What is good faith?

What is good faith?

Published:

Author: Ewan Drummond

Whilst there is no implied duty of good faith in English contracts, this is not the case in many European civil law jurisdictions; such as Belgium, France, Germany, Italy, The Netherlands, Poland, Portugal, Spain and Switzerland.

While the interpretation of the implied duty is not the same in all these countries, in general they all involve obligations in respect of ethics, diligence in pursuing negotiations, and disclosure.

English contracts often expressly apply a duty of good faith to specific parts of the contract; for example withholding payment only when subject to a dispute 'in good faith', or negotiating the price of an element of the contract not yet agreed at the time of contract signature.

Such good faith provisions are often drafted with the intention of avoiding 'agreements to agree' on matters not yet determined at the time of the contract. They may not achieve that, however.

Two recent High Court cases identify issues that can arise where obligations of good faith are drafted into agreements without adequate precision.

One such case - Compass Group UK and Ireland Limited v Mid Essex Hospital Services NHS Trust [2012] EWHC 781 (QB) - was reported on in a Shoosmiths legal update in May 2012, and illustrates that the effect of a good faith provision can be to produce very different results, depending on whether the good faith obligation is to be applied narrowly or more broadly, showing importance of being very precise in drafting such a provision.

Another recent case - Charles Shaker v Vistajet Group Holdings SA [2012] EWHC 1329 (Comm) - sheds further light on the meaning of good faith when it relates to a negotiation; for example the negotiation of heads of terms leading to a formal contract.

Here, it was held that an obligation to negotiate in good faith is unworkable, because it is inherently inconsistent with the position of a negotiating party. It was further stated in the judgment that where acting in good faith and employing reasonable endeavours are to be conditions precedent to a contractual obligation, the conditions will be unenforceable in the absence of a clearly stated, objective means of determining whether good faith had been practised and reasonable endeavours applied.

So where the matter to be determined by good faith discussions can be objectively assessed, the obligation may be enforceable, but without such objective mechanism it is not, and is little more than an agreement to agree.

What does this mean?

Where a contract involves an issue which, at the date of contract, is not yet determined, very clear and objective criteria ought to be established by which that matter may be resolved.

If this is to involve good faith negotiations, the term 'good faith' should be defined, so that it is determinable whether this requirement has been met.

Where good faith obligations are used as shorthand in an effort to avoid the appearance of an 'agreement to agree', this case shows that without such clear criteria they fail in that aim.

What should you do?

In the light of the above, precision in the description of mechanisms for agreeing matters not yet determined is essential.

Good faith provisions should only be used when the term 'good faith' is clearly and objectively determinable. Otherwise, the term should be avoided.