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 " 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 " 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.


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.

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