In a recent decision, the High Court held that a contractual right of termination did not have to be exercised in good faith. An express term of the contract requiring the parties to “work together and individually in the spirit of trust, fairness and mutual co-operation” and to “act reasonably” in respect of “all matters governed by the [contract]” did not impose a duty of good faith, and no such duty could be implied into the contract: TSG Building Services PLC v South Anglia Housing Limited [2013] EWHC 1151.

This is the latest in a series of cases in which the English courts have considered the extent to which contracting parties must act in good faith. The high water mark was Yam Seng Pte Limited v International Trade Corporation Limited [2013] EWHC 111 (QB). In that case, Mr Justice Leggatt implied a duty of good faith into a distribution agreement and said that he saw no difficulty in implying such a duty into ordinary commercial contracts based on the presumed intention of the parties. As we noted in an earlier post, this novel approach goes against the grain of English case law and seems unlikely to herald a significant change in the approach of the courts.

The decision of Mr Justice Akenhead in the present case appears to reinforce the view that the courts will continue to give a narrow interpretation to express contractual obligations of good faith and hesitate before implying such obligations.

Background

The claimant (TSG) contracted to provide a gas servicing and associated works programme to the housing stock of the defendant (South Anglia). The contract was based on the ACA Standard Form of Contract for Term Partnering (TPC 2005 amended 2008) and was for a term of 4 years.

Clause 1.1 of the contract provided as follows:

The Partnering Team members shall work together and individually in the spirit of trust, fairness and mutual co-operation for the benefit of the Term Programme, within the scope of their agreed roles, expertise and responsibilities as stated in the Partnering Documents, and all their respective obligations under the Partnering Contract shall be construed within the scope of such roles, expertise and responsibilities, and in all matters governed by the Partnering Contract they shall act reasonably and without delay.

Clause 13.3 gave South Anglia the right to terminate the contract for convenience.

A little over a year into the contract term, South Anglia sought to exercise this right. It served a termination notice on TSG, without giving any explanation as to why it wished to terminate. TSG commenced an adjudication claiming a termination payment, either as damages for breach or pursuant to the contract. A substantial sum was awarded to TSG by the adjudicator.

Decision

The High Court held that the adjudicator was wrong in awarding compensation. The principal issue was whether South Anglia was under a duty to act in good faith when deciding whether to terminate the contract under clause 13.3. It was TSG’s case that such a duty arose on the proper interpretation of clause 1.1 and also pursuant to an implied term.

As regards clause 1.1, Akenhead J held that the requirement that the parties “work together … in the spirit of trust, fairness and mutual co-operation” related to the provision of gas-related works only. This was also true of the requirement that they “act reasonably” in respect of “all matters governed by the [contract]“. The parties had expressly limited the scope of these obligations to their “roles, expertise and responsibilities” and, as a result, they did not impinge upon the right under clause 13.3 to terminate for convenience. This meant that clause 1.1 did not require South Anglia to act reasonably in exercising this right.

Akenhead J also rejected TSG’s argument that the court should imply a term to this effect. In clause 1.1, the parties had already gone as far as they wanted in expressing terms about how they were to work together. There was therefore no room for the court to imply into the contract a duty of good faith. Even if there was some implied term of good faith, it could not circumscribe what the parties had expressly agreed in clause 13.3. The parties intended that South Anglia could exercise the right for “no, good or bad reason” and TSG took the risk that South Anglia would do so.

In reaching this decision, Akenhead J considered Yam Seng and concluded that, whilst the judgment of Leggatt J was “interesting and illuminating“, he would not draw from it any principle of general application to all commercial contracts. He stated that the limited aspects of good faith considered by Leggatt J, namely honesty and fidelity to the contractual bargain, did not impinge in the instant case. There was no suggestion of any dishonesty in South Anglia’s decision to terminate and fidelity to the bargain was largely already covered by clause 1.1.

Comment

Where a contract contains an express right of termination, the contracting parties will in most circumstances set out what conditions, if any, must be satisfied before the right can be exercised. If the right is to be subject to a requirement of good faith or may not be exercised unreasonably or vexatiously, which could in practice amount to a significant qualification, they can usually be expected to say so expressly. In the absence of any such provision in this case, the court was not willing to imply one.

The role of good faith in contractual relations is currently attracting considerable interest. Such is the level of interest that an academic conference on Yam Seng was held within a few weeks of Leggatt J’s judgment being published. 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.