UK: Good Faith Obligation Does Not Apply To Right To Terminate Without Cause

Last Updated: 24 June 2013
Article by Mark Alsop

TSG contracted with South Anglia to provide gas servicing and associated works for South Anglia's housing stock of 5,500 properties. Included as clause 1.1 in the contract (which was based on an industry standard form) was a "good faith" type clause, of which relevant parts were:

"The Partnering Team members shall work together in the sprit of trust, fairness and mutual cooperation for the benefit for the Term Programme, within the scope of their agreed roles, expertise and responsibilities as stated in the Partnering Documents......

and in all matters governed by the Partnering Contract they shall act reasonably and without delay."

The contract was stated to be for four years, but there was provision in clause 13.3 entitling either party to give three months notice of termination at any time without cause.

For reasons that South Anglia never disclosed, South Anglia gave three months notice to terminate. TSG challenged termination on the grounds that (a) the action was a breach of Clause 1.1 but (b) even if it were not a breach, an obligation of good faith should be implied permitting South Anglia to terminate without cause only if it did so in good faith.

The High Court ( Mr Justice Akenhead) held that South Anglia was entitled to give three months notice of termination without cause:

  • The first part of clause 1.1 concentrated on what was in effect co-operation on the way in which the parties were to work together within the scope of their "agreed roles, expertise and responsibilities". As a matter of commercial commonsense, that did not impinge on either party's right to terminate at will. There was no role, expertise or responsibility involved.
  • As for the obligation to act reasonably in all matters, it would be odd if every obligation, power or right in the contract had to be exercised reasonably. It would mean, for instance, that agreed payments had to be adjusted if the services proved more expensive to provide than TSG had assumed. Similarly, the provision requiring TSG to remedy defects was not something that you would expect South Anglia to act reasonably in relation to - the fact that it was bad luck or hard on TSG to have to put them right would seem to be completely irrelevant. The same went for adjudication - it was difficult to see that a party which wished to refer a dispute to adjudication had an added hurdle of having to act reasonably. The judge therefore formed the view that clause 1 did not require South Anglia to act reasonably in terminating under clause 13.3.
  • As for the implication of a term of good faith, the Judge referred to recent cases on the rules for implying a term, including the Yam Seng decision where a duty to act in good faith was readily implied. The judge agreed with the analysis but distinguished it on the grounds that implied obligations of honestly or fidelity to the contractual bargain did not apply to this case. There was no suggestion of any dishonesty in the decision to terminate. The parties had gone as far as they wanted in expressing terms in clause 1.1 about how they were to work together. There was no need to imply a term of good faith.
  • Even if there were some implied term of good faith, it would not circumscribe or restrict what the parties had expressly agreed as to termination, namely that either of them for no, good or bad reason could terminate at any time before the term of four years was completed. That was the risk that each party clearly undertook when entering into the contract. If South Anglia had misrepresented that it intended to proceed to the full term, then there might have been a separate action for misrepresentation, but this was not suggested in this case.

Comment. There are a number of features of this case which make it of interest. First, it is another example where an express "good faith" clause was construed narrowly and restricted to its precise ambit, i.e. cooperation with each other in performance. Second, because there was already a "good faith" clause covering some areas, there was no room to imply another. Third, even if there had been an implied obligation of good faith, it would not have applied to a straight forward contractual entitlement – the same point was made by the Court of Appeal in Medirest where the decision to enforce service credits in full was not a matter to which good faith could apply, even if the service credit regime was draconian.

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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