Last year saw a number of cases concerning good faith in construction contracts.  As parties increasingly use concepts such as “good faith” and “reasonableness” in their contracts, further judicial examination of these concepts is likely; what did we learn about them in 2013?

In TSG Building Services Plc v South Anglia Housing Limited the parties’ TPC 2005 contract provided that they were to work together and individually in the spirit of trust, fairness and mutual co-operation.  It further stated that “in all matters governed by the Partnering Contract they shall act reasonably and without delay”.  

The parties fell out.  The contract included a termination clause which either party could exercise on 3 months’ notice (a so called “termination at will” provision).  South Anglia wrote to TSG giving 3 months’ notice to terminate the contract.  No reasons were given.

TSG sought damages for breach of contract.  The question for the Court was whether the contract, as a matter of construction, provided any constraint on the right of either party to terminate for convenience.

The Judge held that the wording of the good faith clause was not intended to apply to each and every obligation in the Contact. There were certain absolute rights which could always be exercised, reasonably or not. The effect of the termination at will clause was that either party, for no, good or bad reason could terminate at any time before the contract term was completed.  The judge also rejected the contention that there was an implied term of good faith in the Contract – “the parties had gone as far as they wanted in expressing terms… about how they were to work together in a spirit of “trust fairness and mutual cooperation” and to act reasonably”.

In Mid Essex NHS Trust v Compass, Compass contracted with the Trust to provide catering and cleaning services at hospitals in Essex.  The contract set out detailed performance criteria and the Trust was entitled to levy Service Failure Points (SFPs) if Compass failed to meet the criteria. The accumulation of SFPs carried serious consequences under the contract.

The contract stated that the parties must “co-operate with each other in good faith“.  Nevertheless, the Trust made what the Judge at first instance later described as “absurd assessments” when “awarding” SFPs.  Compass terminated the contract and the Trust claimed repudiatory breach.   The judge at first instance held that there was an implied term that the Trust would not exercise its discretion to award SFPs and make deductions in an arbitrary, capricious or irrational manner. 

The Trust appealed.  The Court of Appeal noted that the contract contained precise rules for determining how many SFPs had accrued; if the Trust awarded more SFPs than the contract allowed, that was a breach of the express provisions of the contract. There was, therefore no justification, or need, to imply a term that the Trust would not act unfairly. Indeed, the only discretion that the Trust could exercise was whether to levy correctly calculated SFPs at all and there could be no criticism of it where it decided to exercise an absolute contractual right.

The Court of Appeal also found that there was no general duty of good faith – such duty could only be imposed expressly by the parties.  In this instance, there was an express duty of good faith but it was not a general one which qualified or reinforced all of the obligations on the parties.

The Trust had, therefore, validly terminated its contract.

What are the practical consequences of these decisions for those agreeing contract terms?  It is clear following Compass that there is no general implied contractual obligation to act in good faith.  Further, even where parties agree a contractual term imposing such a duty, it is likely to be narrowly construed.  The parties must, therefore, be clear and specific with regard to those contractual obligations they wish to be exercised in good faith.