young businessman oath Truth on white background

Despite the fact that you’d like to think we’re an honourable nation, there is no general duty of good faith under English law. This is mainly because English law is not fond of broad, over-reaching principles and instead prefers to create solutions on a case by case basis. There is also a concern that imposing such a wide-ranging concept would undermine contractual certainty – something which English law does care about.

A question of interpretation

Whilst there is no implied duty of good faith, however, parties will sometimes include express wording to that effect in an agreement. In those circumstances, the courts have held that the express contractual term will be interpreted according to normal rules of contractual construction. So, the court will look at the parties’ intentions (on an objective basis); will consider the commercial purpose of the agreement and will apply a meaning consistent with business common sense.

Pushing the boundaries

Last year, a decision by the High Court[1] sent shock waves through the legal community when it appeared to imply a general duty of good faith into a contract. The judge noted that a contract is made against the background of the parties’ unstated and shared understandings. This background then informs the meaning of the contract. That background would include shared values and norms of behaviour, such as an expectation of honesty and keeping with the agreed position. It is hard to envisage, therefore, that any contract could be understood as not requiring honesty in its performance.

However, a closer examination of that case suggests that rather than implying a general duty of good faith, the judge implied certain specific obligations into the relevant agreement using existing principles of contractual interpretation, where terms may be implied based on the parties’ intentions. In addition, the relevant agreement was very short and had been negotiated between two individuals without the help of lawyers. It seems less likely that the same approach would be taken in relation to a detailed agreement negotiated between lawyers where the courts may well consider that if the parties had intended to be subject to a general duty of good faith, they would have stated this expressly in the agreement.

Reining back in

A more recent decision[2] suggests that the courts have decided to pull back from the brink of implying a general duty of good faith. This time, an obligation to have regard to ‘good industry practice’ and to work together on an ‘open, honest, clear and reliable basis’ was held not to be equivalent to a good faith obligation.  It’s noticeable that the agreement before the court in this case was a much more detailed and extensive one than that considered in the case above. Here, the court felt that if the parties had intended there to be a duty of good faith, that would have been expressly set out in the agreement.

State your requirements

Whilst it is always open for parties to include an express duty of good faith in their contractual terms, what is actually required to comply with that general duty will still be subject to interpretation by the courts. Therefore, it is always better for a party to consider exactly what steps they require the other party to take and to set these out expressly in the contract rather than risk the vagaries of interpretation by a particular judge on a particular day.

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[1]           Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB)

[2]           Fujitsu Services Ltd v IBM United Kingdom Ltd [2014] EWHC 752 (TCC)

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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.