And so ends a Rugby World Cup of highs and lows and bitter disappointments for the home nations. As the “sport played by gentlemen”, the concept of “playing fair” is well ingrained in the rugby tradition (or is meant to be by all accounts).  However, does a similar concept apply in English contract law?

Traditionally, there is no general doctrine or duty of good faith which applies to the parties’ performance of their contractual obligations. In this respect, it differs from other legal systems in both civil and common law.  In particular, a duty of good faith is incorporated in the US Uniform Commercial Code and in respect of the commercial code found in many civil law jurisdictions.

However, in English law, such a duty is felt to interfere with the parties’ freedom to contract in the terms they wish to and to undermine the contractual certainty, two of the articles of faith of English contract law.

That said, the use of a concept of good faith has grown in prevalence in recent years, whether as an implied term or as an express term agreed as part of the contract terms by the parties. In Yam Seng PTE Ltd International Trade Corporation Ltd[2013] EWHC 111 (QB), the court expressed doubt that English law was ready to recognise a requirement to act in good faith as an implied duty as a matter of course.  However, the court considered it appropriate to imply such a requirement into a commercial contract (e.g. by reference to the parties’ intentions when entering into the contract) where the parties were engaged in a long-term “relational” contract which required a high degree of communication, cooperation and predictable performance based on mutual trust and confidence.

In addition, parties are free to include an express obligation to act in good faith or similarly well-intentioned terms and more and more frequently do so. For example, it is a core term commonly used in the standard NEC3 forms of contract that the parties “shall act as stated in this contract and in a spirit of mutual trust and cooperation”.

Equally, “good faith” type obligations are commonly agreed as part of PFI contracts where one party agrees to construct and operate a public facility, such as a school, hospital or infrastructure over a number of years in return for payment made over the term period.

The PFI Contract under consideration in Ensign Highways v Portsmouth City Council was one such contract.  Under this agreement, Ensign agreed to refurbish and maintain PCC’s highway network over a period of 25 years.

The Contract provided a mechanism for awarding Service Points where Ensign was in breach of its obligations under the Contract. Ensign was obliged to notify PCC of any breach as soon as practicable.  Under the Contract, PCC had a discretion to award points for default events within a range with a schedule appended to the Contract setting out maximum event values (MEVs) to be accorded to certain default events.  If a certain number of points were accrued within a 12 month period, it could trigger the bank loan to Ensign becoming immediately repayable or enable PCC to terminate the Contract.

From around December 2013, PCC went about implementing a strategy of levying maximum penalties and ambushing Ensign with the award of large Service Points in one go. This strategy was patently aimed at engineering a position to cause maximum difficulty to Ensign in the hope that it would be forced to renegotiate the terms of the Contract.

Ensign objected to PCC’s strategic operation of the payment mechanism and referred the dispute to expert determination under the Contract. Ensign relied on a good faith clause tucked away at clause 44 of the Contract (a clause which related to the duty to provide “best value” under the Contract), which stated:

PCC and [Ensign] shall deal fairly, in good faith and in mutual co-operation with one another and with Interested Parties.

The Expert found that PCC had in fact acted in breach of clause 44, unfairly and in bad faith.

PCC commenced proceedings seeking a declaration from the court relating to the performance of its obligation under the Contract and, in particular, whether:

  • the MEV figures were maximum values that could be awarded for a breach or were tariffs to be applied irrespective of the gravity of the breach;
  • the duty to act in good faith set out in the Contract extended to the award of Service Points; and
  • if the duty of good faith provided for under the Contract did not extend to clause 24, a term requiring the parties to act in good faith should be implied into the clause.

The court held that the MEVs were maximum values rather than fixed tariffs to be applied regardless of the severity of the breach.

In respect to the second question, the judge took the view it was not possible to “cherry-pick” the good faith element of the clause and ignore the obligation to cooperate: both elements needed to be present in order for the clause to be effective. The judge observed that it was difficult to see how clause 44 required cooperation between the parties to work.  Each party had obligations but was not obliged to cooperate with the other as such to make the Service Points regime work.   Likewise, whether or not PCC decided to award Service Points did not involve any cooperation with Ensign: quite the opposite, it required only a unilateral decision from PCC.  Accordingly, the judge held that the contractual duty of good faith did not extend to clause 44.4.1.

Having decided that it was necessary to imply a term into the clause in respect of the award of Service Points, the judge finally considered the thorny question of what that term should be. He rejected Ensign’s submission that PCC should “hold the balance fairly” and “act in a manner which is independent, impartial, fair and honest.”  The judge concurred with PCC that it was entitled to take its commercial interests into account when awarding Service Points.  However, the judge opted to follow the wording determined in relation to a similar issue determined in an earlier case, Mid Essex Hospital v Compass Group and held that when assessing the number of Service Points, PCC was obliged “to act honestly and on proper grounds and not in a manner that is arbitrary or capricious” (emphasis added).

Is this a debate about angels on pinheads or is the result of this formulation something more than that? The difference between an obligation to act in good faith and an obligation to act in a way that is not arbitrary or capricious is arguably nebulous in that it has never been adequately defined by the authorities.  However, the crux of the matter is likely to be (as in this case) whether the parties are entitled to act in a commercially selfish way to the detriment of their counterpart.  It is submitted that where there is a positive obligation of good faith governing the clause in question, such behaviour may represent a breach of contract.  However, where the contract is silent on the point, so long as the conduct is not dishonest or arbitrary, the other party will have great difficulty crying foul.