Most if not all of us would say that we do or like to think that we do but, if we agree in a contract to act in good faith do we know what it means and indeed does it matter?

The answer depends on what law applies, who you are dealing with and in what circumstances. Many countries including those in Europe impose a duty of good faith although the exact scope of that duty varies from country to country. Many other countries from the USA to the Middle East and beyond also recognise such a duty.

Historically, English law has not recognised any general duty to act in good faith when forming or performing contracts on the basis that it is too uncertain i.e. a vague obligation to act in good faith. This has meant that in England it has not normally been possible to enforce an obligation to negotiate in good faith.

However, the court was recently asked to consider how such a duty should be interpreted and if it could be relied on. In the case of Compass Group UK and Ireland Ltd (trading as Medirest) v Mid Essex Hospital Services NHS Trust ([2012] EWHC 781) the following clause in a long-term facilities agreement came under scrutiny:

“The Trust and the Contractor will cooperate with each other in good faith and will take all reasonable action as is necessary for the efficient transmission of information and instructions to enable the Trust or, as the case may be, any Beneficiary to derive the full benefit of the contract.”

Medirest performed poorly during the early period of the contract and the Trust awarded service failure points and subsequently deducted payments. However, when the service improved, the Trust continued to make payment deductions and presented highly exaggerated service failure figures.

In August 2009 Medirest served a notice of material breach following which the Trust reduced its demands considerably. Medirest served a notice of termination in September 2009 and the Trust then served its own notice of termination on the grounds of too many service failure points having been accrued. Whilst the Trust had the right to terminate Medirest’s appointment because Medirest had exceeded the number of permitted service failure points, the key question was whether Medirest also had the right to terminate due to the Trust’s breach of the obligation to act in good faith. Medirest argued that the clause should be read as imposing both a general obligation to cooperate in good faith and a more limited duty to take all reasonable actions as necessary for the two purposes contained in the clause: namely, the efficient transmission of information and to enable the Trust to derive the full benefit of the contract. The Trust argued that the duty was merely specific to the clause.

The court held that the Trust had breached its obligation to act in good faith having prepared “patently absurd”, “cavalier” and “indefensible” calculations of service credits under the contract. The judge indicated that if a clause is open to different interpretations then it should adopt the one closest to common sense and agreed with Medirest’s interpretation. The decision depended on an analysis of the wording with relevant factors being the duration and the fact that ultimately, the behaviour of the parties could affect the well-being of the public.

Although this isn’t new law it shows that even in England there may be situations where an obligation to negotiate in good faith is enforceable, particularly where parties are clear as to the parameters and objectives of their negotiation.

So does it matter? In short, yes. Many colleges have international contracts or are parties to international collaborations, which at the very least require them to be mindful of local customers and traditions. These contracts together with long-term outsourcing contracts will more than likely include a duty to act in good faith at some point.

Broadly, a duty of good faith entails an obligation to inform the other party, where reasonable, of all important points that the other party could not discover on its own, to apply reasonable diligence in the performance of pre-contractual and contractual obligations, to observe moral and ethical standards of behaviour where they are not already implied by local law, and not to break off negotiations without reasonable cause in circumstances where the other party reasonably anticipates that an agreement will be signed. However, rather than leave it to chance and find yourself at the mercy of interpretation of foreign laws, you should set out clearly what is required and avoid expensive, time consuming and frustrating disputes which could damage the college’s reputation.