Most commercial agreements require you to stick to the terms of the contract and no more. Comply with your obligations, but look after your own interests first.
Some contracts don't work like that, such as agency agreements, employment agreements, and partnerships. In these fiduciary agreements, the parties owe a duty of good faith to one another. This means that you have to consider the interests of the other party and, sometimes, put their interests first. This is what "acting in good faith" means: act fairly, consider the interests of the other party, and stay true to the spirit of the deal.
UK lawyers don't expect there to be a general duty of good faith in commercial contracting, beyond the "fiduciary" agreements. This is because it's not obvious how to comply with a good faith obligation in a commercial context. In a sale contract, two parties swap a thing for some money and hope for a clean break. Buyer beware.
But many commercial deals aren't like that. They may last for years, and the parties must co-operate and trust each other. In recent years, the courts in England have recognised that the parties to these "relational contracts" might owe each other a duty of good faith.
A recent English case decided during lockdown, Essex County Council v UBB Waste, explains the position and sheds some light on how one may deal with a good faith obligation in a relational contract. The argument concerned a long term PFI contract, under which UBB would design, build, and operate a waste management facility for Essex. But it didn't work. It didn't pass the commissioning tests. In the end, Essex decided to terminate the contract and sue for damages.
UBB argued that Essex couldn't just terminate the contract. The parties had a relational contract. Instead, Essex should have considered the interests of UBB and agreed a different approach in order to stay true to the deal. And, even though Essex had decided to exercise a right to terminate, they couldn't just act capriciously: they had to have a rational basis for terminating the agreement.
UBB applied a fair dollop of Brasso to its corporate neck before running these arguments. The evidence showed that UBB's design could never work. Essex had tried to accommodate reasonable changes. And some correspondence came to light of UBB's people boasting of misleading representatives of Essex County Council and "bullshitting" the independent certifier of the project.
The court found that, while there was a relational contract and Essex had a duty of good faith, Essex hadn't breached that duty. Essex had not acted capriciously in exercising the right to terminate. In any event, because they were exercising a power in the contract (the power to terminate when the facility didn't pass the commissioning tests) they didn't need to act in good faith. UBB lost.
So what do we take away from this?
- If you are in a long term commercial agreement where there is a need for a fair degree of co-operation and trust, you might have a relational contract.
- If you have a relational contract, a court might imply a duty on you to stay true to the spirit of the deal and act in good faith.
- But your duty of good faith does not prevent you from exercising your powers in the contract.
- Nor does it mean you need to agree to change the deal to make it work.
- Crucially, if you argue that the other party has breached his obligation to act in good faith, don't have a discoverable email chain boasting about how you had "bullshitted" them.
Originally published by Gilson Gray, August 2020
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.
