Obligations of Good Faith: express, implied, underlying and what they really mean

 

Richard Clegg, Barrister at Selborne Chambers, London

It was generally thought that there were but a few well defined categories of contract that required the parties to deal in good faith (partnership and insurance being prime examples) and in all others laissez-faire prevails. In 2013 all that changed. Or did it?

The refusal to recognise a general duty of good faith between contracting parties – in contrast to the approach in most European Civil Law jurisdictions1 – was described by Leggatt J as “swimming against the tide” in Yam Seng Pte Ltd v International Trade Corp Ltd [2013] EWHC 111 (QB), and an underlying duty of “good faith and fair dealing” was applied as the touchstone for construing the contract. The decision was described extra-judicially by Arden LJ at the time as “a welcome tour de force on good faith, and an important case to watch”2 albeit with the caveat that the analysis “treats somewhat too lightly the problems of diminished certainty or the amount of time that might have to be spent in some cases in resolving disputes as to the application of the good faith clause”. Whilst raising academic controversy3, and being regularly deployed by parties seeking implied obligations of ‘good faith’ (often in extravagant terms), it appears now to have been repackaged as an application of existing principle merely expressed in different language. At least this is the explanation of the case given, obiter, by Beatson LJ in a recent Court of Appeal decision.

In Yam Seng the result of interpreting the contract with an underlying duty of good faith firmly in mind was that the Judge found that two terms reflecting that duty should be implied. That fundamental starting point has already changed. The approach of implying terms as an element of interpreting the contract was possible at the time, following Attorney General of Belize v Belize Telecom [2009] UKPC 10. However, the orthodoxy that the implication of terms is a different process and governed by different rules has since been restored by Marks and Spencer v BNP Paribas [2015] UKSC 72. The implication of terms (other than those implied at law) is once again limited to the established categories of business necessity and obviousness. As Lord Neuberger emphasised in Marks and Spencer “a term should not be implied into a detailed commercial contract merely because it appears fair or merely because one considers that the parties would have agreed it if it had been suggested to them”. Indeed in Yam Seng itself the implied terms were entirely uncontroversial under existing principles, despite the language and methodology used. The contract was an exclusive distribution agreement for the sale of duty free products in certain territories. The implied terms were, first, not knowingly to provide false information on which the other party was likely to rely, and secondly, not to authorise the sale of those products in the domestic market of those territories at a price lower than the ‘duty free’ prices. Existing principles already provide a solution for unexpressed contractual inequity, in the form of implied terms against the prevention of performance and for co-operation, as well as such other implied terms as may be necessary to give business efficacy to a contract. Existing principles would provide basis enough for the terms implied in that case. Indeed it was because the Yam Seng implied terms could equally have been implied under existing principles that Arden LJ did not expect the decision to be appealed:

“It is not clear whether it will be appealed as the critical terms were in fact specific terms which could be implied in any event under the general principles applying to the implication of contractual terms.”

In the aftermath of Marks and Spencer, even the language used in Yam Seng has now been repackaged and relabelled as existing principle. In a judgment given on 20 April 2016 in Globe Motors v TRW [2016] EWCA Civ 396, Beatson LJ referred (obiter) to the ‘duty of good faith’ in Yam Seng as being “the language used by Leggatt J” to refer to a duty to co- operate5, and whilst acknowledging that “in certain categories of long-term contract, the court may be more willing to imply a duty to co-operate…Even in the case of such agreements, however, the position will depend on the terms of the particular contract”. For
good measure, he went on to give two examples where even prior to Marks and Spencer such implied terms were rejected in relation to a long-term franchising contract and a distribution agreement6.

Contractual powers and discretions

The language of ‘good faith’ does of course already feature in the context of contractual powers and discretions. In that context the Courts are prepared to imply a duty expressed (literally) in terms of good faith, so as to place some boundary on otherwise ostensibly unfettered contractual powers or discretions by which one party places itself in the hands of another7. However, this is again by applying existing principles rather than any special
principle:

“…this conclusion does not involve an inadmissible extension of the duty of good faith in insurance law or of the consequences of breach of any such duty. The qualification that I have identified does not arise from any principles or considerations special to the law of insurance. It arises from the nature and purpose of the relevant contractual provisions.”8

Indeed, whilst the language of ‘good faith’ is used, the limits imposed are ordinarily of limited scope, requiring only that the discretion or power be exercised honestly, rationally and for the purpose for which it was conferred. The requirement of rationality is broadly equivalent to the public law test of Wednesbury unreasonableness rather than being an objective test9. Again, even in the context of discretions and powers a duty of good faith will not necessarily be implied if the terms of the contract do not justify it10.

Express ‘good faith’ terms

It is of course the case that obligations of good faith can be expressly imposed. Nonetheless, in seeking to elicit its meaning the obligation is often unpacked by the courts into a series of sub-obligations that it might broadly be said (to paraphrase a decision of the Federal Court of Australia11) amount to ‘a warning that game playing around the margins of the express obligations may attract a finding of liability’. Such sub-obligations include ‘observing commercial standards of fair dealing’, ‘being faithful to the agreed common purpose’ and acting ‘consistently with the justified expectations of the parties’12. However, the courts are at pains to emphasise that the content of the good faith obligation is influenced by its context. Thus in Mid Essex Hospital Services NHS Trust v Compass Group [2013] EWCA Civ 200 it was held that the good faith obligation was limited to the two purposes explicitly mentioned as part of the clause and did not have any wider application. Indeed Beatson LJ was of the view that breach of the good faith obligation required bad faith13, whereas the remainder of the Court of Appeal left that question open; as did Vos J in the earlier case of CPC Group v Qatari Diar Real Estate [2010] EWHC 1535 (Ch)14. It is at least possible that that issue would itself be influenced by context, being itself a matter of construction of the particular contract, and so vary on a case by case basis.

What is apparent, though, is that the courts are still finding their way in grappling even with express good faith obligations.

The future for an implied obligation?

Whilst Yam Seng will no doubt continue to be deployed creatively and widely, its significance may perhaps now crystallise around the proposition that “in certain categories of long-term contract, the court may be more willing to imply a duty to co-operate” – “or, in the language used by Leggatt J in Yam Seng…a duty of good faith”15.

Richard Clegg

  1. For example, the requirement to perform a contract in good faith contained in section 242 of the German Civil Code and in article 1175 of the Italian Civil Code.
  2. Speech to the Singapore Academy of Law, 26 April 2013, “Coming to Terms with Good Faith”.
  3. No less than 19 learned articles in the first year alone.
  4. Speech to the Singapore Academy of Law, 26 April 2013, “Coming to Terms with Good Faith”.
  5. Paragraph 67.
  6. Carewatch Care Services v Focus Caring Services Ltd and Grace [2014] EWHC 2313 (Ch) and Acer Investment
    Management v The Mansion Group [2014] EWHC 3011 (QB).
  7. For example, The Product Star [1993] 1 Lloyd’s Rep 397 (a right giving the charterer a choice of ports was to be exercised in good faith and not arbitrarily, capriciously or irrationally) and Gan v Tai Ping [2001] Lloyd’s Rep IR 667 (a reinsurer’s discretion to approve a settlement was to be exercised in good faith and not arbitrarily).
  8. Per Mance LJ in Gan at para 68, with whom Latham LJ agreed.
  9. Braganza v BP Shipping [2015] UKSC 17.
  10. E.g. Mid Essex Hospital Services NHS Trust v Compass Group [2013] EWCA Civ 200.
  11. Bropho v Human Rights & Equal Opportunity Commission [2004] FCAFC 16 per French J: “A good faith provision offers a warning that game playing at the margins of a statutory proscription or obligation may attract a finding of liability”; quoted by Morgan J as ‘useful’ in Berkeley Community Villages v Pullen [2007] EWHC 1330 (Ch).
  12. Berkeley Community Villages v Pullen [2007] EWHC 1330 (Ch) per Morgan J at para97 and CPC Group v Qatari Diar Real Estate [2010] EWHC 1535 (Ch) per Vos J at para246.
  13. Mid Essex Hospital Services NHS Trust v Compass Group [2013] EWCA Civ 200 at para112.
  14. It was left open by Vos J in CPC Group v Qatari Diar Real Estate [2010] EWHC 1535 (Ch), and by the majority of the Court of Appeal in Mid Essex Hospital Services NHS Trust v Compass Group [2013] EWCA Civ 200.