UK: Good Faith - Is There A New Implied Duty In English Contract Law?

Last Updated: 12 July 2013
Article by Justine Usher, Annabel Evans and Kirsty Payne

Keywords: English contract law, good faith

Background

English law does not currently recognise a universal implied duty on contracting parties to perform their obligations in good faith. This differs from the position in many other countries, including France, Germany, the United States and Australia, which, to some extent or another, recognise some form of overriding principle that, in agreeing and performing contracts, the parties should act in good faith.

A couple of recent cases have reignited discussion about whether English law might imply a similar duty. It does not look like this will happen any time soon. But we expect the law on this area to develop further. Why? First, because parties continue to enter into long term, "relational" contracts relying on frequent communication and co-operation to operate effectively. These relationships are being put to the test in the current financial climate. Second, the growing use of express duties of good faith in English law contracts seem bound to attract further judicial interpretation. Pressure to change may also come as European law continues to creep into English law through the implementation of European Directives.

Is there a universal implied duty on contracting parties to perform their obligations in good faith?

No. English courts have been reluctant to recognise a universal implied duty of good faith other than for certain categories of contract - such as employment and fiduciary relationships. This is in part due to concerns that it could create too much uncertainty - deciding what the actual obligation entails can be vague and subjective. It also goes contrary to freedom of contract - why interfere with a contract where the parties have freely negotiated the terms? Rather than enforcing broad, overarching principles of good faith in contracts, English law has evolved by developing particular solutions in response to particular problems, including dealing with specific situations which may be unfair.

In a recent case, the court said a duty of good faith could be implied into a contract but only as a term in fact, based on the presumed intention of the parties. Instead, on the facts, the court implied a term that the parties would not act dishonestly in the provision of information.

Can you impose an express duty of good faith on contracting parties?

Many commercial contracts specifically require a party to perform particular obligations or exercise specified discretions acting "in good faith". It is less common but also possible to impose an express duty to perform the whole contract in good faith. Any express term will be interpreted carefully, in the context of the entire contract and the commercial relationship between the parties.

What does performing in good faith mean?

Under English law, there is no generally applicable definition of "good faith" in performing contracts. It is clear from the authorities that the content of a duty of good faith is heavily conditioned by its context. There may be a core meaning of honesty but, put into context, the meaning of the phrase will call for further elaboration. Examples of different interpretations by the courts include: faithfulness to an agreed common purpose, acting within the spirit of the contract, observing reasonable commercial standards of fair dealing and acting consistently with the justified expectations of the parties. In a recent case, the Court of Appeal found an express obligation to co-operate in good faith meant the parties would work together honestly endeavouring to achieve the stated purposes expressly linked to the duty.

Finally, cases seem to suggest that lack of good faith entails bad faith. Whilst good faith has a core meaning of honesty, not all bad faith involves dishonesty. Bad faith conduct could include behaviour which is seen as commercially unacceptable, improper or unconscionable, but which is not actually dishonest. So, a failure to act in good faith (or not to act in bad faith) does not necessarily require fraud or other dishonesty.

When drafting an express obligation to act in good faith, think about what this involves in the context of the contract. The drafting should be clear and precise, with no room for different interpretations - consider including a non-exclusive list of examples of "good faith" behaviour.

How does English law compare to other jurisdictions?

Most civil law jurisdictions recognise some form of duty on contracting parties to perform their obligations in good faith, although the actual obligation varies between countries. In Germany, under the German Civil Code, contracting parties have to observe good faith in both negotiation and performance of the contract. This is a key provision of German civil law, and involves more than just acting reasonably - it requires a relationship of trust based on the commercial dealing of the parties in a particular transaction. Despite a wealth of case law, there is no established definition of what good faith requires under a German law contract - although this case law does give guidance on the legal consequences of good faith in certain situations. The French Civil Code also contains a requirement that agreements must be performed in good faith.

Many common law jurisdictions also recognise some form of good faith duty on contracting parties. In the United States, every contract or duty falling under The Uniform Commercial Code (adopted by many States) imposes "an obligation of good faith in its performance or enforcement." Good faith is defined as "honesty in fact in the conduct or transaction concerned". For a merchant, good faith has a higher standard, and means "honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade". But, even with these statutory definitions, the meaning of the doctrine in the US and its exact scope is not black and white.

What should contracting parties bear in mind when exercising contractual discretions?

Parties should take care when exercising a contractual discretion even where they are not subject to a good faith obligation in doing so. If it involves making an assessment or choosing from a range of options, taking into account the interest of both parties, case law suggests there is likely to be an implied term that parties will not exercise the discretion in an arbitrary, capricious or irrational manner.

Here is a closer look at the two recent decisions involved:

YAM SENG V ITC1

In this case, Leggatt J considered whether English law does - or should - recognise a duty to perform contracts in good faith.

Yam Seng PTE Limited (a Singapore based distributor) and International Trade Corp Limited (an English supplier) entered into a distribution agreement, with ITC agreeing to supply Yam Seng with Manchester United branded toiletries. The relationship turned sour for a number of reasons and ended up before the English courts. Yang Seng argued it was an implied term of the contract that the parties would deal with each other in good faith.

It is worth noting a couple of things about the contract itself - it was skeletal and didn't set out the parties' obligations in any detail. The judge noted it was evidently written by the parties themselves, without the assistance of lawyers.

Whilst Leggatt J didn't think English law was ready to recognise a duty of good faith as a duty implied by law into all commercial contracts, he thought a duty of good faith could be implied into a contract as a term in fact, based on the presumed intention of the parties. The two main criteria traditionally used to identify terms implied in fact are that the term (1) is so obvious that it goes without saying and (2) is necessary to give business efficacy to the contract. In a 2009 case2, Lord Hoffman characterised these traditional criteria as different ways of approaching what is ultimately always a question of construction - what would the contract, read as a whole against the relevant background, reasonably be understood to mean?

Modern case law on construction of contracts recognises that contracts are made against a background of unstated shared understandings - including not only matters of fact known to the parties, but also shared values and norms of behaviour, including an expectation of honesty. These are taken for granted by the parties, rather than set out in the contract.

Using the more traditional test, a requirement for the parties to behave honestly satisfies the tests of being (1) so obvious that it goes without saying and (2) necessary to give business efficacy to commercial transactions.

As well as honesty, the judge commented that there are other standards of commercial dealing which are so generally accepted that the contracting parties would reasonably be understood to expect them without stating them in the contract - and a key aspect of good faith is to observe these standards. Another aspect of good faith is fidelity to the parties' bargain - contracts can never provide for every eventuality. To apply a contract to circumstances not specifically provided for, the language must be given a reasonable construction which promotes the values and purposes expressed or implicit in the contract.

Leggatt J noted that English law has traditionally drawn a distinction between certain types of contract where the parties owe obligations of disclosure to each other (like partnership, trusteeship or other fiduciary relationships) and other contractual relationships where they do not. He found many contracts don't fit within this model and involve a longer term relationship - these "relational" contracts may involve a high degree of co-operation, consultation and predictable performance based on mutual trust and confidence, which are implicit rather than expressly set out in the contract, and which are necessary to give business efficacy to the contract. Joint venture agreements, franchise agreements and long term distributorship agreements are all examples of these types of "relational" contracts.

Based on his analysis, the judge felt there was nothing "novel or foreign" to English law recognising an implied duty of good faith in the performance of contracts, and the concept is already reflected in various lines of authority: courts have implied duties of co-operation in the performance of contracts, and have found that a contractual power for one party to make decisions which affect both parties to the contract must be exercised honestly and in good faith for the purpose for which it was conferred. However, despite this analysis and an apparent willingness to imply a duty to perform a contract in good faith, the duty the judge actually implied was a duty not to act dishonestly in the provision of information.

MID ESSEX HOSPITAL SERVICES NHS TRUST V COMPASS GROUP UK AND IRELAND LTD (TRADING AS MEDIREST)3

This case considered (amongst other things) (1) the effect of an express contractual obligation to co-operate in good faith and (2) the restrictions placed on a contractual discretion.

Medirest and the Trust entered into a long term facilities contract, with Medirest agreeing to provide catering and cleaning services to the Trust. The agreement included provisions for the Trust to award service failure points and to make deductions from payments if service levels were not met.

Express obligation to co-operate in good faith

The contract said the parties would co-operate with each other and act in good faith and take all action necessary for the efficient transmission of information and instructions and to enable the Trust to derive the full benefit of the contract.

Medirest argued that the obligation involved (1) a general obligation to co-operate in good faith and (2) an obligation to take all action necessary for the two purposes specified in the clause. The Trust argued both obligations (i.e. to co-operate in good faith and to take all action necessary) applied to the two specified purposes only, and not to the contract as a whole. The original trial judge favoured Medirest's reading of this clause. In coming to this view, he applied the "Rainy Sky" principle - faced with a clause in a commercial contract open to different interpretations, the commercial common sense construction of the contract was that there was a general obligation of good faith. As this was a long term contract for the delivery of services, the performance demanded continuous and detailed co-operation between the parties. In these circumstances, the original judge thought it was highly likely that the parties intended there to be a general obligation to co-operate in good faith with each other in all respects, and not just for the two purposes mentioned.

The Court of Appeal took a different view. In his leading judgement, Jackson LJ found the obligation to co-operate in good faith was not a general one which qualified or reinforced all the obligations of the parties in performance of the contract - it was instead specifically focussed on the two specified purposes.

What does an obligation to act in good faith actually mean?

Jackson LJ noted that it was clear from the authorities that the content of a duty of good faith is heavily conditioned by its context. Quoting a 2004 judgement4, "Shorn of context, the words "in good faith" have a core meaning of honesty. Introduce context, and it calls for further elaboration........The term is to be found in many statutory and common-law contexts, and because they are necessarily conditioned by their context, it is dangerous to apply judicial attempts at definition in one context to that of another".

Jackson LJ found the obligation to co-operate in good faith in the Medirest contract meant the parties would work together honestly endeavouring to achieve the two stated purposes. Beaston LJ also made some observations on this - he considered Leggatt J's judgement in Yam Seng v ITC, including that "what good faith requires is sensitive to context", that the test of good faith is objective in 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." Beaston LJ noted that the obligation to co-operate in good faith must be assessed in the light of the provisions of the relevant clause, the other provisions of the contract and its overall context. The clause was contained in a detailed contract which made specific provision for various eventualities. To construe the provision widely could conflict with other express, specific provisions (and any limitations in them).

Restrictions on the exercise of a contractual discretion

The Trust had a contractual power to make deductions from monthly payments and to award service failure points. The original trial judge found there was an implied term that, in exercising this power, the Trust would not act in an arbitrary, capricious or irrational manner. He came to this conclusion after considering various authorities where a term has been implied in a commercial contract as a restriction on the exercise of a contractual discretion: the discretion must be exercised in good faith, and not in an arbitrary, capricious or irrational manner.

The Court of Appeal came to a different conclusion. The authorities considered by the trial judge all involved a discretion which involved making an assessment or choosing from a range of options, taking into account the interests of both parties. In this case, the discretion conferred on the Trust just permitted the Trust to decide whether or not to exercise an absolute contractual right. If the Trust awards more than the correct number of service failure points or deducts more than the correct amount from a payment, the Court of Appeal felt this would be a breach of the express provisions of the contract, and there was no need to imply a term to regulate the operation of the clause in question.

Footnotes

1. [2013] EWHC 111(QB)

2. Attorney General for Belize v Belize Telecom Ltd [2009] 1 WLR 1988

3. [2013] EWCA Civ 200

4. Street v Derbyshire Unemployed Workers' Centre [2004] EWCA Civ 964

Previously published on July 20913

Visit us at mayerbrown.com

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2013. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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.