Blog - 30/06/2020
Litigation & Dispute Resolution
Are contractual parties obliged to act in good faith?
With a possible tsunami of litigation the Government asked contracting parties to act nicely in relation to the performance and enforcement of contracts impacted by the Covid-19 emergency. Although this non-statutory guidance was not intended to override other legal duties or obligations, it begs the question of whether there is any legal duty to act fairly or in good faith under English contract law.
In short, there is no general duty to perform commercial contracts in good faith under English law. However, this differs to the position in many other countries including Australia, France, Germany and the USA, which all recognise some kind of general good faith obligation. Instead, English law has developed piecemeal solutions in response to problems of unfairness. These can generally be categorised as follows:
- An implied duty of good faith;
- A duty of rationality (often referred to as the “Braganza” duty); and
- An express duty of good faith.
Although English law does not imply a general duty of good faith across all commercial contracts, it is possible for the courts to imply such duty into a commercial contract, or to use the concept of good faith to establish other specific duties into a commercial contract. To date, this has been limited to “relational” contracts.
Despite the concept of a “relational” contract being first advocated in a case in 2013 (Yam Seng Pte Ltd v International Trade Corp Ltd  EWHC 111), the development of the concept has been slow. Last year the High Court helpfully held the existence of a “relational” contract and provided a list of nine factors that supported the conclusion in this case (Bates v Post Office  EWHC 3408). Although this list was non-exhaustive, it suggests some of the key features of “relational” contracts. For example, a contract must be long-term, involve significant investment and encompass collaboration, communication and the confidence of the parties. The contract must also not expressly exclude a duty of good faith, in order to be a “relational” contract.
This decision did not, however, settle the matter and cases have since have reverted to deciding that an implied duty of good faith will only apply where needed to give the contract commercial or practical coherence.
The implied duty of rationality applies where there is no clear language to the contrary. The duty requires contractual parties to exercise any contractual discretion in good faith and not arbitrarily or capriciously. While this rule is referred to as an implied term, it has become so well-established and difficult to exclude, that one may consider it to be a general rule. Although this duty does not prevent all unreasonable commercial behaviour, it has been applied in cases where there has been a significant imbalance in power to prevent the stronger party unfairly assuming the role of decision-maker.
An express duty to perform a contract in good faith is not commonplace in English contracts. As such, although English courts are willing to give effect to such contractual terms, the courts have been found to adopt a restrictive approach to interpretation. Including an express duty of good faith in a commercial contract can be beneficial to fill in any gaps in the contractual relationship and encourage both parties to act in a fair and honest way. However, care should be taken when including an express duty of good faith to ensure it does not cut across other express contractual provisions so as to undermine the overall “deal”. When drafting an express duty of good faith, one should take care as to the definition of “good faith” as there is no generally accepted definition in English law.
Importantly, where there is an express duty of good faith, the courts will not imply a wider duty into the contract. Therefore, there is a risk that a poorly drafted express duty may in turn hinder a court’s ability to imply a more beneficial duty and/or resolve unfairness in the event of a future dispute.
What does “good faith” actually mean?
There is no generally accepted definition of good faith under English law. The spectrum of judicial commentary has made reference to fidelity, honesty, integrity and reasonableness. However, what is clear, is that good faith is heavily conditioned by the contractual context and a breach of good faith is assessed objectively (i.e. would the conduct be regarded as commercially unacceptable by reasonable and honest people?).
The English courts’ reluctance to recognise a general duty of good faith, in favour of principles of freedom of contract and contractual certainty, has traditionally been recognised as a strength of English law and a reason why commercial parties often elect for English jurisdiction. However, with growing support internationally for the adoption of a general duty of good faith, it is hard to see why a general duty which promotes honesty, integrity and fair dealing would be such a bad thing. The “Braganza” duty provides some sort of safeguard against capricious behaviour. However, a duty to act rationally is not the same as a duty to act reasonably.
Should you have any questions arising from this blog or wish to discuss your own concerns, please contact any member of the Litigation & Dispute Resolution team.
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Please note that this blog is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content of this blog.
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