What does acting in good faith really mean?
The duty of good faith has no universally accepted meaning and what it means in a construction contract will depend on the contract in question and its commercial context. It has been held to entail an obligation to:
- adhere to the spirit of the contract
- observe reasonable commercial standards of fair dealing
- be faithful to the agreed common purpose
- act consistently with the justified expectations of the other party
- prevent action that frustrates the purpose of the agreement
- require disclosure of all material facts to the other party
- not knowingly lull the other party into a false belief
- not provide false information upon which the other party will rely
Although there is usually no implied duty of good faith in construction contracts, there is an exception for ‘relational contracts’. A new ruling considers the factors to be taken into account in deciding whether a contract is ‘relational’, and confirms that an implied duty of good faith requires more than just honesty. Whilst the case in question did not relate to construction contracts, it would appear that the principles are equally applicable to the construction industry.
What’s the background?
This latest ruling was handed down during a long-running group litigation against the Post Office; which continues. More than 500 sub-postmasters are claiming damages from the Post Office following significant problems with software rolled out by the Post Office nearly two decades ago.
This particular judgment concerned a number of ‘common issues’, notably where the contracts between the claimants and the Post Office were ‘relational contracts’, meaning that the Post Office was subject to the implied duties of good faith, fair dealing, transparency, co-operation, and trust and confidence.
What did the court decide?
The courts will not often imply such duties in the absence of express terms, but the High Court stated that where the specific characteristics listed below are present, a contract is to be categorised as a relational contract. Those factors are:
- A lack of any specific express terms in the contract preventing a duty of good faith being implied into it
- The contract will be a long-term one, with the parties’ mutual intention being that there will be a long-term relationship
- The parties must intend that their respective roles be performed with integrity, and with fidelity to their bargain
- The parties will be committed to collaborating with one another in the performance of the contract
- The spirit and objectives of their venture may not be capable of being expressed exhaustively in a written contract
- They will each repose trust and confidence in one another, but of a different kind to that involved in fiduciary relationships
- The contract in question will involve a high degree of communication, co-operation and predictable performance based on mutual trust and confidence, and expectations of loyalty
- There may be a degree of significant investment commitment by either or both parties in the venture
- Exclusivity of the relationship
Applying that test, the Court found that the various characteristics and features of the contracts between the claimants and the Post Office indicated that they were relational contracts. A higher standard was therefore expected of the Post Office.
What does this mean?
They are relatively new in English law, but it is a clear principle that can be applied to construction contracts such that they can be deemed to be relational contracts where certain factors are present. Businesses who are party to a relational contract must, however, understand that this implied duty of good faith means more than simply requiring honesty. It means that a duty of good faith is implied into the contract, with the result that the parties must avoid conduct which (in context) would be considered commercially unacceptable by reasonable and honest people.
If your business has long-standing construction relationships it may be wise to review those contracts to determine if it could be treated in law as a relational contract, thus imposing additional duties on the parties.
However, as far as your new contracts are concerned, there is much more clarity, as the Court made it clear that if the express terms exclude the implied duty of good faith, then that will be the end of the matter. So when negotiating new contracts, consideration should be given to expressly excluding the duty of good faith in the contract. Whether or not that will be acceptable commercially will of course depend on the facts and circumstances surrounding the relevant contract.