UK: Good Faith And Contract Termination

Last Updated: 12 August 2016
Article by Tracey Petter

Deciding whether to terminate a contract, whether at common law for an alleged repudiatory breach or under a specific term in the agreement, is rarely easy. Get it wrong and you may be in breach yourself. In several cases over the last couple of years, parties have tried to impugn their counterparty's termination by alleging a failure to act in good faith. Recent decisions have provided important guidance on whether a requirement to act in good faith can apply when exercising termination rights.

The developing concept of good faith in English contract law

There has, traditionally, been no general duty to act in good faith towards your counterparty under English contract law, other than in a few well-established and restrictive categories of case. But Yam Seng Pte Limited v. International Trade Corporation Limited [2013] EWHC 111 (QB) held that in certain circumstances the court should imply a duty of good faith (or fair dealing) into the parties' contract.  Leggatt J identified joint ventures, franchises and long-term distributorship agreements as non-exhaustive examples of "relational" contracts in which an implied duty of good faith may, depending on the context, arise. However, it was unclear to what extent courts would, in future, imply obligations of good faith either into these types of contract, or more generally. The aspects of the parties' relationship to which any implied duty of good faith would apply were, similarly, uncertain. Specifically for current purposes, must a party ever act in good faith when exercising a right to terminate the contract?

Express termination rights in the contract – are they subject to implied duties of good faith?

Monde Petroleum SA v. Westernzagros Ltd [2016] EWHC 1472 considered whether an express right to terminate a contract was subject to an implied term that the party terminating must act in good faith.

The parties entered an agreement for Monde (MP) to provide consultancy services to Westernzagros (WZ) to assist WZ in its negotiations with authorities in the Kurdistan region of Iraq for an oil exploration and production sharing agreement (EPSA). MP received monthly consultancy fees and, in the event that the EPSA was executed and various other conditions met, had an option to acquire a 3% interest in the project. WZ and Kurdistan signed an EPSA in 2006, but over the following months Kurdistan insisted on various amendments which made the arrangement less economically attractive to WZ. In March 2007, WZ served notice on MP to end the consultancy agreement, relying on its express termination rights under that contract. Among other issues, MP argued there was an implied term that WZ and MP would act in good faith towards each other when performing their obligations and exercising their rights under the consultancy agreement, including the express termination regime. MP alleged WZ had breached that implied term. It contended the termination had unconscionably deprived MP of its rights to future consultancy fees and to participate in the project (although it was speculative whether MP would ever be in a position to exercise its option).

The court held there were two insuperable obstacles to MP's case on this issue. First, even though MP argued the parties had intended their relationship to be long term and of a quasi-partnership nature, this did not automatically mean that an implied duty of good faith applied. The recent Supreme Court decision in Marks & Spencer plc v. BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72 has reaffirmed that any term, to be implied, must be either necessary or obvious, and not inconsistent with the express terms. These requirements apply just as much to an alleged implied duty of good faith as they do to any other form of implied term. Specifically in relation to the consultancy contract, the court said:

"It is impossible...to identify any facts forming part of the commercial background, or any aspect of the relationship between the parties...which indicate that the [agreement] would lack commercial or practical coherence without the implication of a 'good faith' term..."

Secondly, the court held that the implied term proposed by MP would rarely, if ever, apply to restrict a contractual right to end the contract. It distinguished such a term from a contractual discretion. The latter generally will be restricted by an implied term that the relevant party must exercise it in good faith, for the purposes for which it is given, and not in an arbitrary, capricious or irrational way. But a discretion involves a range of options from which that party can choose. A right to terminate, on the other hand, involves a binary choice: to end the contract or not. The only issue is whether any conditions required to trigger the right to terminate have been met. So, as the judge put it:

"A contractual right to terminate is a right which may be exercised irrespective of the exercising party's reason for doing so. Provided that the contractual conditions (if any) for the exercise of such a right (for example, the occurrence of an Event of Default) have been satisfied, the party exercising such a right does not have to justify its actions." 

Can a general contractual duty to act in good faith restrict an express right to terminate?

Sometimes, of course, the parties expressly provide in their contract that they must act in good faith towards each other, or set out similar standards of conduct required. Without clear language, will such a provision apply to a separate but express right to terminate?

This point did not arise in the Monde case, as the consultancy agreement contained no general good faith requirement. But the court reviewed an earlier decision suggesting that general good faith (or similar) wording is unlikely to restrict an otherwise clear contractual right to terminate. Thus, in TSG Building Services plc v. South Anglia Housing Ltd [2013] EWHC 1151 (TCC), the parties entered a four-year contract for TSG to provide gas servicing and associated work covering some 5,500 properties owned by SAH. Clause 1 stated:

"The [parties] shall work together and individually in the spirit of trust, fairness and mutual co-operation for the benefit of 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 Partnering Objectives included "trust, fairness, mutual co-operation, dedication to agreed common goals and an understanding of each other's expectations and values".

The court refused to interpret these terms as restricting a separate clause in the contract entitling either party to terminate the contract on three months' notice. Indeed, the existence of the express standards of behaviour persuaded the court that it should not imply a more general duty of good faith applying to the right to terminate. The judge stated:

"The parties have gone as far as they wanted in expressing terms...about how they were to work together in a spirit of 'trust, fairness and mutual co-operation' 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...that either of them for no good or bad reason could terminate at any time..."

Is a common law right to terminate for repudiatory breach subject to requirements of good faith?

The cases mentioned above concerned express contractual rights to terminate. But what is the position where a party has a common law right to terminate the contract for repudiatory breach? The innocent party can then elect to accept the breach and end the contract or affirm the agreement and keep the parties' respective rights and obligations alive. Must it make that decision in good faith?

This point came up in MSC Mediterranean Shipping Co SA v. Cottonex Anstalt [2016] EWCA 789. The carrier under a contract for the international carriage of goods had the right to terminate for the shipper's repudiatory breach. Due to a dispute between the shipper and consignee about who had title, the goods effectively remained embargoed at the port. The shipper was in repudiatory breach as it could not return the containers to the carrier. But the carrier elected to affirm and keep the contract alive, purely so it could claim liquidated damages in the form of demurrage. These payments were due at a daily rate, without limitation in time.

At first instance, Leggatt J held the carrier had not been entitled to affirm, principally because it had no legitimate interest in keeping the contract on foot as there was no prospect of the shipper performing its remaining obligations. But the court also said that a party must decide whether to exercise its common law right to terminate for repudiatory breach in good faith, effectively applying the same test as for exercise of an express contractual discretion.

The Court of Appeal has now considered the case. It decided the substantive issue on the basis that, on the facts, there was eventually deadlock between the parties. The contract in its agreed form was no longer capable of performance and had, in effect, become frustrated. The contract had terminated automatically at that point and the continuing right to demurrage with it.

Addressing the good faith point, the Court of Appeal said it was neither " necessary [nor] desirable" to resort to that principle to decide the case. More generally, it suggested it was better for the law to develop along established lines rather than to seek out what Leggatt J had suggested was a "general organising principle" drawn from cases of very different kinds. The Court of Appeal thought the cases on express contractual discretions - and the implied good faith restrictions on their exercise - provided no help when considering the exercise of a right to terminate arising at common law.

Practical implications

These cases are significant because, especially when taken together, they suggest the courts will rarely if ever accede to an argument that a right to terminate has to be exercised in good faith - unless the parties have expressly provided for this.

It seems logical that an express contractual right to terminate should not be subject to an implied requirement to exercise it in good faith, and that general good faith wording in the contract should not, properly interpreted, restrict such a right. This is especially so where the party exercising that right will, by definition, be acting against the interests of the counterparty. But take care if you do include in your contract a general requirement for the parties to act towards each other in good faith (or set a similar standard of conduct). It may still be safer to state expressly if other specific rights are exceptions from such general duties rather than rely on the court's interpretative powers to achieve that result.

MSC has provided useful clarification when considering whether to exercise a common law right to terminate. You still need to analyse whether the counterparty is indeed in repudiatory breach. But the decision whether to elect to end or affirm the contract is not akin to the exercise of an express contractual discretion. It therefore is not generally subject to a requirement to act in good faith.

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.

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
Events from this Firm
6 Sep 2018, Business Breakfast, Glasgow, UK

Decarbonising our heat is a key component of The Scottish Energy Strategy and an essential piece of the complex matrix we must tackle if we are to meet our climate change obligations.

11 Sep 2018, Business Breakfast, Milton Keynes, UK

Join us for our next development breakfast round table event reflecting on the on-going planning discussion regarding the Oxford-Cambridge corridor and helping you consider how best to cash in on the exciting opportunities by considering the benefits of promotion and option agreements.

20 Sep 2018, Seminar, London, UK

Environmental regulation and liability have risen up the boardroom agenda over the past decade. Recent changes to environmental sentencing have brought this area of risk even more into focus.

Similar Articles
Relevancy Powered by MondaqAI
Goodman Derrick LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Goodman Derrick LLP
Related Articles
 
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions