Is there a duty of good faith in English law contracts?
Mr Justice Leggatt started it. In a 2013 case (Yam Seng Pte Ltd v ITC [2013] EWHC 111) he examined in detail and perhaps for the first time in the English courts “the subject of whether English law does or should recognise a general duty to perform contracts in good faith”. A general principle of good faith is recognised in most civil law systems, and so its apparent absence from English law comes as a surprise to practitioners in, for example France, Germany and Italy. Mr Justice Leggatt even found support for the principle in common law systems (the US, Canada and Australia) other than England and Wales.
Mr Justice Leggatt argued that there was no difficulty in implying a duty of good faith “into any ordinary commercial contract” based on the presumed intention of the parties. The exercise of implying terms into a contract is ultimately a question of construction: what would the contract, read as a whole against the relevant background, reasonably be understood to mean? He described an expectation of honesty as “a paradigm example of a general norm which underlies almost all contractual relationships”. If the requirement of honesty was at the top of the list and the most obviously implied term, Mr Justice Leggatt had further, related suggestions: the observance of generally accepted standards of commercial dealing; fidelity to the parties’ bargain. Further, in the appropriate context of “relational” contracts, providing an answer or even a straightforward answer in response to a request for information or sharing information relevant to the performance of the contract. What are relational contracts? Those contracts which require a high degree of communication, cooperation and predictable performance based on mutual trust and confidence, for example joint venture agreements, franchise agreements and long-term distributorship agreements.
The editors of the leading textbook on English contractual law (Chitty on Contracts) were not impressed: “with respect, the implication of such an implied term applicable generally (or even widely) to commercial contracts would undermine to an unjustified extent English law’s general position rejecting a general legal requirement of good faith.”
Nonetheless, even though there is no general doctrine of good faith in English contract law, a duty of good faith is implied by law as an incident to certain categories of contract (Mid Essex Hospital Services [2013] EWCA Civ 200. Ultimately, it is a question of construing or interpreting the relevant contract and is therefore highly sensitive to context. For example:
TSG Building Services [2013] EWHC 1151 dealt with a 4 year agreement between a housing association and a maintenance company. Mr Justice Akenhead said that the Yam Seng principles were of general application to all commercial contracts, but did not impinge on the contractual bargain in this case at all. TSG’s complaint was that the defendant had terminated the contract early and unlawfully. However, the Court found that the defendant had properly exercised the contract’s (no fault) right to terminate on 3 months notice. Therefore, as a matter of construction, there was simply no room for the implied term contended for.
Hamsard 3147 Ltd [2013] EWHC 3251 considered not a long-term joint venture, but an interim arrangement affording the parties an opportunity to negotiate a new joint venture. The judge found no basis to imply a good faith term into the contract. However, the judge readily accepted that there will generally be an implied term not to do anything to frustrate the purpose of a commercial contract.
Bristol Groundschool Ltd [2014] EWHC 2145 involved an agreement where the defendant created artwork paid for by the claimant and the copyright vested in the claimant. The judge found that the agreement was a relational contract that did contain an implied duty of good faith. It was found that good faith extends beyond, but at the very least includes, the requirement of honesty. The relevant test is that of conduct that would be regarded as commercially unacceptable by reasonable, honest people in the particular context involved.
Acer Investment [2014] EWHC 3011 (QB) involved a short-term, non-exclusive agreement between distributors of financial products and the company that set up and sold funds. The agreement did not require either party to spend significant sums in reliance on the continuation of the relationship. There was no scope for the implication of the term of good faith. The judge found as a fact that the claimant had lied about the fact that the claimant had been marketing to a third party. However, even if there was a good faith requirement, the dishonesty did not relate to the performance of the contract.
D&G Cars Ltd [2015] EWHC 226 concerned a long term agreement with special features that made it a relational contract “par excellence”: the contract dealt with the recovered property of members of the public acting on behalf of the law enforcement agency; the property might be returned to the public; and the property might be evidence for criminal investigations. In such circumstances, the judge had no difficulty in implying a requirement of fair dealing and transparency.
Where does this leave us?
Although there is no general requirement of good faith in all English law governed contracts, Yam Seng has established some important principles. The starting point is for the court to construe the agreement properly. Does the contract allow for the implication of good faith terms? If the contract is relational, then there is a good chance that such terms will be implied. A note of warning here: the Mid Essex case considered a relational contract, but on its proper construction there was no room to imply good faith terms because the hospital had no real contractual discretion to exercise. If the contract allows for the implication of good faith terms, then what are they? The implied term of honesty will be the most readily applied, but a duty not to perform the contract in a commercially unacceptable way has also been imposed.
This may all signal the introduction of an element of uncertainty in the terms which may be implied into a contract between commercial counterparties. This is an interesting development to have been made by a Judge of the English Commercial Court which has traditionally valued certainty so highly. The House of Lords had considered this issue earlier in Walford v Miles [1992] 2 AC 128 and rejected the idea of a duty of good faith (admittedly to negotiate rather than to perform) on the basis that it was “inherently repugnant to the adversarial position of the parties” and “unworkable in practice”.
Gibson & Co.
April 2015