Good faith is a key term in contract law, but it's not always clear what this means, so read on to get a clearer idea.
The term ‘good faith’ is often used in commercial contracts. However, there is no universally accepted definition of what is meant by good faith, and there is no general doctrine of good faith under English law.
As a result, the obligation to act in good faith in any contract carries with it a level of uncertainty. This uncertainty may lead to problems if and when a party to a contract containing a good faith obligation is unhappy with the other party’s behaviour, and subsequently claims that party is in breach of the obligation. In these circumstances, it is open for the courts to determine whether a breach has occurred and if so, what the adequate remedy should be.
Express duty
Including an express obligation to act in good faith within a contract is not straightforward. It carries with it the risk of whether the words chosen will succeed in imposing a duty, and what that duty will actually mean in practice. From case law, it appears that the courts do not distinguish between varying degrees of good faith. For example, imposing a duty to act in the ‘utmost good faith’ has been held to the same level as a duty to ‘resolve disputes by friendly discussion’.
The meaning of an express duty to act in good faith also depends on the circumstances and the commercial context of the contract. The courts have interpreted the duty to mean various things, including to:
- Prevent action that frustrates the purpose of the agreement (Berkeley Community Villages Ltd v Pullen [2007] EWHC 1330).
- Require disclosure of material facts to the other party (Horn v Commercial Acceptances [2011] EWHC 1757).
- Prohibit knowingly luring the other party into a false belief (Costain Ltd v Tarmac Holdings Ltd [2017] EWHC 319).
- Prohibit asking for information under pretence (Health & Case Management Ltd v Physiotherapy Network Ltd [2018] EWC 869).
- Prohibit knowingly providing false information on which the other party will rely (Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] EWHC 111).
- Prohibit negotiating behind the other party’s back (Al Nehayan v Kent [2018] EWHC 333).
Whilst it is uncertain what a duty of good faith will mean in practice, the courts have held that express duties of good faith will be unlikely to cut across hard contractual rights, such as the right to terminate a contract for convenience, and will be unlikely to require a party to give up its own commercial interests.
Implied duty
Good faith obligations may also arise where they have not been expressly included within a contract. According to case law, the courts may imply a duty of good faith where a contract lacks commercial or practical coherence without it, unless there are express obligations to the contrary. Implied duties of good faith often arise in “relational” contracts to assist with the interpretation of the contract or to imply fact-specific duties. Relational contracts are typically long term agreements involving high levels of transparency, co-operation, trust and confidence between the parties.
In the recent case of Bates v Post Office (No 3) [2019] EWHC 606, the High Court set out nine factors that supported an implied duty of good faith. These included…
- The fact there were no terms in the contract which were inconsistent with an implied duty of good faith.
- The idea that the parties were committed to collaborating and carrying out their roles with integrity and fidelity.
- The contact involved a high degree of communication, cooperation and predictable performance based on mutual trust and confidence and expectations of loyalty.
- The fact that the relationship between the parties was exclusive was also indicative.
However, the circumstances in this case were unusual and it is likely that a good faith obligation will be only be implied in exceptional circumstances.
Summary
Where contractual terms are explicit and the agreement between the parties is clear, then the term good faith will have very little impact. This is because the terms of the contract will be clear enough on their own, with little room for disagreement regarding interpretation. On the other hand, in a contract where the agreement is less clear, good faith becomes much more significant because any form of unfair behaviour may be seen as being in breach of the agreement made between the parties.
In light of the uncertainty that comes with a duty of good faith, when drafting a contract the focus should be upon ensuring that it is clearly written and that it explicitly states what is expected of both parties. This will help prevent future disputes over what is meant by good faith, given that it has no clear legal meaning, and should help provide parties with greater contractual certainty.
