In the recent case of Portsmouth City Council v Ensign Highways Ltd [2015] EWHC 1969 TCC, the High Court provided further guidance as when the parties to a contract will be under an obligation  to act in good faith.

Background:

In this case, Portsmouth City Council (PCC) had entered into a complex PFI contract with Ensign Highways Limited (EH) for the maintenance of its highways. Under the terms of the contract, PCC was able to award service points to EH for breaches of contract relating to EH's performance obligations. A number of the clauses within the contract contained an express obligation to act in good faith. Importantly though, the clause that enabled PCC to award service points and impose financial penalties on EH did not contain an express obligation of good faith. Following a dispute over the award of service points, EH sought to argue that an express good faith clause, relating to "best value", applied to the performance clause or that alternatively, there was an implied duty of good faith.

The Decision:

Rejecting the case put forward by EH, the Court held that:-

  •  Whilst a number of clauses contained an express obligation of good faith, the language in those clauses did not support a wider interpretation that a duty of good faith should apply to the contract generally;
  • The fact that some clauses contained an express obligation of good faith suggested that the parties only intended that it would apply in certain circumstances; and
  • The clause relating to EH's performance obligations (and imposition of financial penalties) did not require the Court to imply a duty of good faith to make it work.

Comment:

Existing case law in this area has shown that the English Courts will be reluctant to interfere with the parties' ability to negotiate the terms of a contract and to imply an overall duty of good faith. Similarly, even where a contract does include a clause containing an express duty of good faith, the Courts have shown that the clause will be interpreted strictly, will not extend beyond its stated purpose and is unlikely to give rise to a general obligation of good faith[1].

Whilst it should not be ignored that the Court has on occasions implied a duty of good faith into certain contracts, see for example Yam Seng Pte v International Trade Corporation [2013] EWHC 111 QB and Emirates Trading v Prime Mineral Exports [2014] EWHC 2014 (Comm),  it is clear from those cases and their subsequent application that it will only do so in exceptional circumstances.

Conclusions:

Against this background, the decision in Ensign is relatively unsurprising. It does, however, serve as a useful reminder of the approach that the Court will take when considering whether a duty of good faith exists. Importantly:-

  •  Where the parties to a contract wish to include an overall duty of good faith, it would be advisable to do so through a separate clause which makes it clear that it is intended to govern the contract as whole.
  • Where a clause in a contract contains an express duty of good faith,  it will be interpreted narrowly by the Court and it is unlikely to extend beyond its stated purpose or give rise to a general obligation of good faith.
  • Whilst it is unlikely that the Court will imply a duty of good faith, this will depend on the context of a particular matter and whether or not an implied duty of good faith is necessary to give business efficacy to a particular clause or contract.