Developments in contract: Good faith
A brief summary of the principles, recent developments and practical tips relating to implied duties of good faith.
- Prior to 2013, English law had never recognised an implied duty of good faith in contracts, and primacy was given to privity of contract and the right to pursue one’s own commercial interests, subject to consumer law and certain implied terms of reasonableness.
- An attempt was made by Mr Justice Leggatt, in Yam Seng PTE Ltd v International Trade Corporation Ltd to establish a general principle for implying a contractual obligation of good faith into an innocuous-sounding (but in fact very broad) category of “relational” contracts, characterised as something more than a one-off transaction, and which “may” involve a high degree of communication, cooperation and predictable performance based on mutual trust and confidence.
- Yam Seng received a generally unenthusiastic reception from the remainder of the English legal system, with a number of High Court and Court of Appeal decisions marginalising it and holding that any such duty would be unlikely in any event to meet the test for implying terms into a contract.
- In Sheikh Tahnoon Bin Saeed Bin Shakhboot Al Nehayan v Ioannis Kent (AKA John Kent), one of his final judgments prior to his elevation to the Court of Appeal, Mr Justice Leggatt (as he then was) made a fresh attempt to revive the concept of a general implied duty of good faith in English contract law.
- Tahnoon significantly expands the Yam Seng implied good faith duty in two important aspects. First, it extends the duty from one of enhanced disclosure and information-sharing into a more wide-ranging obligation “to act honestly and with fidelity to the bargain…to act reasonably and with fair dealing having regard to the interests of the parties (which will, inevitably, at times conflict) and to the provisions, aims and purposes of the contract, objectively ascertained”, and not to be “opportunistic”.
- Second, in Tahnoon it was found that, because the contract in dispute was a “relational” one, it was therefore “essential” that a duty of good faith be implied into it in order to give effect to the parties’ reasonable expectations, “…on the basis that the nature of the contract as a relational contract implicitly requires (in the absence of a contrary indication) treating it as involving an obligation of good faith”. This is an expansion of the concept of “relational” contracts, which in Yam Seng were said only potentially to require the implication of a good faith obligation.
- Mr Justice Leggatt was not able to define precisely what such an implied duty might comprise, noting instead that “It is unnecessary and perhaps impossible to attempt to spell out an exhaustive description of what this obligation involved.”
What this means
- The decision in Tahnoon is a troubling one, because it represents a material reduction in commercial certainty for parties entering into long-term business relationships. Absent a contrary finding from an appellate court, it would appear for the time being that substantially all such relationships will, absent express terms to the contrary, potentially be subject to an implied good-faith duty.
- Moreover, Lord Justice Leggatt now sits in the Court of Appeal; for the first time, there is a real risk of a Court of Appeal judgment confirming the existence of such an implied duty.
- Parties are therefore strongly advised to give thought to including contractual wording that either entirely expressly excludes any implied good-faith obligation, or else sets out a clearly-defined and attenuated de minimis good-faith obligation so as impliedly to exclude any wider implied obligation.
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