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The traditional position under the contract law of England andWales (which I shall, with no disrespect to Wales, refer toas'English' law) has been that, save for contractsgiving rise to a fiduciary relationship (eg a contract betweenagent and principal), a duty of good faith in the performance of acontract is not to be implied as a matter of course or as a matterof law.
That contrasts with the position in some other jurisdictions,both common law and non-common law, where such a duty is imposed bylaw.
In the United States of America, the Uniform Commercial Code(UCC), which applies in the law of most of the states, providesthat'Every contract or duty within the [UCC] imposesan obligation of good faith in its performance andenforcement.' Good faith is definedas'honesty in fact and the observanceofreasonable commercial standards of fairdealing'.
Similarly, the US Restatement (Second) of Contracts (1981)(which does not have official force of law, but is treated by UScourts as highly persuasive authority as to the principlesofcontract law) provides that'Every contractimposes uponeach party a duty of good faith and fair dealingin its performance and its enforcement'.
To take anexample of a non-common lawjurisdiction,the French Civil Code (a'Napoleonic' code derivedfrom Roman law) provides that contracts must be performed in goodfaith.This can result in very different outcomes in cases onopposite sides of the Atlantic or the Channel, as I experienced inan international arbitration some 30 years ago. Briefly, a writtensale ofbusiness agreement was being negotiated, in English,between an English company and a French company. Just before it wassigned, the French party insisted on a French governing law clausebeing inserted. Subsequently, the English party had various privatediscussions with the French government, which made it much moredifficult for the contract to be performed, but did not disclosethose discussions to the French party, which (when it found out)considered that it would have achieved a better outcome than the'rosbifs' had managed. There was nothing in the writtencontract to indicate that such conduct placed the English party inbreach of it.
When the matter ended up before a panel of arbitrators, theFrench party referred to the duty of good faith under the FrenchCivil Code and argued convincingly that the English party hadbreached it. The case was settled soon afterwards. Under Englishlaw, the English company would probably have been in the clear,reflecting a view that'all's fair in love, war andcommerce'.
However, in the last five years, there has been a (some mightsay) belated change in attitude in the courts of England and Walestowards the implication of a duty of 'good faith' in sometypes of contract, influenced no doubt by the approach inotherjurisdictions.
Case law
A consensus has emerged that incertain contracts of along-term nature or where parties have to work together closely toachieve the contract's purpose (labelledas'relational' contracts), terms are likely to beimplied such as honesty, integrity, co-operation, communication,fair dealing and/or sharing of information (labelled togetheras'good faith'). The following is a short review ofthe case law.
(i)
In Yam Seng v International Trade Corpn [2013] EWHC 111(QB), Mr Justice Leggatt (as he then was) held against a party to along-termdistribution contract (describing itas'relational') who had misled the other party duringthe performance of the contract and hadundercut that otherparty's prices, basing the decision upon impliedtermsflowing from an implied duty of good faith.
(ii)
The following year, in Bristol Groundschool v IntelligentData [2014] EWHC 2145 (Ch), a joint venture agreement,described by the judge as a'relational' contract, washeld to include an implied term requiring good faith in itsperformance,which the defendant had breached by conductwhich'would be regarded as commercially unacceptableby reasonable and honest people'.
(iii)
In D&G Cars v Essex Police [2015] EWHC 226 (QB),the judge held that the contract at issue (under which a privatecontractor had agreed to dispose of unwanted police cars)was'a relational contract parexcellence' and held that it included an impliedterm that thecontractor would perform it with honesty andintegrity.
(iv)
2016 saw two cases in the Court of Appeal in which non-bindingcomments were made by different judges as to the implication ofgood faith terms in contracts:
(a) InMSC Mediterranean Shipping v Cottonex[2016] EWCA Civ 789, Lord JusticeMoore-Bickexpressed his opposition to the concept of ageneral duty of good faith in contracts, foreseeing'areal danger that if a general principle of good faith wereestablished it would be invoked as often to undermine as to supportthe terms in whichthe parties havereachedagreement'. (I struggle to understand hisconcern. First, if a principle of good faith were to be advanced soas to undermine the terms the parties had agreed, it would surelysuggest thatthe partyopposingthe principle wasseeking to support bad faith behaviour,which no court couldcondone. Second, it was not aconcern for those who draftedthe laws and codes in the USA and France, referred to above, whichappear to have stood the test of time.)
(b) InGlobe Motors v TRW Lucas [2016] EWCA Civ396, Lord Justice Beatson suggested, in relation to a long-termsupply contract (ie a relational contract), that an argumentinfavour of the existence of a duty to co-operate might havefound favour with the court had it been advanced.
(v)
Other decisions which support the implication of a duty to actin good faith in relational contracts,where justified on thefacts of the case, are Portsmouth City Council v EnsignHighways Ltd [2015] EWHC 1969 (QB), National Private AirTransport v Creditrade [2016] EWHC 2144 (Comm)andProperty Alliance Group v RBS [2016] EWHC 3342 (Ch).
(vi)
Two more decisions have followed this year:
(a) In Amey v Birmingham City Council [2018] EWCA Civ264, the Court of Appealcommented that a long-termPFIcontractcould be classifiedas'relational'.
(b) The judge who had decided the YamSengcase five yearspreviously, Lord Justice Leggatt (sitting inthe High Court), returned to thesubject of good faith inrelational contracts in Al Nehayan v Kent [2018] EWHC 333(Comm).
(vii)
InAl Nehayan v Kent, LordJusticeLeggatt:
(a) referred back to the YamSeng case,stating:'I drew attention to acategory ofcontract inwhich the parties are committed to collaboratingwith each other, typically on a long term basis, in wayswhichrespect the spirit and objectives of their venture but which theyhave nottried to specify, and which it may beimpossibleto specify, exhaustively in a written contract. Such"relational" contracts involve trust... that theother party will act with integrity and in a spirit of cooperation.The legitimate expectations which the law should protect inrelationships of this kind are embodied in the normative standardsof good faith.'
(b) continued:'Although the observations that Imade in the Yam Seng case about the scope for implyingduties of good faith in English contract law have provokeddivergent reactions, there appears to be growing recognition thatsuch a duty may readily be implied in a relationalcontract.'
(c) held that a jointventure agreement between twoindividuals,which was intended as a long-term collaborationinwhich theirinterests were interlinked andwhichrequired a high degree ofco-operation between themwas'a classic instance of a relationalcontract' and that'the implication ofa duty of good faith in the contract is essential to give effect tothe parties' reasonable expectations and satisfies the businessnecessity test which Lord Neuberger in Marks & Spencer vBNP Paribas [2016] AC 742... reiteratedastherelevant standard for theimplication of aterm into a contract'.
(d) identified the usual content of theobligation of goodfaith as comprising obligations:
- to act honestly and with fidelity to the bargain
- not to act dishonestly and not to undermine the bargain enteredinto or the substance of the contractual benefit bargained for
- to act reasonably and with fair dealing having regard to theinterests of the parties (which will, inevitably, at timesconflict) and to the provisions, aims and purposes of thecontract,objectively ascertained (the obligation of fairdealing not being a demanding one, which does no more than requirea party to refrain from conduct which in the relevant context wouldbe regarded as commercially unacceptable by reasonable and honestpeople).
(e) held that'two forms of furtive oropportunistic conduct' seemed to him'incompatiblewith good faith in thecircumstances of this case':
- 'First, it would be inconsistent with that standard [ofgood faith] for one party to agree or enter into negotiations tosell his interestor part of his interest in thecompanies which they jointly owned to a third party covertly andwithout informing the other beneficial owner.'
- 'Second, while the parties to ajointventure were generally free to pursue their owninterests and did not owe an obligation of loyalty to the other,itwould becontrary to the obligation to act in goodfaith for either party to use his position as ashareholder ofthe companies to obtain a financial benefit for himself at theexpense of the other.'
Conclusions
Thus, whilst English law has not yet aligned itself eitherwiththe USA or with 'civil law' jurisdictions such asFrance interms of recognising a general duty of good faith intheperformance of contracts, thelast five years haveseen 'growing recognition that such a duty may readily beimplied in a relational contract'.
Were there to be a're-run', 30 years later, of thearbitration Imentioned above, but with anEnglishgoverning law clause in place of the French one,the'rosbifs'' conduct would probably not be foundtohave breached the contract, as a one-off sale of businessagreement is probably not a'relational' contract.However, had the contract been for sale ofpart of thebusiness, with a jointventure thereafter, English law wouldprobably now imply a duty of good faith, in alignment with Frenchlaw and unlike the position 30 years ago.
This article first appeared on The Law Society.
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