Good Faith in Contract: the English Position

May 29, 2018

The performance of contracts and the conduct of contracting parties is at the heart of many commercial disputes. However, contracting parties may find it surprising that the conduct expected of them varies across the common law world and that the position in England is different than other major common law jurisdiction. Canada, the United States, and Australia all imply a general duty of good faith in the performance of contracts. In England, however, the courts have repeatedly refused to embrace such a duty.

In this blog post I will explore what the duty of good faith contract performance entails, the obligations it imposes on contract parties, and how the approach of other common law countries differs with the English approach.

What is good faith and what does it require?

Pinning down a definition of good faith is difficult and led Professor Roy Goode to quip that “… we do not know quite what [good faith] means”.[i]

Despite its nebulous meaning, there is a growing body of authority which sets out the obligations that the duty imposes on contracting parties. The Supreme Court of Canada recently held that the duty requires parties “to perform contracts honestly”.[ii] The United States Second Restatement of Contracts states that “[g]ood faith performance or enforcement of a contract emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the other party; it excludes a variety of types of conduct characterized as involving “bad faith” because they violate community standards of decency, fairness or reasonableness” (para 205).

None of these obligations, however, rise to the level of requiring a party to take on the role of a fiduciary and subordinate its interests to that of another. As Barret J of the Supreme Court of New South Wales held:

… the party subject to the obligation [of good faith] is not required to subordinate the party’s own interests, so long as pursuit of those interests does not entail unreasonable interference with the enjoyment of a benefit conferred by the express contractual terms so that the enjoyment becomes (or could become) … ‘nugatory, worthless or, perhaps, seriously undermined’… the implied obligation of good faith underwrites the spirit of the contract and supports the integrity of its character. A party is precluded from cynical resort to the black letter. But no party is fixed with the duty to subordinate self-interest entirely which is the lot of the fiduciary… The duty is not a duty to prefer the interests of the other contracting party. It is, rather, a duty to recognise and to have due regard to the legitimate interests of both the parties in the enjoyment of the fruits of the contract as delineated by its terms.[iii]

If requiring a contracting party to act “honestly”, with “a lack of bad faith”, and with “due regard to the legitimate interests of both the parties” still seems vague, this is for good reason. Courts are not attempting to set out an exhaustive list of acceptable and unacceptable behaviours. Instead they are setting out principles which may be used to consider the behaviour of parties in individual cases. Therefore, exactly what good faith means in a specific situation and the obligations it imposes will depend on “the particular circumstances” of the case. This context specific approach was described by the Full Court of the Federal Court in Australia:

Honesty is an element embedded in the ordinary meaning of good faith. It is the antithesis of bad faith. The idea of fidelity or loyalty goes beyond honesty. It is a relational concept. It involves adherence to a commitment or an obligation or a principle. Because it is relational it is ambulatory and because it is ambulatory so too is the concept of “good faith” as a whole. In a less direct sense so too is honesty. In the context of an implied term of good faith in the performance of a contract, Sir Anthony Mason used the words “mainly in the sense of loyalty to the promise itself and as excluding bad faith behaviour” — AF Mason op cit at 69. These elements are not contingent upon context. They emerge from the ordinary meaning of the words although, like “fairness” in administrative justice, they take their content from the particular circumstances in which it is sought to apply them (emphasis added).[iv]

General duty of good faith in England and Wales

The imposition of a general duty of good faith continues to be resisted by English courts. English law prizes freedom of contract and there is concern that implying a duty of good faith in the performance of contracts could undermine that freedom.[v] For example, in James Spencer & Co Ltd v Tame Valley Padding Co Ltd, Potter LJ held:

There is no general doctrine of good faith in the English law of contract. The plaintiffs are free to act as they wish, provided they do not act in breach of a term of the contract. It is not alleged that by investigating rival products or contemplating termination under the contract the plaintiffs were in breach of any of its terms. Questions of breach and/or repudiation will fall to be judged objectively and not by reference to the motive or good faith of the plaintiffs.[vi]

Similarly, in ING Bank NV v Ros Roca SA, Rix LJ stated that “there is no obligation in general to bring difficulties and defects to the attention of a contract partner… for where there is no obligation to speak, silence gives no hostages to fortune”.[vii]

This resistance to the imposition of a general good faith duty in contract led a leading Canadian academic to comment that the “traditional common law took a kind of perverted pride in the claim that it had no general notion of good faith, as if admitting that the law could be founded in “good faith” would be admitting to the presence of some kind of embarrassing social disease”.[viii]

The English piecemeal approach to good faith

Try as it might, English law has not avoided the “embarrassing social disease” completely. While it continues to reject a general duty of good faith, it has implied duties of good faith in select circumstances “in response to demonstrated problems of unfairness”.[ix]

These circumstances were recently summarised by Mr Justice Leggatt in a lecture  to the Commercial Bar Association.[x] His Lordship set out two types of two types of situations in which English law may imply a duty of good faith:

First, relational contracts. These are contracts where parties are engaged in long term relationships which “may require a high degree of communication, cooperation and predictable performance based on mutual trust and confidence and involve expectations of loyalty which are not legislated for in the express terms of the contract but are implicit in the parties' understanding and necessary to give business efficacy to the arrangements”.[xi] A typical example of a relational contract is a contract of employment. Mr Justice Leggatt acknowledged that this line of authority still has shallow roots but suggested that the type of good faith obligations imposed in employment contracts could also be applied to some joint venture, franchise, and long-term distributor agreements.

Second, the exercise of contractual discretion. Courts require that parties exercise discretions conferred on them by contract in good faith. As set out by Lord Sumption, “it is well established that, in the absence of very clear language to the contrary, a contractual discretion must be exercised in good faith and not arbitrarily or capriciously”.[xii]

This second category helps illustrates the ‘dividing line’ between the “piecemeal English approach and the imposition of a general duty of good faith which applies to all contracts. Whereas parties to a contract in Canada, the United States, and Australia must approach all the actions they take in performance of a contract with good faith, parties in England, outside of parties to relational contracts, are only required to act in good faith when exercising express contractual discretions. In other words, if a party is exercising a freedom which exists because it is not excluded by the contract, English law does not require that that freedom be exercised in good faith.

A potential path to a general duty of good faith?

In his lecture, Mr Justice Leggatt suggested that there is “a case to be made for recognising an obligation of good faith in the performance of contracts” as a default rule.[xiii] He pointed to the ‘dividing line’ above and queried whether there was “any principled distinction between the exercise of an express contractual power and the exercise of a freedom which exists because the contract does not exclude it”.[xiv] He considered that it was possible that a general duty of good faith in English law could develop if the law required the same good faith from parties exercising action founded on contractual silence as it does from actions based on contractual discretion.

While such an evolution is possible, it has yet to be taken up by the courts and has been criticised in the Court of Appeal. In MSC Mediterranean Shipping Co SA v Cottonex Anstalt  Moore-Bick LJ rejected the adoption of a general duty of good faith and cautioned that “[t]here is in my view a real danger that if a general principle of good faith were established it would be invoked as often to undermine as to support the terms in which the parties have reached agreement”.[xv] Therefore, while the law may yet evolve as Mr Justice Leggatt suggests, we are not there yet. 

 

 

 

[i] A Farnsworth, “Good Faith in Contract Performance”, Beatson and Friedmann (eds) Good Faith and Fault in Contract Law, Clarendon Press Oxford (1995) at 157 n 13.

[ii] Bhasin v Hrynew 2014 SCC 71 at para 62.

[iii] Overlook v Foxtel [2002] NSWSC 17 at paras 65-67.

[iv] Bropho v Human Rights and Equal Opportunity Commission [2004] FCAFC 16; BC200400209, per French J at para 94.

[v] Chitty on Contracts, 31st ed at 1-039.

[vi] [1998] Lexis Citation 1612 (CA).

[vii] [2011] EWCA Civ 353 at para 92.

[viii] Swan, "Whither Contracts: A Retrospective and Prospective Overview", in Special Lectures of the Law Society of Upper Canada 1984 -- Law in Transition: Contracts (1984), 125, at p 148.

[ix] Interfoto Picture Library Ltd v Stilletto Visual Programmes Ltd [1989] 1 QB 433 at 439 (Bingham LJ).

[x] “Contractual duties of good faith” by Mr Justice Leggatt, Lecture to the Commercial Bar Association on 18 October 2016.

[xi] Yam Seng Pte v International Trade Corp [2013] EWHC 111 (QB) Leggatt J at para 142.

[xii] British Telecommunications Plc v Telefonica O2 UK Ltd [2014] UKSC 42 at para 37.

[xiii] “Contractual duties of good faith” by Mr Justice Leggatt, Lecture to the Commercial Bar Association on 18 October 2016 at para 30.

[xiv] Ibid at para 55.

[xv] [2016] EWCA Civ 789 at para 45.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Seth.Whitmore@byrneandpartners.com

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

020 7842 1660

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

About Seth

Seth is a Canadian-qualified Barrister and Solicitor and associate in the commercial litigation team. He is developing a broad practice comprising high value, complex contractual disputes, civil fraud litigation, insolvency and banking, and financial services matters.