Recent challenges to the English law position on "good faith"
Unlike in many other legal systems around the world, English common law does not recognise a general contractual duty to act in good faith either when negotiating or when performing contracts. However, a series of recent high court cases have tested this position and have shown an increasing willingness of the courts to imply good faith obligations in the performance of contracts, at least for long-term "relational contracts" such as joint ventures, franchise and distribution arrangements.
The traditional English law aversion to a general duty of good faith has, on the whole, so far survived this challenge. However with practitioners increasingly alive to the possibility of alleging a contractual duty of good faith, it is reasonable to expect that there will be more disputes about the existence and scope of such duties in the future.
This newsletter summarises the current English law position and contains some tips to keep in mind when drafting contracts.
Basic English law position
Unlike in many civil law systems and indeed some common law systems as well, there is no overriding principle under English law that parties to a contract should act in good faith either in negotiating a contract or in their performance of that contract once entered. This is underpinned by English law's aversion to restrictions on freedom of contract and on the fear that a vague and subjective obligation such as "good faith" would create too much uncertainty.
Accordingly, if parties wish to include a good faith duty they must do so expressly in the contract. Furthermore, even where contracts so have such an express obligation, the lack of a general good faith doctrine under English law and the reluctance of English courts to accommodate notions of good faith, often leads to narrow interpretations of express good faith obligation. For example, a court will not interpret an express good faith obligation in a way that would require a party to give up a freely negotiated right or financial advantage that is clearly established in the contract.
Series of cases
A recent series of high court cases has tested English law's traditional reluctance to imply good faith obligations into the performance of contracts.
In support of an implied duty
In 2013, the High Court implied a duty of good faith into a distribution agreement (the Yam Seng case)1:
- In particular, the judge found that this implied duty of good faith would prevent a party from (i) knowingly providing false information to the other; or (ii) undercutting prices of products which were also sold under the distribution agreement.
- In the judge's view, the traditional English “hostility” towards a generally applicable duty of good faith in performing contracts is “misplaced” and “swimming against the tide”, though he doubted that English law was ready to recognise a requirement of good faith implied by law into all commercial contracts.
- He suggested that whether a good faith duty should be implied would depend on the presumed intentions of the parties and the background against which the contract was entered into. In this context, courts should be more ready to imply a duty of good faith into what he termed “relational contracts”, such as some joint venture agreements, franchise agreements and long term distributorship agreements. This was on the basis that such contracts require a high degree of communication, cooperation and predictable performance based on mutual trust and confidence and involve expectations of loyalty.
Against an implied duty
However, a judge in a later 2013 High Court case2 appeared to revert back to the traditional English law position. In that case the High Court refused to imply a good faith requirement on a party exercising a right to terminate a service contract for convenience. This was despite the fact that the contract included a general conduct clause that contained notions of good faith.
In support of an implied duty again
In an even more recent case, the High Court again implied a duty of good faith into a long-term agreement between two commercial parties (the Bristol Groundschool case)3. In doing so, the judge endorsed the approach of the High Court in Yam Seng and held that the contract in question was a “relational” agreement which did contain an implied duty of good faith.
Appeal court position
The line of reasoning in these cases is yet to be conclusively tested in a Court of Appeal or Supreme Court decision. 4
Obligations under an implied duty of good faith
Based on the judgements in the Yam Seng and the Bristol Groundschool cases, an implied duty of good faith would encompass:
- a duty to act honestly; and
- an objective test based on whether, in the context of the particular contract, the conduct would be regarded as commercially acceptable by a reasonable person.
Exactly what would be required under a good faith duty would be very fact dependent based on the terms of the contact, the subject matter, the parties and their relationship. An example might be an expectation that information would be freely shared between the parties to the contract in an open and collaborative manner.
Other examples of duty of good faith under English law
Whilst English law does not recognise a general obligation on parties to perform contractual obligations in good faith, good faith concepts are recognised in some aspects of English law. For example, notions of good faith are implied into contracts of employment, agency and contracts between partners or others whose relationship is categorised as fiduciary. Also, good faith obligations are found in legislation based on EU regulations, such as the Unfair Terms in Consumer Contracts Regulations 1999. Indeed the proposed Common European Sales Law (a new set of contract law rules for cross-border contracts) includes a general good faith duty (although the English Government’s response to this proposed law raised issues with the duty of good faith).
Furthermore, English courts' application of equitable principles and tests based on reasonableness are in reality based on the same ideas of fairness that underpin good faith duties in other legal systems and can lead to similar conclusions.
Accordingly, perhaps a good faith duty is not so foreign a concept to English law and it may be that English law will eventually follow other legal systems in recognising this duty.
- On balance, in the absence of any definitive appeal court conclusion on this recent line of cases, it is likely that the traditional English law aversion to a general good faith duty will prevail and express good faith obligations, whilst enforceable, will continue to be interpreted narrowly.
- However, parties involved in long-term "relational" contracts such as joint venture agreements, franchise agreements and long-term distribution arrangements, should be aware of this recent hint of an attitude shift in English courts and the possibility of broader duties of good faith being implied.
- Furthermore, clearly a court is more likely to be willing to imply a good faith obligation to counter dishonest behaviour by a party.
- As always, the best approach to reduce uncertainty is to spell out the parties' intentions in the contract.
- If the parties intend to include a good faith duty, its terms and scope should be expressly written. For example, if the parties intend that they must each act in good faith when exercising a termination right, this should be expressly stated in the termination clause rather than simply relying on a generic good faith undertaking.
- Under English law, duties implied by law can, subject to a few limitations, be excluded by the parties. Therefore, the contract could alternatively include an express exclusion of any good faith duty if the parties instead wish to avoid any possible implied restraints on their ability to act freely in their sole interests.