In a recent case, the High Court has implied a duty of good faith into a long-term agreement between two commercial parties: Bristol Groundschool Limited v Intelligent Data Capture Limited [2014] EWHC 2145 (Ch).

In doing so, the court endorsed the analysis of Mr Justice Leggatt in the 2013 case of Yam Seng Pte Ltd v International Trade Corpn [2013] EWHC 111 (see post), which has been seen as the high water mark in recognising such duties, though subsequent first instance decisions have appeared to beat something of a retreat from it (see for example this post).

In Yam Seng, Leggatt J found that a duty of good faith could be implied into ordinary commercial contracts based on the presumed intentions of the parties, though he doubted that English law was ready to recognise a requirement of good faith implied by law into all commercial contracts, even as a default rule. Such a clause was more likely to be implied into so-called “relational” contracts – contracts which involve a longer term relationship, and a high degree of communication and cooperation, between the parties.

Although only first instance, the present decision is of interest in showing that the courts may be prepared to imply a duty of good faith into contracts which require a high degree of cooperation and communication between the parties. From a claimant’s perspective an allegation of an implied duty of good faith may, in the right circumstances, be a useful tool in the armoury. Examples of “relational” contracts given in Yam Seng were joint venture agreements, franchise agreements and long term distributorship agreements. The agreement in the present case did not fall squarely within these categories (counsel for the defendant described it as a “hybrid”) but the judge nevertheless found that there was an implied duty of good faith.

Parties negotiating longer term agreements which may be considered “relational” should be aware of the possibility of broader duties of good faith being imposed. It may be advisable to seek to limit or exclude such duties, where possible, or incorporate more specific terms seeking to define their nature and extent.

Background

For approximately ten years between 1999 and 2009, the claimant (BGS) and one of the defendants (IDC) collaborated on producing electronic training manuals for commercial airline pilots. IDC created the artwork for the manuals. BGS provided the text, sold the manuals to students, and paid a specified sum to IDC for each manual sold. This arrangement was formalised in two agreements, the 1999 Agreement and the 2001 Agreement. In 2009, the two companies fell out and began producing rival training manuals.

The court considered as one of a number of preliminary issues whether a duty of good faith should be implied into the 2001 Agreement. If such a duty was implied, there was then a question as to whether BGS breached that duty by downloading materials from IDC’s IT systems without authorisation – and whether that breach was repudiatory. This issue was raised as a counterclaim to BGS’s own claim that IDC breached the 2001 Agreement by failing to provide technical support and refusing to include new materials in the manuals.

Decision

On the implied duty of good faith issue, the judge (Richard Spearman QC, acting as Deputy Judge of the High Court) expressly followed the approach of Leggatt J in Yam Seng. He held that the 2001 Agreement was a “relational” agreement which did contain an implied duty of good faith.

The judge referred to the Court of Appeal’s decision in Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd [2013] EWCA Civ 200. Although the Court of Appeal made only passing reference to the decision of Leggatt J and did not focus on the implication of the duty of good faith in contracts outside the traditional categories (eg contracts of employment, contracts between partners and other fiduciary relationships), the judge said he detected “no element of disapproval” of Leggatt J’s judgment in the judgments of the Court of Appeal.

The judge went on to consider what the implied duty of good faith meant for the parties. He decided that good faith “extends beyond, but at the very least includes, the requirement of honesty”. The relevant test is whether the conduct in question would be regarded as “commercially unacceptable” by reasonable and honest people in the particular context involved.

BGS’s unauthorised downloading of material was commercially unacceptable and therefore BGS was in breach of the implied duty of good faith.  

However, the judge found that the breach was not repudiatory. The breach did not “strike at the heart of the trust which is vital to any long-term commercial relationship”. This was for a number of reasons, including that the fruits of the unauthorised download were used for limited purposes, it was predominantly a precautionary measure, and the financial damage caused to the defendant by the unauthorised download was minimal, if not non-existent.