one party would not exercise a discretion it enjoyed in an arbitrary, irrational or capricious manner?

Question (i) – effect of an express good faith obligation

The contract contained an express good faith provision in the following terms:

"The Trust and the Contractor will co-operate with each other in good faith and will take all reasonable action as is necessary for the efficient transmission of information and instructions and to enable the Trust... to derive the full benefit of the Contract."

The contract also contained a mechanism for measuring the Contractor's performance. This involved the awarding of "Service Failure Points" ("SFPs") by the Trust, as and when certain standards were not met. The contract specified the SFPs to be awarded in various circumstances and the effect that was to have on the monthly payments due to the Contractor under the contract.

At first instance, the Judge found that the manner in which SFPs had been awarded by the Trust was a breach of the express good faith term set out above. The Trust appealed against this conclusion. The Court of Appeal allowed the appeal. In doing so, Lord Justice Jackson referred to Yam Seng and reiterated the view that there is no general doctrine of good faith in English contract law.

In the Court of Appeal's view, the question was then whether the express good faith obligation quoted above applied to all of the parties' obligations under the contract (as argued by the Contractor), or whether the obligation was limited to the two matters referred to in the latter half of the same sentence (as argued by the Trust). The Court of Appeal found that the more limited construction argued for by the Trust was the correct one and that, in this context, that created an obligation on the parties to "...work together honestly endeavouring to achieve the two stated purposes."

Lord Justice Beatson referred to Yam Seng and agreed with Mr Justice Leggatt that what good faith requires is sensitive to context, that the test of good faith is objective, in the sense that it depends upon whether, in the particular context, the conduct would be regarded as commercially unacceptable by reasonable and honest people, and that its content is established through a process of construction. He added that, where a contract contains an express provision as to good faith, as in this case, care must be taken not to apply it more widely than the context permits and attach obligations to "co-operate" or "to act in good faith" to other, more specific, provisions, "lest it cut across those more specific provisions and any limitations in them".

Question (ii) – implied term in relation to the exercise of a discretion

The question also arose as to whether there was an implied term to the effect that the Trust was bound to act in a way which was neither arbitrary, capricious nor irrational in awarding SFPs. Where a contracting party enjoys a discretion affecting both parties, that discretion must, in general, not be exercised arbitrarily, capriciously or irrationally. For an example, see the Product Star [1993] 1 Lloyd's Rep. 397, where the ship-owners had a discretion under a charterparty to refuse to proceed to any port they considered to be dangerous, but the court held that they were not entitled to refuse charterers' orders to proceed to a port in the Gulf on the grounds of war risk, because there had been no material increase in risk since the charterparty was entered into.

The first instance Judge agreed with the Contractor that the Trust's discretion to award SFPs, and to make deductions from the monthly payment due accordingly, could not and should not be exercised arbitrarily, capriciously or irrationally. On appeal, the Court of Appeal agreed with the Trust that there was no room, in this instance, for such an implied term. Previous case-law indicated that it might be appropriate to imply such a term where the discretion involved making a choice from a range of options, taking into account the interests of both parties, but not where the decision was simply whether or not to exercise an absolute contractual right. In this case, the Trust was not making an assessment or choosing from a range of options. Rather, the contract contained precise rules as to how payment deductions and SFPs should be calculated and this left no room for argument. The relevant clause simply involved a matter of calculation and there could only be one right answer in undertaking the calculation. The Trust simply had to decide whether or not to make the payment deductions flowing from the calculation. If the Trust did this to a greater extent than permitted, there would be a breach of the clause, but no implied term was required for this.

The Court of Appeal made it clear, therefore, that, where the contract contains an express duty of good faith in relation to certain contractual obligations, that duty will be limited to the performance of those obligations, rather than extended to the parties' contractual performance as a whole. This view is echoed in a recent construction dispute involving a contract containing a termination for convenience clause, namely a provision allowing for termination of the contract by either party without a requirement to give a reason for doing so.

TSG Building Services Plc v. South Anglia Housing Ltd [2013] EWHC 1151 (TCC)

The contract here was one for the provision of building services to a housing association. The relevant contractual provision listed various events that would trigger a termination right (breach, insolvency etc.) and also provided for termination for convenience, should one party so wish. Following various difficulties, the Association exercised its right to terminate for convenience. The Contractor contended that a duty of good faith ought to be implied and that such an implication constrained the Association's exercise of the termination for convenience right. Alternatively, the Contractor sought to rely upon a separate provision in the contract, which provided for the parties to perform their contractual obligations and responsibilities in a spirit of "trust, fairness and mutual cooperation", arguing that this duty extended to the parties' rights of termination.

Mr Justice Akenhead considered in detail the Yam Seng decision, concluding that, whilst it was an "extremely illuminating and interesting judgment", no general principle applicable to all commercial contracts could be drawn from it or any other decision dealing with the duties of good faith in relation to any particular contract. Each case would depend upon its own facts and upon the contractual provisions in question.

In this case, the Judge held that the provision requiring the parties to act in a spirit of trust, fairness and mutual cooperation was limited to their obligations and responsibilities in performing the contract, which did not extend to their rights of termination of that contract. He added that there was no room at all for an implied term of good faith, given the express termination provision the parties had included in the contract. This is in line with the reasoning in the Mid Essex case, whereby the court will not extend an express duty of good faith in respect of certain contractual obligations to the parties' contractual obligations as a whole. Furthermore, even if such a term were implied, it would not, in the Judge's view, restrict the parties' termination rights, as expressly agreed and provided for by them. So far as fidelity to the bargain was concerned, that depended upon what the bargain was. At the time of entering the contract, both parties had voluntarily taken the risk that either one of them might choose to terminate for no good or bad reason before the four year term of the contract had expired, although they might have thought or hoped the contract would run to its full term. That was the bargain.

Comment

It is fair to say that neither the Mid Essex case nor the TSG Building Services case pick up the "good faith" baton raised in Yam Seng by Mr Justice Leggatt and take it forward, but it may be that the recognised implied obligation of honesty may develop in due course into something looking very much like a general obligation of good faith.

However, it is arguably unlikely that such a duty will be implied into contracts based on standard forms or one-off sale of goods contracts. The same can be said of one-off shipping contracts, such as voyage charterparties. On the other hand, umbrella or framework agreements for the sale of commodities in instalments and over a prolonged period of time, long-term charterparties or contracts of affreightment in a shipping context, or joint ventures in an energy or finance context, might be more susceptible to an implied duty of good faith, because they are contracts that require co-operation and mutual confidence if they are to be effective.

In the meantime, the following points are worth keeping in mind:

  1. Parties who wish to impose a duty of good faith on any contractual obligation should expressly provide for this in the contract.
  2. The courts will restrict the scope of an express good faith provision to the contractual purposes/obligations to which it is stated to apply. It will not be given a wider application to the parties' contractual responsibilities as a whole.
  3. A duty of good faith, to the extent that it may be implied from the presumed intention of the specific parties to the contract, will not be implied into all contracts. However, it may well be implied into certain categories of contract, specifically long-term, relational contracts such as joint venture agreements.
  4. Where such a term is implied, its scope and extent will be sensitive to context. Broadl y speaking, however, the parties' duty of good faith will likely encompass honesty, fidelity to the parties' bargain, fair dealing and disclosure of material information.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.