Introduction

Hot topics for the Technology and Sourcing team often relate to technology itself (the move to Cloud) or market developments (single versus multi sourcing; trends in contractual risk allocation). One current hot topic, however, is purely legal: 'good faith'. Can it be implied into contracts? If so, what would that mean in practice?

An implied term?

In Yam Seng last year, Mr Justice Leggatt criticised the English court's traditional hostility to the doctrine of an implied duty of good faith in English contract law. He expressed the view that the concept could be implied into "relational" agreements (many complex IT agreements, franchising agreements and joint ventures, for example, would fall into this category). As to what this implied duty would mean in practice, "good faith and fair dealing", "fidelity to the parties bargain" and a standard which would be breached by "commercially unacceptable behaviour" were all mooted by the judge. Ultimately, however, his comments were not binding, Yam Seng having been decided on other points of law.

Many of our non UK colleagues will be familiar with the approach recommended by Leggatt J, implied, or often express, duties of good faith being well established in many jurisdictions around the globe (although the precise standard required by this expression varies from jurisdiction to jurisdiction). For those advising on English law contracts, however, Leggatt J's views have been widely discussed. Lawyers took the opportunity to argue for implied good faith obligations in other disputes, but subsequent decisions declined to follow the judge's lead - until this summer.

First, in Emirates Trading, Mr Justice Teare described Leggatt J's reasoning as "masterly". Then, in Bristol Groundschool, Mr Justice Spearman approved of the views expressed in Yam Seng and went a step further by implying a duty of good faith into a relational contract. Echoing the thoughts of Leggatt J this obligation, said Spearman J, extended beyond mere honesty. It required commercially reasonable behaviour - as judged by reasonable and honest people given the particular context.

Practical application

Where are we now? Opinion is divided.

In part, it is said that the reasoning in Leggatt J's comments in Yam Seng (and, it follows, Bristol Groundschool) is that the new approach really only pulls together, and repackages, a number of well- established English legal principles. If so, it is perhaps not such a game changer in practice. Certainly some consider Bristol Groundschool to be an exception to the, still applicable, general rule that there is no implied duty of good faith of general application in English contract law. Interestingly, Bristol Groundschool also rather skirts around a decision of the higher Court of Appeal which came after Yam Seng which said that if the parties wish to impose a duty of good faith "they must do so expressly".

On the other hand some commentators see Bristol Groundschool as heralding a new era in English contract law.

So we are left with current uncertainty - which presents a challenge. Might it be possible to imply a good faith obligation into a particular agreement? If so, what exactly will it mean as a legal principle and, more importantly, as regards specific behaviour in the context of a particular contract?

To counter this uncertainty, parties to relational contracts should, if they wish, document their agreed position.

If they agree to include good faith obligations these should be set out as an express obligation (eg of "good faith and fair dealing"), which in all likelihood will be mutual. Any express term might also be coupled with an explanation as to precisely what it is intended to mean. Having actively established the express obligation, the contract can then go on to exclude any implied terms - whilst always being mindful of issues relating to the enforceability of exclusion clauses.

Parties might, alternatively, consider expressly excluding any potential implied duties of good faith altogether. On the face of it, such a negotiating position might appear somewhat unpalatable. But in the context of the current legal uncertainty, and particularly where the contract is entered into by legally sophisticated parties who have, instead, agreed to express, precise, behavioural terms (which might cover, say, co-operation, attendance at meetings, disclosure of relevant project information in a full and timely manner, and so on), a potential uncertainty can be replaced with the legal certainly that benefits all.

Case references

Yam Seng Pte Limited v International Trade Corporation [2013] EWHC 111 [QB]

Bristol Groundschool Limited v Intelligent Data Capture and others [2014] EWHC 2145 (Ch)