In many countries, parties to a contract have an implied duty of good faith to one another. This can have wide-ranging consequences - it may require a duty of candour / disclosure and moral and ethical standards in the parties' behaviour. Further, “[t]ransparency, co-operation, and trust and confidence are… implicit within the implied obligation of good faith"1 and are therefore required. As this duty is implied, where it applies it will arise whether or not the parties to a contact include it in their written terms, which can have unintended results.
Traditional Irish Position
The Irish courts have traditionally been resistant to the recognition of a general implied duty of good faith in contracts2.
For example, in Flynn v Breccia3 Finlay-Geoghegan J. commented that there was no general principle of good faith in Irish contract law4, and this has been taken to represent the Irish position, although those comments did not form the basis of the Court’s ruling. The decision did not appear to rule out change, however in a concurring judgment, Hogan J. stated that "[t]The fact that the Irish courts have not yet recognised such a general principle may over time be seen as simply reflecting the common law’s preference for incremental, step by step change through the case-law…rather than an objection per se to the substance of such a principle"5.
In the United States, the Uniform Commercial Code provides that "every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement"6 and that provision cannot be waived by the parties7. A general principle of good faith also arises in civil law jurisdictions, such as in Article 1134 of the French Code Civil or Article 2 of the Swiss Civil Code.
The implied duty of good faith has also been introduced through judicial interpretation in some jurisdictions - i.e. the Australian judgment in Burger King v. Hungry Jack’s8 and the Canadian Supreme Court decision in Bhasin v. Hrynew9. There, the Canadian Supreme Court found that: -
“There is a general organizing principle of good faith that underlies many facets of contract law… [including]… a duty of honest performance, which requires the parties to be honest with each other in relation to the performance of their contractual obligations.”10
The position in England traditionally mirrored that in this country – a general duty of good faith was not recognised. That had been eroded over the past decade but a recent decision means that the implied duty may now arise in far wider circumstances.
Bates v. Post Office11 involved 550 claimants, mostly sub-postmasters, who had contracts of employment with the defendant. The court was asked to decide whether the contracts included an implied duty of good faith.
The Court found that the concept of a "relational contract" is an established one in English law12 and that in relational contracts, "there is implied an obligation of good faith (which is also termed “fair dealing” in some of the cases)"13. The indicators of a ‘relational’ contract are indicative only and not all need be met for such a contract to arise: -
- There must be no specific express terms in the contract that prevents a duty of good faith being implied.
- A long-term contract, with the mutual intention of a long-term relationship.
- The parties must intend that their respective roles be performed with integrity, and with fidelity to their bargain.
- The parties will be committed to collaborating with one another in performance of the contract.
- The spirits and objectives of their venture may not be capable of being expressed exhaustively in a written contract.
- Each party has trust and confidence in one another, but of a different kind to that involved in fiduciary relationships.
- The contract will involve a high degree of communication, co-operation and predictable performance based on mutual trust and confidence, and expectations of loyalty.
- There may be a degree of significant investment by one party (or both) in the venture, in some cases, more accurately described as substantial financial commitment.
- Exclusivity may also be present14.
The decision in Bates v Post Office expands the English law in a potentially wide manner. It confirms an implied duty of good faith in 'relational contracts'. However, the indicative tests for the presence of a ‘relational contract’ are matters which are relatively commonplace in commercial arrangements and parties may unintentionally meet the criteria. The Irish Courts have often followed developments of the law originating from English decisions. This suggests that a party seeking to argue in favour of recognition of such a duty in this jurisdiction would find support in the Bates decision. Whilst the Flynn decision represents the primary Irish judicial commentary to date, uncertainty will continue until the Supreme Court delivers a determinative judgment on the issue.
In the interim, parties who wish to ensure a duty of good faith arises in their contracts (or guard against such an interpretation) should cover this specifically in individual contracts through the use of bespoke language. Whether, and in what manner, this should be done in individual cases would require the careful consideration of a number of matters on which specific advice should be sought.