Is there any implied overriding duty of good faith as between parties to a contract under English law? For many years the answer seemed clear: No. However, some recent cases have re-examined this issue. In Mid Essex Hospital Services NHS Trust v Compass Group UK & Ireland Ltd (t/a Medirest) [2013] EWCA Civ 200, the Court of Appeal overturned an earlier decision of the High Court that such a duty could be implied in certain circumstances. The Court of Appeal restated the English court's traditional approach to the duty of good faith; namely, that there is no general principle of good faith in contracts. Given the striking facts of the case, it will be interesting to see if this is appealed, and if so, whether the Supreme Court shares the same view.

The Facts

A contract between an NHS trust and a provider of catering and cleaning services included a provision for "service failure points", from which the trust could calculate appropriate payment deductions for the service provider's performance failures. The contract included the clause:

"3.5: The Trust and the Contractor will co-operate with each other in good faith and will take all reasonable action as is necessary for the efficient transmission of information and instructions and to enable the Trust…to derive the full benefit of the Contract."

The trust identified a number of service failure points and made a number of payment deductions amounting to more than half the total sums due to the service provider over a six month period. These fines were often tremendously disproportionate, and included, for example, a fine of £84,540 upon discovery of a chocolate mousse in the fridge one day after its best before date, and a fine of £46,320 for out-of-date ketchup that had been supplied by a different supplier.

The Position on Good Faith

The extent to which national courts recognise an obligation of good faith varies between jurisdictions. The US duty of good faith, which is applicable to the negotiation and performance of contracts, is relatively rare amongst common law countries (being more akin to civil law jurisdictions, i.e. in continental Europe). Certainly, there is generally no implied duty of good faith in English law contracts (except in insurance contracts).

The Decision in the High Court [2012] EWHC 781

At first instance, Mr Justice Cranston held that the trust had acted in an "arbitrary, capricious, and irrational manner" in levying "patently absurd" fines. The Court held that the trust's conduct was fundamentally flawed, and by behaving in such a manner, had breached their duty of faith under the contract. As such, the trust's conduct constituted a material breach. By implying that a duty of good faith existed under contract, Cranston J had shifted from the traditional position on good faith in English law.

The Decision in the Court of Appeal

The Court of Appeal overturned Cranston J's judgment, and restated the traditional approach of the English courts; specifically, that there is no general principle of good faith.

Two main issues were before the court:

  1. whether there was an implied term to act reasonably (and if so, whether there was a breach);
  2. whether there was a breach of an express obligation of good faith contained in clause 3.5 of the contract.

As to the first point, Lord Justice Jackson concluded that there was no general obligation on a party to act reasonably in a long-term contract. In the instant case, there was no need to imply any term that the trust should act reasonably; if the supplier felt the trust had apportioned an inappropriate level of service failure points, or levied a disproportionate level of fines, this would have been potentially a breach of the express terms setting out the basis for levying such points or fines, and such a breach could have been challenged by the supplier under a dispute resolution mechanism set out in the contract, failing which the supplier could bring an action for normal breach of contract.

The Court of Appeal referred to another recently decided case, Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB), in which the High Court held that there is no general doctrine of good faith; if parties wish to impose such a duty, they must do so expressly.

As to the second point, Jackson LJ agreed with the NHS trust and held that the obligation of good faith was not a general one, and was limited to the two specified aims set out in clause 3.5: (i) efficient transmission of information; and (ii) to enable the trust…to derive the full benefit of the Contract. Jackson LJ disagreed with the supplier, and Cranston J, that the good faith obligation applied to all aspects of the parties' interaction under the contract.

Conclusion

The Court of Appeal held that aggressive and capricious behaviour by a contractual party does not, in itself, breach any contractual duty under English law. If the parties to a contract wish to impose a general duty of good faith in contracts, they must do so expressly and unequivocally. When drafting a clause expressly imposing a duty of good faith on the parties, care must be taken to ensure there can be no ambiguity in its interpretation. This confirms what the position has traditionally been understood to be; we wait to see if this is appealed, and if so, whether the Supreme Court shares the Court of Appeal's view.