In the June edition of the eBulletin, we examined the terms “best endeavours” and “reasonable endeavours”, which are both common contractual terms. Another common contractual term is one which requires the parties to exercise “good faith” in their dealings with each other. The obligation to act in “good faith” is not something which should be ignored or treated lightly.

The requirement to act in “good faith” was examined recently in the case of Berkeley Community Villages Limited v FD Pullen and others [2007] EWHC 1330. Mr Pullen is a farmer who owned 840 acres of land in Kent with substantial development value. In 2003, Mr Pullen entered into an agreement with Berkeley under which Berkeley would try to obtain planning permission for part of the land. While the agreement was in place, Mr Pullen could not sell the land to a third party.

Perhaps predictably, another party did come along and offered Mr Pullen £35 million for the land. This was an offer he felt that he could not refuse. Berkeley applied for an injunction to prevent the sale on the basis that it would breach the agreement. The Court ruled that a provision in the agreement “to act in good faith” meant that “reasonable standards of fair dealing” had to be observed and that the parties had to be faithful to the common purpose. If the sale proceeded, Berkeley would be unable to recover its fee and complete its role. Berkeley got its injunction.

“Boilerplate” is the term used to describe phrases and clauses that are nearly always found in contracts and perhaps the fact that they are always there means that they are sometimes overlooked. The lesson here, however, is that, while many words and phrases are trotted out time and time again in contracts, this does not lessen their impact and effect. A requirement to act in good faith means just that and it is not a phrase with hen’s teeth, as Mr Pullen found out.