Good faith duties in English commercial contracts – a changing position?

The traditional approach in the English Courts has been to avoid implying a duty of good faith into commercial contracts. This has for some time been at odds with the approaches taken by other jurisdictions, which have chosen to recognise that an implied duty of good faith can exist between contracting parties.

The case of Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] demonstrated a shift from the English Courts' general rule and suggested that a duty of good faith could and should, in fact, be implied into commercial contracts. 

In this case, Yam Seng Pte Limited ("Yam Seng") accused International Trade Corporation ("ITC") of breaching the implied term to work together in good faith. Yam Seng alleged that ITC had provided false information in full knowledge that Yam Seng would rely on this to their detriment. 

The Court considered a contractual duty of honesty was implicit in commercial contracts, it stated: 

"As a matter of construction, it is hard to envisage any contract which would not reasonably be understood as requiring honesty in its performance. The same conclusion is reached if the traditional tests for the implication of a term are used. In particular the requirement that parties will behave honestly is so obvious that it goes without saying. Such a requirement is also necessary to give business efficacy to commercial transactions." (137)

The Court explained that a requirement of honesty was one of several aspects of the concept of good faith.  It noted that dishonesty was not the only indicator of a lack of good faith.  It also referred to the parties' "fidelity to bargain" as another aspect of good faith which overlaps with the requirement for honesty.  It explained that contracts can never expressly provide for every event that may occur and in unforeseen circumstances contractual language must promote the "values and purposes expressed or implicit in the contract".

It was made clear in this case that whilst a contractual duty of good faith could be implied, the requirement of good faith is sensitive to the context of each commercial contract.  The Court noted that in some circumstances the expectations may extend further than in others and therefore each case was to be looked at on the merits and particular facts.

In the case it was held that it was clearly implied that ITC would not provide faulty information to the detriment of Yam Seng; therefore ITC was in breach of this implied duty of honesty in its dealings with Yam Seng.

This case is of particular interest as it goes beyond the approach previously taken by the English Courts.  However it still falls short of the approach taken by the Supreme Court of Canada which has gone as far as to say that there is now a "general organizing principle" under which parties to a contract must perform in good faith.  The Supreme Court held that it is appropriate to recognize a new common law duty that applies to all contracts and thereby recognise the manifestation of a duty of honest performance, which requires the parties to be honest with each other in relation to the performance of the contractual obligations.  As a result of this decision it appears that under Canadian law it will now no longer be necessary to search the contract for an express obligation in order to protect the parties reasonable expectations of good faith. 

It is yet to be seen whether the English Courts will continue to follow the route taken by the Supreme Court of Canada and bring their approach in line with other foreign jurisdictions.  Certainly this would be the recommendation of Leggatt J in Yam Seng v ITC who noted that:

"the fear that recognising a duty of good faith would generate excessive uncertainty is unjustified. There is nothing unduly vague or unworkable about the concept." (152)

Leggatt J also expressed his dissatisfaction with the traditional English legal approach to good faith:

"I respectfully suggest that the traditional English hostility towards a doctrine of good faith in the performance of contracts, to the extent that it still persists, is misplaced." (153)

Unfortunately there is still uncertainty in English law since Yam Seng v ITC. In the 2013 case of TSG Building Services Plc v South Anglia Housing Limited, the High Court appeared to revert back to the traditional English law approach whereby good faith was not implied. However, the more recent case of Bristol Groundschool Ltd v Intelligent Data Capture Limited [2014] approved the views expressed by Leggatt J in Yam Seng v ITC.

It is still yet to be seen whether the approach of Yam Seng v ITC and Bristol Groundschool is a real departure from the well-established English legal principles, as certainly seems to be advocated by the Court. These cases are yet to be conclusively tested in any Court of Appeal or Supreme Court decision. 

There does appear to be some divergence in opinion as to whether these recent cases do signify a new era in English contract law or in fact go no further than encourage parties to perform a contract in a way in which most parties would already seek to do.  If the latter is true then it is argued that not much may actually have changed in practice as a result of these cases.

Uncertainty remains in this area and parties should be aware of the potential implication of a good faith clause.  There may be merit in expressly excluding all potential implied duties of good faith and instead expressly including in detail precise behavioural terms which will be required under the contract. Such an approach may give parties further reassurance of the legal certainty of terms within their contract. 

The traditional refusal of the English Courts to recognise a general obligation to perform contractual relationships in good faith is to some extent an anomaly in English law.  The concept of good faith is already implied into contracts of employment and contracts which regulate fiduciary relationships.  Similarly good faith obligations are found in legislation and indeed the English Court's application of equitable principles and tests based on reasonableness pivot on the same concepts of fairness that underpin good faith duties.  When considered in this light, an implied duty of good faith is not so far a stretch for the English Courts to make as may first appear. The approach by the Courts to good faith will certainly be watched with interest going forward. 

For more information please contact Tim Richards, Partner and Head of Commercial Dispute Resolution on tim.richards@michelmores.com or 01392 687605 or contact Charlotte Bolton, Solicitor in the Commercial Dispute Resolution team on charlotte.bolton@michelmores.com or 01392 687745.