UK: All Fair In Love, War And Commerce?

Last Updated: 4 July 2018
Article by Jonathan Haydn-Williams

The traditional position under the contract law of England and Wales (which I shall, with no disrespect to Wales, refer to as 'English' law) has been that, save for contracts giving rise to a fiduciary relationship (eg a contract between agent and principal), a duty of good faith in the performance of a contract is not to be implied as a matter of course or as a matter of law.

That contrasts with the position in some other jurisdictions, both common law and non-common law, where such a duty is imposed by law.

In the United States of America, the Uniform Commercial Code (UCC), which applies in the law of most of the states, provides that 'Every contract or duty within the [UCC] imposes an obligation of good faith in its performance and enforcement.' Good faith is defined as 'honesty in fact and the observance of reasonable commercial standards of fair dealing'. 

Similarly, the US Restatement (Second) of Contracts (1981) (which does not have official force of law, but is treated by US courts as highly persuasive authority as to the principles of contract law) provides that 'Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement'. 

To take an example of a non-common law jurisdiction, the French Civil Code (a 'Napoleonic' code derived from Roman law) provides that contracts must be performed in good faith.This can result in very different outcomes in cases on opposite sides of the Atlantic or the Channel, as I experienced in an international arbitration some 30 years ago. Briefly, a written sale of business agreement was being negotiated, in English, between an English company and a French company. Just before it was signed, the French party insisted on a French governing law clause being inserted. Subsequently, the English party had various private discussions with the French government, which made it much more difficult for the contract to be performed, but did not disclose those discussions to the French party, which (when it found out) considered that it would have achieved a better outcome than the 'rosbifs' had managed. There was nothing in the written contract to indicate that such conduct placed the English party in breach of it.

When the matter ended up before a panel of arbitrators, the French party referred to the duty of good faith under the French Civil Code and argued convincingly that the English party had breached it. The case was settled soon afterwards. Under English law, the English company would probably have been in the clear, reflecting a view that 'all's fair in love, war and commerce'.

However, in the last five years, there has been a (some might say) belated change in attitude in the courts of England and Wales towards the implication of a duty of 'good faith' in some types of contract, influenced no doubt by the approach in other jurisdictions.

Case law

A consensus has emerged that in certain contracts of a long-term nature or where parties have to work together closely to achieve the contract's purpose (labelled as 'relational' contracts), terms are likely to be implied such as honesty, integrity, co-operation, communication, fair dealing and/or sharing of information (labelled together as 'good faith'). The following is a short review of the case law.

(i)

In Yam Seng v International Trade Corpn [2013] EWHC 111 (QB), Mr Justice Leggatt (as he then was) held against a party to a long-term distribution contract (describing it as 'relational') who had misled the other party during the performance of the contract and had undercut that other party's prices, basing the decision upon implied terms flowing from an implied duty of good faith.

(ii)

The following year, in Bristol Groundschool v Intelligent Data [2014] EWHC 2145 (Ch), a joint venture agreement, described by the judge as a 'relational' contract, was held to include an implied term requiring good faith in its performance, which the defendant had breached by conduct which 'would be regarded as commercially unacceptable by reasonable and honest people'.

(iii)

In D&G Cars v Essex Police [2015] EWHC 226 (QB), the judge held that the contract at issue (under which a private contractor had agreed to dispose of unwanted police cars) was 'a relational contract par excellence'  and held that it included an implied term that the contractor would perform it with honesty and integrity.

(iv)

2016 saw two cases in the Court of Appeal in which non-binding comments were made by different judges as to the implication of good faith terms in contracts:

(a) In MSC Mediterranean Shipping v Cottonex [2016] EWCA Civ 789, Lord Justice  Moore-Bick expressed his opposition to the concept of a general duty of good faith in contracts, foreseeing 'a real danger that if a general principle of good faith were established it would be invoked as often to undermine as to support the terms in which the parties have reached agreement'. (I struggle to understand his concern. First, if a principle of good faith were to be advanced so as to undermine the terms the parties had agreed, it would surely suggest that the party opposing the principle was seeking to support bad faith behaviour, which no court could condone. Second, it was not a concern for those who drafted the laws and codes in the USA and France, referred to above, which appear to have stood the test of time.)

(b) In Globe Motors v TRW Lucas [2016] EWCA Civ 396, Lord Justice Beatson suggested, in relation to a long-term supply contract (ie a relational contract), that an argument in favour of the existence of a duty to co-operate might have found favour with the court had it been advanced.

(v)

Other decisions which support the implication of a duty to act in good faith in relational contracts, where justified on the facts of the case, are Portsmouth City Council v Ensign Highways Ltd [2015] EWHC 1969 (QB), National Private Air Transport v Creditrade [2016] EWHC 2144 (Comm) and Property Alliance Group v RBS [2016] EWHC 3342 (Ch).

(vi)  

Two more decisions have followed this year:

(a) In Amey v Birmingham City Council [2018] EWCA Civ 264, the Court of Appeal commented that a long-term PFI contract could be classified as 'relational'.

(b) The judge who had decided the Yam Seng  case five years previously, Lord Justice Leggatt (sitting in the High Court), returned to the subject of good faith in relational contracts in Al Nehayan v Kent [2018] EWHC 333 (Comm)

(vii)  

In Al Nehayan v Kent, Lord Justice Leggatt:

(a) referred back to the Yam Seng case, stating: 'I drew attention to a category of contract in which the parties are committed to collaborating with each other, typically on a long term basis, in ways which respect the spirit and objectives of their venture but which they have not tried to specify, and which it may be impossible to specify, exhaustively in a written contract. Such "relational" contracts involve trust ... that the other party will act with integrity and in a spirit of cooperation. The legitimate expectations which the law should protect in relationships of this kind are embodied in the normative standards of good faith.'

(b) continued: 'Although the observations that I made in the Yam Seng case about the scope for implying duties of good faith in English contract law have provoked divergent reactions, there appears to be growing recognition that such a duty may readily be implied in a relational contract.'

(c) held that a joint venture agreement between two individuals, which was intended as a long-term collaboration in which their interests were interlinked and which required a high degree of co-operation between them was 'a classic instance of a relational contract'  and that 'the implication of a duty of good faith in the contract is essential to give effect to the parties' reasonable expectations and satisfies the business necessity test which Lord Neuberger in Marks & Spencer v BNP Paribas [2016] AC 742 ... reiterated as the relevant standard for the implication of a term into a contract'.

(d) identified the usual content of the obligation of good faith as comprising obligations:

  • to act honestly and with fidelity to the bargain
  • not to act dishonestly and not to undermine the bargain entered into or the substance of the contractual benefit bargained for
  • to act reasonably and with fair dealing having regard to the interests of the parties (which will, inevitably, at times conflict) and to the provisions, aims and purposes of the contract, objectively ascertained (the obligation of fair dealing not being a demanding one, which does no more than require a party to refrain from conduct which in the relevant context would be regarded as commercially unacceptable by reasonable and honest people).

(e) held that 'two forms of furtive or opportunistic conduct'  seemed to him 'incompatible with good faith in the circumstances of this case':

  • 'First, it would be inconsistent with that standard [of good faith] for one party to agree or enter into negotiations to sell his interest or part of his interest in the companies which they jointly owned to a third party covertly and without informing the other beneficial owner.'
  • 'Second, while the parties to a joint venture were generally free to pursue their own interests and did not owe an obligation of loyalty to the other, it would be contrary to the obligation to act in good faith for either party to use his position as a shareholder of the companies to obtain a financial benefit for himself at the expense of the other.'

Conclusions

Thus, whilst English law has not yet aligned itself either with the USA or with 'civil law' jurisdictions such as France in terms of recognising a general duty of good faith in the performance of contracts, the last five years have seen 'growing recognition that such a duty may readily be implied in a relational contract'.

Were there to be a 're-run', 30 years later, of the arbitration I mentioned above, but with an English governing law clause in place of the French one, the 'rosbifs'' conduct would probably not be found to have breached the contract, as a one-off sale of business agreement is probably not a 'relational' contract. However, had the contract been for sale of part of the business, with a joint venture thereafter, English law would probably now imply a duty of good faith, in alignment with French law and unlike the position 30 years ago.

This article first appeared on The Law Society.

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
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
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