'Good faith' revisited

'Good faith' revisited


Author: Paul Scott

Historically, the English courts have been reluctant to recognise a general doctrine of 'good faith' in the performance of contractual obligations, and there is no generally applicable legal definition of the concept.

Paul Scott, associate in Shoosmiths construction team looks at how have the courts treated the doctrine of 'good faith' in recent cases, and how the current state of the law might be relevant to construction contracts.

An obligation to 'act in good faith' is an express obligation placed upon all contracting parties in many jurisdictions based on Civil Codes, and a 'duty of good faith' is implied into various categories of contract at English law as appropriate (for example, partnership, agency and insurance contracts, and other contracts which involve fiduciary obligations), and a number of standard forms of construction and engineering contract include obligations which might be characterised by some as 'good faith' type obligations (for example, core clause 10.1 of the NEC3 contract and various forms of 'partnering' contract. However, historically, there has been no pervasive concept of 'good faith' that applies generally to contracts governed by English law.

The position was summarised neatly several years ago, in the Judgment of the High Court in Interfoto Picture Library v Stilleto:

'English law has, characteristically, committed itself to no such overriding principle [of good faith] but has developed piecemeal solutions in response to demonstrable problems.'

This did not stop a number of parties to cases before the Technology and Construction Court seeking to rely upon implied duties of good faith in the years since that Judgment (for example, in Bedfordshire County Council v Fitzpatrick; Francois Abballe v Alstrom UK; and Hadley Design v The City of Westminster). However, in each of these cases, the court declined to imply the general duties of good faith contended for.

Despite this, in the more recent Judgment in Yam Seng Pte v International Trade Corporation, Leggatt J implied a number of good faith obligations into the parties' agreement.

In this case, the parties entered into an agreement by which the defendant granted the claimant exclusive rights to distribute Manchester United branded toiletries in various territories in the Middle East, Asia, Africa, and Australasia. The contract that the parties signed up to was rather brief, and was negotiated by the parties directly without recourse to lawyers. The parties' relationship soured and the claimant made various allegations about the conduct of the defendant, including late shipment of orders, failure to supply products, and failure to adhere to agreed minimum retail prices. Many of the matters complained of by the claimant, perhaps as a result of the brief nature of the written agreement between them, were founded upon an allegation that the defendant had breached an implied obligation to act in accordance with principles of good faith. This submission found favour with Leggatt J, who considered the question of whether or not a duty of 'good faith' ought to be implied in this case. Leggatt J concluded:

'.the traditional English hostility towards a doctrine of good faith in the performance of contracts, to the extent that it still persists, is misplaced'.

Hot on the heels of Yam Sen Pte came the Judgment of the Court of Appeal in Mid Essex Hospital Services NHS Trust v Compass Group. This was another case where the Court was required to grapple with the concept of 'good faith'. This time the question was not solely whether a duty of good faith ought to be implied into an agreement, but also what the scope of an express good faith contractual clause ought to be.

The facts of the case were that the respondent was engaged by the appellant to provide catering and cleaning services. The agreement provided for the respondent to meet certain agreed service levels with financial consequences for the respondent in the event that the agreed service levels were not met. Following a first instance decision, which provided for a broad application of an express contractual good faith provision, on appeal, the appellant contended that the good faith obligation ought to be construed narrowly and ought not be applied to the contractual provisions relating to service level failures. The respondent, relying heavily on Yam Sen Pte, contended that the contractual good faith clause should be construed widely and applied to the service level provisions, and/or that a general duty of good faith ought to be implied into the contract in any event.

The Court of Appeal decided that the effect of the contractual good faith provision was merely to require the parties to work together honestly to achieve the effective transmission of information, and the full benefit of the respondent's services to the appellant. These were the express stated intentions of the good faith provision as set out in the wording of the clause. Lord Justice Jackson summarised the position in his Judgment by stating:

'The obligation to co-operate in good faith is specifically focused upon the two purposes stated in the second half of that sentence. Those purposes are: the efficient transmission of information and instructions; [and] enabling the Trust or any beneficiary to derive the full benefit of the contract.'

The Court of Appeal also decided that there was no need to imply a general obligation of good faith into the contract, and therefore declined to do so.

The message to any party defending a dispute arising from construction contract with no express good faith obligation at present, is not to be surprised if you face a contention that an implied duty of good faith has been breached. Although many commentators have suggested that it was a case that turned in its particular facts, and notwithstanding the outcome of Mid Essex Hospital Services NHS Trust, Yam Sen Pte remains good law, at least until issues of good faith come before the Appeal Courts once again. Parties ought to carefully consider their conduct during the course of a contract in the light of Yam Sen Pte in order to head off any allegations of a breach of this type of implied term.

In the event that a contract does contain an express good faith obligation, then parties should pay attention to the Judgment in Mid Essex Hospital Services NHS Trust to give some guidance as to how the Courts might construe that obligation. Following the Judgment of Lord Justice Jackson, the specific parameters of a good faith provision will be key. Parties should also take care when negotiating good faith provisions, to ensure that their expectations as to the scope of that obligation are clearly reflected in the drafting.