dcsimg

Good faith in English contract law – a fuss about nothing?

Jason Rix

Some English lawyers seem to distrust the concept of good faith insofar as it relates to the performance of obligations under commercial contracts. If this is the case, the good news is that it is implied infrequently and when it is implied, the requirements tend not to be that onerous. The bad news is that it is hard to stop good faith being deployed by way of interlocutory jiggery-pokery.

It’s pretty clear that, as a matter of contract law, there is no pre-contractual duty to negotiate in good faith to conclude an agreement. However, a duty to negotiate in good faith written into dispute resolution clause in a contract may bind the parties.

An example of where there is an implied duty to act in good faith is where a true contractual discretion is being exercised, as compared to the exercise of an absolute contractual right.

In recent times, it is the decision in Yam Seng, that has caused people to think about whether a duty to act in good faith will implied into long term relational contracts, for example, distributorships, franchise agreements and joint venture agreements. The answer is that if the context so requires then an obligation to act in good faith may be implied. Where it is implied it may extend beyond honesty and fidelity to the parties’ bargain or acting in a commercially acceptable way. The few cases where the term has been implied and found to have been breached have all involved pretty flagrant bad faith, and in one instance criminal behaviour.

Equally, use of the term in one part of the contract has limited “contamination risk”. Where the parties use the phrase good faith in a contract it will not usually override a term that deals specifically with dispute in question. So a term requiring the parties to use good faith in the exchange of information in an outsourcing contract will not alter the way in which one party applies the service credit/debit regime. Equally importantly, an honest mistake in allocating service debits will not breach a requirement of good faith.

Comments published on Compact Contract do not necessarily reflect the views of Allen & Overy or its clients.

Read comments below or add a comment

Leave a comment

Your email address will not be published. Required fields are marked *