UK: Contract Law Update - Implied Terms, Good Faith And Termination (Video)

Elsie Blackshaw-Crosby provides a short contract law update covering implied terms, good faith and termination.



Tom Cox: Hello and welcome to the latest podcast for ThinkHouse Foundations. My name is Tom Cox. I am a senior associate at Gowling WLG and I also co-chair ThinkHouse Foundations. ThinkHouse Foundations is a programme run by the firm for in-house solicitors between 0-5 years PQE, in which we put on a variety of training events and create an environment in which in-house lawyers can meet and interact.

Today was our Autumn event of the ThinkHouse Foundations series and as part of that we enjoyed a session presented by Elsie Blackshaw-Crosby.

Elsie, good afternoon.

Elsie Blackshaw-Crosby Good afternoon Tom.

Tom: This morning Elsie you kindly provided a contracts law update for the attendees. You focused on three subjects, implied terms, good faith and termination of contracts. Let us start with the first one, implied terms. Is there anything new our listeners need to be thinking about?

Elsie: No Tom, you will be pleased to hear that the general position under English law remains unchanged. The general position is that it is very difficult to imply terms under English law and the test that the Courts have applied to date, remains valid. To recap on that, the court will only imply a term if it is reasonable and equitable to do so, it is necessary to give business efficacy to the contract or it is so obvious that it goes without saying, it is capable of clear expression and it does not contradict any expressed terms of the contract.

In the update this morning we looked at two new cases, that of Bou-Simon and JN Hipwell. In one of these cases the test for implied terms was satisfied and in the other it was not. These two cases reiterate the key lesson that it is very hard to imply terms unless the contract simply does not make sense and cannot operate without them. Taking the example of Bou-Simon, but without going into the facts, even if the expressed terms do not reflect the parties intentions or what some might consider to be commercial common sense a term will not be implied if a contract can operate on its expressed terms, it is therefore vital that you ensure that expressed terms reflect the parties intentions.

Tom: So good news for careful draftsman by the sound of it, but if your drafting is a bit sloppy you are not going to be saved by the Courts.

We then moved on to look at good faith and in particular two separate questions. Firstly whether good faith exists in typical contractual relations and secondly to the extent to which good faith applies when parties are exercising some form of contractual discretion.

Let us start with the first one Elsie.  So is good faith creeping into English contract law?

Elsie:   It seems like it might be Tom, but only in respect of what Lord Justice Legatt has called relational contracts. Relational contracts are those contracts which are particularly long term and involve commitment and loyalty between the parties. Lord Justice Legatt in his 2013 case of Yam Seng found that there was a relational contract, and where a relational contract existed there was an implied duty of good faith. It is not clear whether other members of the judiciary will adopt the same approach as Lord Justice Legatt but at the moment these two cases remain good law and therefore it is something that we need to be aware of.

Whether or not a relational contract exists will be fact dependant but it is certainly something to keep an eye out for.  Most businesses are probably party to long-term contracts which may be determined to be relational contracts, if your business is involved in such contracts those managing those contracts need to be aware that there may be an implied duty of good faith, particularly relating to disclosure and truthfulness and they may need to consider how to comply with this obligation going forward.

Tom: Well it seems to me Elsie that courtesy of Lord Justice Legatt there is potentially a rather grey area over what is and is not a relational contract and whether good faith does exist in English contractual law. Is the position in respect of exercising good faith in matters of contractual discretion any easier to follow?

Elsie: Yes, thankfully Tom it is. In this morning's update I gave a brief example of what might be a contractual discretion and we discussed examples such as a decision by one party to set a particular rate of interest or to give consent for a particular act. You will be pleased to hear that the law has not changed in respect of good faith and contractual discretions and the position remains as set under the 2013 Supreme Court case of Braganza and BP. We discussed today the two limbs of the Braganza duty being related to process and outcome. In order to comply with the Braganza duty of good faith when exercising contractual discretions, it is necessary to make sure that you ask the right question and take the right matters into account. In respect of the outcome you must avoid results so outrageous that no reasonable decision maker could have reached it.

Tom: OK, well that seems much better news for our listeners, albeit that if someone in the business is being required to exercise contractual discretion they are going to need to make sure that the Braganza test is satisfied.

Finally we move onto termination, which I think as we all know is a particularly prickly topic. Any fresh news on this?

Elsie: Thankfully there has not been any new law on this Tom, but we did look at a recent case of Phones 4U and EE Limited which provided some useful reminders of important lessons. The bottom line for our listeners is that termination is not as simple as it may seem and it is important to ensure that those in your business seeking to terminate a contract do so having taken legal advice. The case of Phones 4U and EE Limited reminded us that in order to be able to claim common law damages i.e. loss of bargain or loss of contract damages, a party must reference and rely on repudiatory breach in their termination letter, it is not something that can be done after the event once the contract has already been terminated on its own terms.

Tom: So for our listeners out there, when it looks like a contract needs to be terminated of course we need to be very careful about the way in which you go about that termination so as not to prejudice your position further going forward.

Elsie thank you very much, that has been extremely helpful. Hopefully there is something of use for our listeners.

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