UK: Implying Good Faith Into Agreements Made Under English Law: Part 2

Last Updated: 9 July 2013
Article by Jeremy Glover

In the Contract Corner section of Issue 5 of IQ, I asked whether recent case law in England and Wales suggested that there may be a small change occurring in the approach of the English courts to the question of whether or not English law does or should recognise a general duty to perform contracts in good faith. In particular I looked at the judgment of Mr Justice Leggatt in the case of Yam Seng Pte Ltd (a company registered in Singapore) v International Trade Corporation Ltd1where the Judge indicated that the refusal to recognise any such general obligation of good faith, would appear to be an example of "swimming against the tide" of both civil and common law jurisdictions. That said, the Judge was clearly not saying that you would be able to imply good faith into each and every agreement; everything depended on the context of the contractual arrangements made between the parties.

I also noted that this was a development that would be watched with interest and which would no doubt be featured in future editions of IQ. I had not, however, anticipated that it would be featured in Issue 6 of IQ. However, there have been two further cases in the English courts that confirm that everything does indeed depend on the context, and the ability to imply good faith into agreements made under English Law remains a difficult matter.

First there was the case of TSG Building Services Plc v South Anglia Housing Ltd.2Here, TSG and SAH entered into a contract for the provision by TSG of a gas servicing and associated works programme relating to SAH's housing stock. This contract was based on the ACA Standard Form of Contract for Term Partnering (TPC 2005, amended 2008). Mr Justice Akenhead identified two key contract terms:

"1.1 The Partnering Team members shall work together and individually in the spirit of trust, fairness and mutual co-operation for the benefit of the Term Programme,3 within the scope of their agreed roles, expertise and responsibilities as stated in the Partnering Documents, and all their respective obligations under the Partnering Contract shall be construed within the scope of such roles, expertise and responsibilities, and in all matters governed by the Partnering Contract they shall act reasonably and without delay."

"13.3 If stated in the Term Partnering Agreement that this clause 13.3 applies, the Client may terminate the appointment of all other Partnering Team members, and any other Partnering Team member stated in the Term Partnering Agreement may terminate its own appointment, at any time during the Term or as otherwise stated by the period(s) of notice to all other Partnering Team members stated in the Term Partnering Agreement."

A question arose as to whether or not termination under sub-clause 13.3 of the Contract needed to have been effected in good faith or at least reasonably. Did sub-clause 1.1 as a matter of construction provide for any constraint, condition or qualification on the apparently unfettered right of either party to terminate in effect for convenience (or without any already given reason) under sub-clause 13.3? In broad terms, the Judge said that this meant that one needed to determine objectively what a reasonable person with all the background knowledge reasonably available to the parties at the time of the contract would have understood the parties to have meant. In doing this, he was saying that he was looking to adopt a more rather than less commercial construction.

The first part of sub-clause 1.1 was clearly primarily calling upon the parties to "work together" and in that context to do so, jointly and separately, "in the spirit of trust, fairness and mutual co-operation", the object being towards "the benefit of the Term Programme". The Term Programme had as its object the efficient and good quality performance of the gas-related works in some 5,500 dwellings. This was all to be "within the scope" of the "roles, expertise and responsibilities" called for in the Partnering Documents. This both on its face and as a matter of commercial common sense did not obviously or at all impinge upon either party's right to terminate at will under sub-clause 13.3. Termination at will was not a "responsibility". It did not give rise to a "role" and/or was not dependent upon any "expertise".

It was therefore necessary to consider the scope of sub-clause 1.1 in the context of the preamble confirming that the parties had agreed to work "in mutual cooperation to fulfil their agreed roles and responsibilities and apply their agreed expertise in relation to the Term Programme, in accordance with and subject to the Partnering Documents" and the bespoke part of sub-clause 1.1 which spelt out that the "roles, expertise and responsibilities" of the parties were further described in the Term Brief and Term Proposals. The remainder of subclause 1.1 concentrated on what is in effect co-operation in the spirit of trust and fairness. The phrase "roles, expertise and responsibilities" was repeated twice. The clause was primarily directed to them and the way in which the parties shall work together (and individually).

The Judge concluded that sub-clause 1.1 did not require SAH to act reasonably as such in terminating under clause 13.3. Sub-clause 13.3 entitled either party to terminate for any reason or even no reason. It was clear that the four-year term is subject to clause 13. Clause 13 provided for automatic termination for insolvency, termination for breach, and an unqualified and unconditional right to terminate. There could be no doubt that if either party had applied their mind to this prior to the contract being signed it was clear that there was such an unqualified right available to either party; it was obvious to each that the other could terminate at any time. Sub-clause 1.1 was primarily concerned with the assumption, deployment and performance of roles, expertise and responsibilities set out in the Partnering Documents and the parties in so doing must "work together and individually in the spirit of trust, fairness and mutual cooperation for the benefit of the Term Programme" and act reasonably and without delay in so doing.

However, was there an implied term of good faith? The Judge referred to the review carried out by Mr Justice Leggatt in the Yam Seng case. He noted the need to be "sensitive to context" and also the Judge's comments on what he described as the "core value of honesty".

Mr Justice Akenhead did not consider that the case here was one involving implied obligations of honesty or fidelity. There was no suggestion or hint that there had or might have been any dishonesty in the decision to terminate. The Judge concluded that:

"I do not consider that there was as such an implied term of good faith in the Contract. The parties had gone as far as they wanted in expressing terms in Clause 1.1 about how they were to work together in a spirit of 'trust fairness and mutual cooperation' and to act reasonably. Even if there was some implied term of good faith, it would not and could not circumscribe or restrict what the parties had expressly agreed in Clause 13.3, which was in effect that either of them for no, good or bad reason could terminate at any time before the term of four years was completed. That is the risk that each voluntarily undertook when it entered into the Contract, even though, doubtless, initially each may have thought, hoped and assumed that the Contract would run its full term..."

The Court of Appeal also referred to the Yam Seng case in Mid-Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd.4 Here, in considering whether or not Compass had been entitled to terminate their long-term facilities contract, the court had to consider the meaning of clause 3.5 which imposed a duty to cooperate in good faith:

"3.5 The Trust and the Contractor will cooperate 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 or ... any Beneficiary to derive the full benefit of the Contract."

At first instance Mr Justice Cranston had concluded, amongst other things, that the Trust's conduct constituted a breach of its obligation to cooperate in good faith and that the Trust had acted (in breach of an implied term) in an arbitrary and/or irrational manner in exercising its power to make deductions from monthly payments and award service failure points. This gave Compass the right to terminate. However, the Trust also had the right to terminate the contract because of a series of service failures by Compass. Since both parties were entitled to terminate, neither could succeed in their substantial claims for posttermination losses. Compass appealed.

At first instance, the Judge had also noted that the Trust and Compass had entered into a long-term contract for the delivery of food and other services within a hospital. The performance of this contract would require continuous and detailed cooperation. He considered that it accorded with commercial common sense for there to be a general obligation on both parties to cooperate in good faith.

The Trust said that if the parties had intended to impose a general duty to cooperate with one another in good faith, they would have stated this in a standalone sentence with a full stop at the end. They did the opposite of that in clause 3.5. This was a very detailed contract, where the obligations of the parties and the consequences of any failings were spelt out in great detail. Commercial common sense therefore did not favour the addition of a general overarching duty to cooperate in good faith.

LJ Jackson had begun his judgment by noting that there is no general doctrine of "good faith" in English contract law. If the parties wish to impose such a duty they must do so expressly. He then held that he agreed with the Trust. The content of a duty of good faith is heavily conditioned by its context. The obligation to cooperate in good faith was not a general one that qualified or reinforced all of the obligations on the parties in all situations where they interacted. The obligation to cooperate in good faith was specifically focused upon the two purposes stated in the second half of that sentence.

In the context of clause 3.5 of the conditions the obligation to cooperate in good faith simply meant that the parties would work together, honestly endeavouring to achieve the two stated purposes. On a proper construction the obligation to cooperate in good faith was limited to the dual purposes stated in clause 3.5, i.e. the efficient transmission of information and instructions and the enabling of the Trust to derive the full benefit of the Contract.

The Court of Appeal had to consider whether the Trust was in breach of clause 3.5 by awarding excessive service failure points or making excessive deductions from monthly payments. The Trust had made substantial deductions in July and August 2009 which exceeded the true amount which the Trust was entitled to deduct. This was a breach of the contract.

However, these unilateral deductions were not breaches of clause 3.5: this was in part because there had been no finding by the trial Judge that the Trust was acting dishonestly, as opposed to mistakenly applying the provisions of a complicated contract. These deductions were irrelevant to the two stated purposes of clause 3.5. Further, the Trust cured the breach by repaying all of the sums which it had wrongfully deducted.

Compass could not rely upon breaches of the implied term to support their arguments that there had been a breach of good faith. In any event, on the issue of the proper meaning of clause 3.5, the Court of Appeal found that the duty of good faith and cooperation was not general but was limited to the parties' relations concerning the two specific purposes set out in the balance of the clause. In any event, absent any dishonesty, the Trust's miscalculation of the amount of service failure points would not have amounted to a breach of a general obligation of good faith. It should be noted that Lord Justice Beatson specifically commented upon the Yam Seng case, noting that Mr Justice Leggatt had emphasised that "what good faith requires is sensitive to context", "that the test of good faith is objective in the sense that it depends on 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 of the contract' ... Those considerations are also relevant to the interpretation of an express obligation to act in good faith."

He therefore agreed that the scope of the obligation to cooperate in good faith in clause 3.5 must be assessed in the light of the provisions of that clause, the other provisions of the contract, and its overall context. In other words, the content of the obligations to co-operate in good faith was to be determined by reference to the two purposes specified in the clause. Put another way, one should take a narrow interpretation of any clause that suggests that parties must exercise the duty of good faith. He said:

"In a situation where a contract makes such specific provision, in my judgment care must be taken not to construe a general and potentially open-ended obligation such as an obligation to 'co-operate' or 'to act in good faith' as covering the same ground as other, more specific, provisions, lest it cut across those more specific provisions and any limitations in them."

Both Mr Justice Akenhead in the Technology and Construction Court and the appellate judges in the Court of Appeal laid stress on Mr Justice Leggatt's view that "what good faith requires is sensitive to context". Therefore we are still perhaps a long way off from the English and Welsh courts accepting that there is a wideranging duty of good faith, such as to be found in the majority of other jurisdictions around the world.

Footnotes

1. [2013] EWHC 111 (QB)

2. [2013] EWHC 1151 (TCC)

3. This is not so far away from the NEC clause 10.1 which requires all those operating the contract to act "in the spirit of mutual trust and co-operation".

4. [2013] EWCA 200 Civ

Please click here to read Part 1

This article came from Fenwick Elliott's International Quarterly, to see similar articles please go to www.fenwickelliott.com/research-insight/newsletters/international-quarterly.

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