UK: Is There A General Principle Of Good Faith Under English Law?*

Last Updated: 8 December 2016
Article by Sana Mahmud

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 civil 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 performance.2 Yet, as Sana Mahmud asks, to what extent do the English Courts recognise the concept of good faith?

Good faith under English law – to what extent is this a recognised concept?

Those working in the construction industry will be aware that many standard forms of contract used domestically include obligations that could be commonly construed as good faith-type obligations. Examples are perhaps most obviously apparent in partnering contracts and in clause 10.1 of the NEC3, which states that the parties should act in accordance with the Contract and in a spirit of mutual trust and cooperation. 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 faith.3

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 Lord Justice Bingham put it in Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd,4 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, Lord Justice Bingham 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 apply.5

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 a 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 Ltd,6 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 Seng.7 The Court of Appeal has, however, recently overturned the MSC decision at first instance, reverting to the traditional position that English contract law does not recognise a general duty of good faith.

Some recent cases

Yam Seng Pte Ltd v International Trade Corporation Ltd

As mentioned above, in 2013 the issue of whether a duty of good faith could be implied into a contract was examined in the case of Yam Seng Pte Ltd v International Trade Corporation Ltd. Here, Mr Justice Leggatt, who also sat as the Judge at first instance in MSC,8 adopted a relatively broad (and some might say novel) approach regarding the circumstances in which good faith obligations could be implied into ordinary commercial contracts. In his judgment, he expressed the view that:

"the traditional English hostility towards a doctrine of good faith in the performance of contracts, to the extent that it still persists, is misplaced".

The reasoning behind this view was that an obligation of good faith could be implied by reference to the established approach for the implication of terms into a contract – in this case, whether the term is so obvious that it goes without saying, or is necessary to give business efficacy to the contract.

The dispute arose out of a long-term international distribution agreement between the parties under which ITC granted Yam Seng exclusive rights to distribute Manchester United branded fragrances.

The relationship broke down and Yam Seng alleged a number of breaches of contract by ITC and sought to argue that an obligation of good faith should be implied into the agreement.

Specifically, Yam Seng argued that ITC had:

(i)     failed to act with an implied obligation of good faith in prejudicing Yam Seng's sales by offering the same products for domestic sale below the duty free prices that Yam Seng was permitted to offer;

(ii)    instructed or encouraged Yam Seng to incur marketing expenses for products that ITC was unable or unwilling to supply; and

(iii)   offered false information upon which Yam Seng relied to its detriment. There were no express terms in the agreement dealing with these points.

In this particular case, the two obligations implied by the court were:

(i)     to not knowingly provide false information on which the other party would rely, and

(ii)    a fact-specific obligation not to undercut duty free prices.

A duty of good faith was implied in both these respects. The first obligation was contrary to usual standards of commercial dealing and the second was implied into the agreement between the parties as a matter of fact.

There were certain circumstances specific to this case which led the court to conclude that an obligation of good faith could be implied. The agreement was "skeletal" and had not been drafted by lawyers. In the view of the court, it would be more difficult to imply a term into a detailed and professionally drafted document.

Furthermore, the contract was a long-term distributorship agreement which, the court noted, required the parties to communicate effectively and cooperate with each other in its performance. Mr Justice Leggatt classed this type of agreement as a "relational contract" and the case appeared to provide authority for the position that a general duty of good faith could be implied into these kinds of contracts. The examples he cited as falling within the definition of a "relational contract" included joint venture agreements, franchise agreements and the type of long-term distributorship that was the subject of this dispute. Other examples, though not mentioned specifically, would also likely have included certain types of construction and engineering contracts.

Following the decision in Mid Essex Hospital Services9 and more recently the Court of Appeal judgment in MSC,10 both discussed below, Yam Seng should be treated with caution.

In another very recent case concerning a long-term contract, Globe Motors Inc v TRW Lucas Variety Electric Steering Ltd,11 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."

Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd12

Shortly after the judgment in Yam Seng, however, 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 had exceeded the number of service failure points permitted in any given six-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 into 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 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."

The position in 2016

The Court of Appeal's decision in 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 at the dock.

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 Mr Justice Leggatt 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, Lord Justice Moore-Bick 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"

He continued 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".

The Judge concluded with the warning that there was:

"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 Lord Justice Moore-Bick 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.

Conclusion

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 tests.13 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 to 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 remember that good faith will not trump an absolute contractual right.


Footnotes

* The Court of Appeal's decision in MSC Mediterranean Shipping Company S.A. v Cottonex Anstalt [2016] EWCA Civ 789

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) [2013] 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. [1989] QB 433

5. Marks and Spencer Plc v BNP Paribas Security Services Trust Company (Jersey) Limited [2015] UKSC 72

6. [2013] EWHC 111 (QB)

7. Bristol Groundschool Limited v Whittingham [2014] EWHC 2145 (Ch); D&G Cars Ltd v Essex Police Authority [2015] EWHC 226 (QB)

8. MSC Mediterranean Shipping Company SA v Cottonex Anstalt [2015] EWHC 283 (Comm)

9. Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd (trading as Medirest) [2013] EWCA Civ 200

10. MSC Mediterranean Shipping Company S.A. v Cottonex Anstalt [2016] EWCA Civ 789

11. [2016] EWCA Civ 396

12. [2013] EWCA Civ 200

13. Marks & Spencer Plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd [2015] UKSC 72


This article is taken from Fenwick Elliott's 2016/2017 Annual Review. To read further articles go to http://www.fenwickelliott.com/research-insight/annual-review/2016


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