The role of good faith in current commercial contract law
By David Sears QC
Posted: 4th August 2016 09:14
There has been much discussion recently as to the extent to which, if at all, English common law now recognises a need to import an obligation of good faith into all commercial contracts. Given the move towards ever more collaborative forms of contract, it is a debate which has a particular relevance to the construction industry.
There have been a number of recent cases in the High Court where the question has arisen. Most notably, in two separate cases, Mr Justice Leggatt has suggested that there is no good reason why English law should not imply an obligation of good faith in all commercial contracts.Relying upon what Lord Hoffman said in AG for Belize v Belize Telecom Ltd, Leggatt J said that the process of implication has to be analysed as an exercise in construction of the contract as a whole and that the central question which has to be asked is: what would the contract, read as a whole against the relevant background, reasonably be understood to mean?
The judge suggested that the relevant background would include shared values and norms of behaviour and that a paradigm example of a general norm which underlies almost all contractual relationships is an expectation of honesty, although it was seldom, if ever, made the subject of an express contractual obligation. He said that, as a matter of construction, it was hard to envisage any contract which would not reasonably be understood as requiring honesty in performance. He also thought the same result would be achieved if the traditional test for the implication of terms was applied because the requirement that the parties would behave honestly was so obvious as to go without saying (or so he thought).
Although beguiling in its simplicity, all the indications are that English law is not yet ready to imply a duty of good faith into all commercial contracts. Of course, there are certain types of contract where such an obligation is imposed by law; for example, contracts where one party assumes fiduciary duties, partnership agreements and insurance contracts. But other than in those well-established exceptions, the courts have demonstrated a marked reluctance to imply such a term into other commercial contracts.
A notable recent example of a court’s reluctance is the decision of the Court of Appeal in Mid Essex Hospital services NHS Trust v Compass Group UK. In fact, it was a case about the scope and meaning of an express term requiring the parties to ‘cooperate with each other in good faith’ and so the question whether such a term should be implied did not arise. However, Jackson LJ made it clear that ‘there is no general doctrine of good faith in English contract law’ and that ‘if the parties wish to impose such a duty, they must do so expressly.’
Another example of a recent decision to like effect is to be found in the judgment of Mrs Justice Andrews in Greenclose Ltd v National Westminster Bank Plc where she said that ‘there is no general doctrine of good faith in English contract law and such a term is unlikely to arise by way of necessary implication in a contract between two sophisticated commercial parties negotiating at arms' length.’
Such an approach is likely to be strengthened by recent developments in the law concerning the implication of terms as exemplified by the decisions of the Supreme Court in Arnold v Britton and Marks & Spencer plc v BNP Paribas, both of which are generally regarded as heralding a retreat to a more traditional or black letter approach to contract construction, thereby discouraging the previous leaning of the courts to favour commercial common sense over the strict literal meaning of the words actually used. Specifically, in the latter case, the Supreme Court said that a term should not be implied into a detailed commercial contract merely because it appears fair or because the parties would have agreed it if it had been suggested to them.
However, even where there is an express term importing an obligation to act in good faith, recent court decisions make it clear that any such term will be strictly construed as to the scope, meaning and application of the obligation. For example, in the Medirest case mentioned above, it was held that the express obligation imposed upon the parties ‘to cooperate with each other in good faith’ was not a general obligation which qualified all the obligations on the parties but was instead limited in its application to the specific purposes enumerated in the remainder of the relevant term.
TSG v South Anglia Housingwas a case in which South Anglia entered a contract with TSG for the provision of a gas servicing and associated works programme based on the ACA Standard Form of Contract for Term Partnering. Clause 1.1 of the Contract provided that ‘(1) the Partnering Team members would work together and individually in the spirit of trust, fairness and mutual cooperation for the benefit of the Term Programme and (2) all their respective obligations under the Partnering Contract would be construed within the scope of such roles, expertise and responsibilities, and (3) in all matters governed by the Partnering Contract, they would act reasonably and without delay.’ The contract also provided for either party to terminate at will on three months’ notice.
The court was asked to determine whether, in terminating the contract, South Anglia was obliged to act in good faith or to act reasonably. Akenhead J held that Clause 1.1 did not operate so widely as to require South Anglia to act in good faith or to act reasonably when terminating the contract in accordance with the termination provision. The judge drew a distinction between the requirements in the cooperation clause and the unilateral and unfettered right to terminate at will. In the case of the termination clause, the judge took the orthodox common-law view that the parties had agreed the term on an equal basis and must be taken to have accepted that the words would mean what they said; i.e. that the right to terminate was open to either party to operate at will.
Similarly, in the very recent case of Bristol Rovers (1883) Ltd v Sainsbury’s Supermarkets Ltdthe Court of Appeal rejected an argument that an express obligation to ‘act in good faith in relation to the parties’ respective obligations under the contract meant that Sainsbury’s was obliged to ‘adhere to the spirit of the contract’ and not to resort to its black letter.
The conclusion which must be drawn is that, except in the few categories of case which are recognised as genuine exceptions, the courts are very unlikely to imply a term requiring the parties to act in good faith. Moreover, even where there is an express term requiring one or other or both parties to act in good faith, the court is likely to scrutinise the wording very carefully to ensure that the obligation to act in good faith does not extend any further than the parries intended. It follows that if a party wishes to impose a general obligation to act in good faith upon the other party, it needs to do so very clearly indeed.
David Sears QC is a barrister in practice at Crown Office Chambers. He was called to the Bar in 1984 and was appointed a QC in 2003. He is widely recognised as a leading practitioner in commercial dispute resolution with a particular emphasis on professional indemnity, construction and engineering, energy and utilities, information technology and insurance law.
David has many years’ experience as an advocate in the Technology and Construction Court, the Commercial Court and the Court of Appeal. He has advised and acted for clients in international arbitrations under ICC, UNCITRAL, LCIA and ad hoc rules as well as in relation to all kinds of domestic disputes. He is a Fellow of the Chartered Institute of Arbitrators. He is also an accredited adjudicator and mediator.
David is regularly listed in the two main legal directories (Legal 500 and Chambers) as a leader in the fields of professional negligence and construction.
David can be contacted on +44 (0)20 7797 8100 or by email at firstname.lastname@example.org