In this month’s potted guide, Jonathan Seitler QC guides practitioners through the basics of the law relating to good faith obligations in agreements, whether implied or express
Is there a general duty of good faith in English Law?
No, as a matter of principle.
As Bingham LJ said in Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] QB 433, English law has instead sought to develop “piecemeal solutions in response to demonstrated problems of unfairness”.
In other words, unlike the law in many other countries, there is no general principle of good faith, and so English law has not adopted a blanket policy of implying duties of good faith into contracts.
Which of the “piecemeal” solutions do involve implying into a contract a term that parties should act towards each other in good faith?
Contracts into which a duty of good faith would be implied are those where the situation makes it obvious that a duty of good faith is meant to be owed by each side to the other.
Prime examples include joint venture agreements, partnership deeds, franchise agreements and insurance contracts.
Also included are long-term contracts which necessarily require cooperation between the parties to fulfil their purpose. In Globe Motors, Inc v TRW Lucas Varity Electric Steering Ltd [2016] EWCA Civ 396, Beatson LJ referred to the “duty of good faith” in Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB) as being the language used to refer to a “duty to cooperate”, saying that “in certain categories of long-term contract, the court may be more willing to imply a duty to cooperate”.
In Yam Seng the contract was a long-term distributorship agreement which, the court noted, required the parties to communicate effectively and cooperate with each other in order for either party to reap its fruits. The case provides authority for the proposition that a general duty of good faith can be implied into such contracts and the same principle might well be thought to extend to leases, which are usually long term by the standards of many other types of contract.
Context, however, remains all. In Globe Motors, the Court of Appeal held that “an implication of a duty of good faith will only be possible where the language of the contract, viewed against its context, permits it”.
What is a ‘Braganza duty’?
Contracts will usually be subject to an implication of a “Braganza duty” – based on Braganza v BP Shipping Ltd [2015] UKSC 17.
This is a duty, when a clause of a contract involves one party exercising a discretion of some sort, that the discretion be exercised honestly, rationally and for the purpose for which it was conferred – it reflects the same principles as are required in the exercise of any public law discretion.
The decision in Braganza was applied in a landlord and tenant context recently in No 1 West India Quay (Residential) Ltd v East Tower Apartments Ltd [2018] EWCA Civ 250; [2018] EGLR 16.
In Victory Place Management Company Ltd v Kuehn and another [2018] EWHC 132 (Ch); [2018] PLSCS 17 a landlord’s refusal of the tenant’s desire to keep a dog in the premises was held to be subject to such an implied duty of rationality, where, under the lease, the keeping of pets was subject to the landlord’s consent. The landlord was therefore required to take into account all relevant matters and exclude from its consideration any irrelevant matters.
What does good faith mean?
Its meaning depends heavily on the context of the agreement but in general terms it will involve:
- Fair and open dealing;
- Faithfulness to an agreed common purpose;
- Not going behind the other side’s back (Al Nehayan v Kent [2018] EWHC 333 (Comm)) by, for instance, hacking or snooping (Bristol Groundschool Ltd v Intelligent Data Capture Ltd [2014] EWHC 2145 (Ch)); and
- No lulling the other side into a false sense of security (Costain Ltd v Tarmac Holdings Ltd [2017] EWHC 319 (TCC)).
Parties bound by an obligation of good faith are expected to adhere to the “spirit” of the contract andact consistently with the justified expectations of the other party.
A duty of good faith might well also preclude a party from “cynical resort to the black letter” of the contract.
Leading cases in which a duty of good faith has been applied to property-related contracts include Berkeley Community Villages v Pullen [2007] 3 EGLR 101 and CPC Group Ltd v Qatari Diar Real Estate Investment Co [2010] EWHC 1535 (Ch).
In one much-loved dicta from a case in the Federal Court of Australia, good faith was held to amount to “a warning that game-playing around the margins of the express obligations may attract a finding of liability”: Bropho v Human Rights & Equal Opportunity Commission [2004] FCAFC 16, per French J. This was cited by Morgan J as “useful” in Berkeley, where he construed an express good faith clause in the contract as “imposing upon the defendants a contractual obligation to observe reasonable commercial standards of fair dealing in accordance with their actions that related to the agreement and also requiring faithfulness to the agreed common purpose and consistency with the justified expectations of the… claimant.”
However, it is important not to overstate the scope of a good faith clause.
In Astor Management AG v Atalaya Mining plc [2017] EWHC 425 (Comm) Leggatt J said that it is only “a modest requirement”: “It does no more than reflect the expectation that a contracting party will act honestly towards the other party and will not conduct itself in a way which is calculated to frustrate the purpose of the contract or which would be regarded as commercially unacceptable by reasonable and honest people.”
What is the difference between honesty and a duty of good faith?
Common honesty is implied into every contract. In HIH Casualty v Chase Manhattan Bank [2003] UKHL 6, Lord Hoffman said: “Parties contract with one another in the expectation of honest dealing… in the absence of words which expressly refer to dishonesty, it goes without saying that underlying the contractual arrangements of the parties there will be a common assumption that the persons involved will behave honestly.”
Good faith is a somewhat wider concept and involves loyalty to the bargain which the parties have struck. It requires compliance with “the spirit” of the agreement: see CPC Group.
In Yam Seng Pte Leggatt J even suggested it would influence the way in which the terms of an agreement would be construed: “Another aspect of good faith… is what may be described as fidelity to the parties’ bargain. The central idea here is that contracts can never be complete in the sense of expressly providing for every event that may happen. To apply a contract to circumstances not specifically provided for, the language must accordingly be given a reasonable construction which promotes the values and purposes expressed or implicit in the contract.”
Where a specific express obligation conflicts with an obligation of good faith, which wins out?
When the “spirit” of the agreement and an express embedded financial advantage collide, the latter usually prevails: see Gold Group Properties Ltd v BDW Trading Ltd [2010] EWHC 1632 (TCC); [2010] PLSCS 189.
Good faith is, therefore, not to be treated as a “general organising principle” in relation to contracts, because that has potential to undermine the express terms which the parties have freely chosen to agree: see MSC Mediterranean Shipping Company SA v Cottonex Anstalt [2016] EWCA Civ 789.
Therefore, as an example, in TSG Building Services plc v South East Anglia Housing Ltd [2013] EWHC 1151 (TCC), a building contract included a duty to “work together and individually in the spirit of trust, fairness and mutual co-operation” but this was held not to inhibit a contractual right to terminate the contract on a certain period of notice.
Will differences in the way that an express obligation of good faith is worded make a difference to the duty?
Only if the difference is meaningful. For instance, an obligation on the parties to exercise good faith is unlikely to carry a very different meaning from an obligation to use “utmost” good faith. Utmost is one of those words that can mean very little in circumstances in which one cannot really be said to be required to exercise only a moderate amount of good faith.
In Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd (t/a Medirest) [2013] EWCA Civ 200 it was not suggested that anything turned on that difference, nor in Horn v Commercial Acceptances [2011] EWHC 1757 (Ch), where the obligation was to act in absolute faith, which turned out to have been breached when one party did not disclose all relevant facts to the other about the funding of a development.
Will an obligation of good faith require a party to subordinate its commercial interests to those of the other contracting party?
Generally, no. In Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd [2001] UKHL 1, insurers alleged that shipowners had failed to observe “utmost good faith” as required by statute. It was held that in the particular context the duty of utmost good faith required no more than that the insured should act honestly and not in bad faith.
It is only fiduciary duties – which are quite different – that require one party to put the other party’s interests ahead of its own: see also Hamsard 3147 Ltd v Boots UK Ltd. [2013] EWHC 3251 (Pat), per Norris J (obiter).
Even if it is subject to an express duty of good faith, therefore, a party is not usually required to tell its counterparty about that counterparty’s rights under the contract: see Apollo Window Blinds Ltd v McNeil [2016] EWHC 2307 (QB). A duty of good faith would not extend that far.
Checklist
■ Is there a general duty of good faith in English law?
■ Which of the “piecemeal” solutions do involve implying into a contract a term that parties should act towards each other in good faith?
■ What is a “Braganza duty”?
■ What does good faith mean?
■ What is the difference between honesty and a duty of good faith?
■ Where a specific express obligation conflicts with an obligation of good faith, which wins out?
■ Will differences in the way that an express obligation of good faith is worded make a difference to the duty?
■ Will an obligation of good faith require a party to subordinate its commercial interests to those of the other contracting party?
Jonathan Seitler QC is a barrister at Wilberforce Chambers
