Back in Issue 05 of IQ, we examined the decision in Yam Seng PTE Ltd v International Trade Corporation Ltd and looked at whether a general obligation of good faith could be implied into contracts made in accordance with English law. The decision in Yam Seng was seen at the time as a change in the established approach that could potentially open the door to the possibility of implying a pervasive duty of good faith in commercial contracts. A number of subsequent cases followed the approach in Yam Seng, including the first instance decision in MSC. MSC eventually went before the Court of Appeal, where Lord Justice Moore-Bick advocated a return to the orthodox view that English law does not recognise any general duty of good faith in matters of contract.
A brief recap - good faith under English law: a recognised concept?
Many jurisdictions1 expressly include in their civil codes references to the concept of good faith in commercial dealings. In that context, an obligation to act in good faith in the making and performance of a contract becomes an express obligation on all parties. It also should be noted that the recognition of a general doctrine of good faith is not limited to just common law jurisdictions. For example, Australian courts have been known to imply broad duties of good faith into commercial contracts, and the Supreme Court of Canada recently recognised a new common law duty of honest performance2.
Whilst it is accepted that broad concepts of fair dealing can be reflected in the English court's response to questions of construction and the implication of terms, the long-standing position under English contract law is that courts have been reluctant to recognise any general pervasive duty of good faith3.
The historical reluctance of the courts to imply a general duty of good faith is due in part to concerns that doing so would likely undermine contractual certainty. Instead, the English courts have, as Bingham LJ put it in Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd4, preferred to develop "piecemeal solutions in response to demonstrated problems of unfairness". There is no generally accepted definition of the concept under English law, but in the same judgment, Bingham LJ described good faith as being most aptly conveyed by colloquialisms such as "playing fair", "coming clean" or "putting one's cards face upwards on the table", concluding that it "is in essence a principle of fair and open dealing".
If the term is not expressly defined in a contract, parties will have scope for argument about what an obligation of good faith in a particular context means. Where parties have expressly included good faith obligations in their contract, the general approach is that the courts will seek to give effect to those express provisions which relate to the actual performance of a particular obligation. However, whether a party can successfully rely on such a provision will depend to a great degree on the specific wording of the particular clause. The usual principles of contractual interpretation will apply5.
Often in cases where there is an express clause incorporating an obligation of good faith, parties seeking to rely on the clause have attempted to argue that the duty is general one that can apply across other provisions of the contract. The courts have generally favoured a narrow interpretation of express contractual obligations of good faith, and in cases where the duty relates to a specific provision, they have been hesitant to imply a wider overarching contractual duty. The judgment in the 2013 case of Yam Seng Pte Ltd v International Trade Corporation Limited6 which we examined in Issue 05, however, briefly raised expectations that the courts were open to a pervasive duty of good faith being implied more commonly in commercial contracts. A number of subsequent cases, including the first instance decision in MSC, followed the approach in Yam Seng7. The Court of Appeal has in MSC recently restated the traditional position that English contract law does not recognise a general duty of good faith. Prior to the Court of Appeal judgment in MSC the decision in Mid Essex Hospital Services, which we also look at briefly below, had already cast some doubt on the approach in Yam Seng. Consequently, Yam Seng should now be treated with caution.
Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd
Shortly after the judgment in Yam Seng the Court of Appeal took a much more narrow and restrictive approach in Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd. Here, the court made clear that the obligation to act in good faith under a particular provision did not extend to all conduct under the contract.
The factual background to the case was that the respondent, Compass, agreed to provide cleaning catering services to the appellant Trust under a substantial commercial contract. Under this contract, Compass was required to meet certain agreed performance levels and criteria. Failure to meet the agreed performance levels or criteria by Compass would result in the levying of certain deductions. The dispute concerned the levying of those deductions, and a question of whether the Trust had been entitled to terminate the contract on the basis that Compass has exceeded the number of service failure points permitted in any given 6 month rolling period.
Clause 3.5 of the contract, which contained an express duty to cooperate in good faith, read as follows:
"The Trust and the Contractor will co-operate 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, as the case may be, any Beneficiary to derive the full benefit of the Contract."
The Court was asked to decide whether this clause provided an overarching obligation on the parties to cooperate with each other in good faith. Compass relied heavily on the decision in Yam Seng, arguing that the good faith obligation in Clause 3.5 should be construed widely so as to apply to the contractual provisions relating to performance level failures and / or that a general duty of good faith should be implied in to the contract. Reversing the decision of the High Court at first instance, the Court of Appeal held that the obligation to act in good faith was limited to the purposes identified in the clause: to transmit information and provide full benefit of the contract to the customer. The court found that that commercial common sense did not favour the addition of an overarching duty to cooperate in good faith in circumstances where good faith had been provided for in the contract in such a precise manner at clause 3.5. The Court of Appeal emphasised that "if the parties want to impose a duty they must do so expressly".
MSC Mediterranean Shipping Company S.A. v Cottonex Anstalt
The case concerned a dispute between a carrier, MSC, and a shipper, Cottonex in respect of demurrage on 35 containers used for the carriage of raw cotton from Bandar Abbas and Jebel Ali to Chittagong. Cottonex engaged MSC to transport the cotton in three consignments under five bills of lading. Each of these bills of lading contained a clause providing for a period of free time for the use of the containers at their destination, after which demurrage became payable at a daily rate.
In the time it took to ship the consignments to their destination, the price of cotton collapsed and the consignee refused to accept the goods. Cottonex received payment for the consignments by presenting its documents to a bank which had opened a letter of credit in its favour and subsequently argued that it had no right to deal with the goods as property in them had passed to the consignee. The bills of lading contained terms which under certain circumstances gave MSC the right to unpack the goods and dispose of them, however, the customs authorities at Chittagong refused to allow anybody to deal with the containers without permission from the court. Consequently, nobody was able to take delivery of the goods or dispose of them. At the time of the Court of Appeal judgment, it was understood that the cotton was still there.
Under the terms of the bills of lading, demurrage would become payable at a daily rate of US $840 a day upon the expiry of the period of free time for the use of the containers. The continued impasse meant that the period expired, and MSC claimed demurrage of US $577,184, which was said to be still accruing at the daily rate during the appeal.
The case mostly dealt with the right to affirm in the context of repudiatory breach, however, in its decision the Court of Appeal took the opportunity to make some observations on remarks made by Leggatt J in deciding the case at first instance. The High Court had held that MSC was not entitled to keep a contract alive indefinitely for the purpose of claiming ongoing demurrage following Cottonex's repudiatory breach. The High Court had further held that an innocent party's decision to terminate or affirm a contract after a counterparty's repudiatory breach (akin to a contractual discretion) must be exercised in good faith and must not be exercised arbitrarily, capriciously or unreasonably.
In his Court of Appeal judgment, Moore-Bick LJ stated that he did not believe there was any justification in applying principles of good faith when considering whether an innocent party had a legitimate interest in affirming a contract following a repudiatory breach. He noted that the "recognition of a general duty of good faith would be a significant step in the development of our law of contract with potentially far-reaching consequences" and that in his view "the better course is for the law to develop along established lines than to encourage judges to look for what the judge called in this case "some general organising principle" drawn from cases of disparate kinds". He concludes with the warning that there is "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".
The approach taken by the Court of Appeal appears to be one that seeks to limit what Moore-Bick LJ fears might otherwise be an opening of floodgates to claims which undermine express terms agreed between parties. The judgment makes it clear that there is no general organising principle of good faith in English law and effectively curtails the line of authority that began with the decision in Yam Seng.
In another very recent case concerning a long-term contract, Globe Motors Inc v TRW Lucas Variety Electric Steering Ltd the Court of Appeal rejected the concept that "relational contracts" are likely to be subject to duties of good faith. Instead, the court confirmed that "the implication of a duty of good faith will only be possible where the language of the contract, viewed against its context, permits it. It is thus not a reflection of a special rule of interpretation for this category of contract." In circumstances where a party argues that an implied term based on the concept of good faith applies, the term would still need to meet strict implications tests8. In practice this means that a term of this nature would be unlikely to be implied unless a party could properly demonstrate that the contract would lack commercial or practical coherence without it.
In light of the above, if a party wants to rely on a good faith obligation in a contract, it should expressly provide for one. Where a party chooses do this, it is important that the scope and substance of that obligation is made clear to avoid any ambiguity as to what it means or to which provisions of the contract it applies. Certainty is key. Parties should also remember that good faith will not trump an absolute contractual right.
- 1. For example, French, German and UAE Civil Codes
- 2. Bhasin v Hrynew 2014 SCC 71
- 3. Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd (trading as Medirest)  EWCA Civ 200. It should be noted that duties of good faith are relevant in the context of certain kinds of contracts, such as contracts of agency, insurance, employment and contracts with consumers, however, these are beyond the scope of this article.
- 4. Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd  QB 433.
- 5. Marks and Spencer Plc v BNP Paribas Security Services Trust Company (Jersey) Limited  UKSC 72.
- 6. Yam Seng PTE Ltd v International Trade Corporation Ltd  EWHC 111 (QB).
- 7. Bristol Groundschool Limited v Whittingham  EWHC 2145 (Ch); D&G Cars Ltd v Essex Police Authority  EWHC 226 (QB).
- 8. Marks & Spencer Plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd  UKSC 72.
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