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Swimming against the tide of good faith

It is largely accepted that English contract law does not acknowledge a general duty to perform in good faith. In support of this proposition most commentators refer to Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] QB 433, CA, in which Bingham LJ (as he then was) spoke of the lack of any overriding legal principle of good faith, in the following terms:

“In many civil law systems, and perhaps in most legal systems outside the common law world, the law of obligations recognises and enforces an overriding principle that in making and carrying out contracts parties should act in good faith. This does not simply mean that they should not deceive each other, a principle which any legal system must recognise; its effect is perhaps most aptly conveyed by such metaphorical colloquialisms as "playing fair," "coming clean" or "putting one's cards face upwards on the table." It is in essence a principle of fair and open dealing… English law has, characteristically, committed itself to no such overriding principle but has developed piecemeal solutions in response to demonstrated problems of unfairness.”

The evaluation in Interfoto Picture Library is clear: Statutory provisions, the common law and equity offer a piecemeal solution, but a solution nonetheless, to unfairness and/or unconscionability.

Notwithstanding this, good faith clauses are becoming commonplace in bilateral construction contracts and the principle, existence, purpose and merit of an implied duty of good faith, like those accepted in many other civil and common law jurisdictions, has generated significant commentary this year.

Notably, in Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB), Leggatt J said: “In refusing… if indeed it does refuse, to recognise any such general obligation of good faith, this jurisdiction would appear to be swimming against the tide.”

Whatever you think of contractual good faith (fundamentally objectionable, impracticable, panacea etc.) it seems to be vying for its place, in the first instance, amongst our boilerplate.

“Putting one’s cards face upwards on the table “ sounds laudable but there is significant confusion surrounding what is required. There are likely to be few who are unwilling to agree to perform honestly but an amorphous bundle of good faith obligations will tend to be more taxing than a promise not to knowingly hoodwink the other party.

In the circumstances, until good faith has been demystified, many clients perceive the following dilemma: is it prudent to actively seek to limit or even exclude promises to perform construction contracts in good faith?

Faithful wording

Establishing trust and cooperation to improve the delivery of major construction projects is desirable. How to go about generating an environment of cooperation and trust is challenging. Can contractual wording ever be enough?

Partnering is well established; and there has long been a level of enthusiasm for multi-party partnering contracts centered on collaborative team working, such as those in the ACA suite. This is particularly true of PPC2000, a form devised in direct response to the recommendations made to the industry in the Egan Report (1998). Wording aside, the success or failure of project partnering is dependent on more complex matters than promises to perform in a collaborative manner.

The novelty of the current trend, in relation to good faith, is that it predominantly concerns terms in bilateral contracts.

Yam Seng: Good faith isn’t novel after all

In Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB) the parties entered into a distributorship agreement consisting of 8 short clauses. Leggatt J described the agreement as “a skeletal document”. It did not include a good faith clause. The relationship broke down and Yam Seng Pte Ltd commenced proceedings.

Unsurprisingly Yam Seng Pte Ltd alleged breach of express terms of the contract. Rather unusually it also pleaded breach of an implied term that the parties would deal with each other in good faith.

In a comprehensively researched yet succinct judgment Leggatt J saw no difficulty in implying narrower duties, based on the objectively presumed intentions of the parties, and did so under the banner of good faith; namely a duty of honesty in the provision of information and a duty not to approve a domestic retail price for a product, which undercut the duty free retail price.

In the Judge’s view this approach was consistent with the incremental development of the common law. While the Judge gave a detailed examination of good faith, in the context of English contract law and other common law jurisdictions, which he used to support his opinion that any existing hostility towards it was “misplaced”. It is important to highlight that Leggatt J did not imply an overarching duty of good faith. He said:

“I doubt that English law has reached the stage… where it is ready to recognise a requirement of good faith as a duty implied by law, even as a default rule, into all commercial contracts.”

Despite the obvious problems arising, not least determining precisely what each clause requires in the context, in the wake of Yam Seng clients are more likely to agree a suitable express provision regarding good faith. Whether they will do so because of a growing desire to uphold a principle of fair and open dealing remains to be seen.

The benefit of settling on a narrow form of words may be twofold. First it will enable clients to define and limit the obligation; and second it is likely to inhibit any implied duty in respect of good faith.

Medirest: Good faith can be narrowly expressed

In Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd (t/a Medirest) [2013] EWCA Civ 200 the services contract, which Jackson LJ described as “a somewhat complicated contract”, included an express provision, as follows:

“The Trust and the Contractor will co-operate with each other in good faith and will take all reasonable action as is necessary for the efficient transmission of information and instructions and to enable the Trust or, as the case may be, any Beneficiary to derive the full benefit of the Contract. At all times in the performance of the Services, the Contractor will co-operate fully with any other contractors appointed by the Trust or any Beneficiary in connection with other services at the Location.” [Clause 3.5]

The contract also provided for payment deductions against the monthly amount of the contract price, if the contractor failed to meet specific performance criteria (by way of clause 5.8).

The parties’ dispute concerned whether the good faith obligation in clause 3.5 restricted operation of clause 5.8.

After distinguishing the discretion, as to whether or not to exercise the absolute contractual right, in clause 5.8 from one that would give rise to an implied term not to exercise it in an arbitrary, capricious or irrational manner, Jackson LJ construed clause 3.5, as follows:

“The obligation to co-operate in good faith is not a general one which qualifies or reinforces all of the obligations on the parties in all situations where they interact. The obligation to co-operate in good faith is specifically focused upon the two purposes stated in the second half of that sentence.”

Clearly context is everything. Nevertheless the narrow construction afforded to clause 3.5 in Medirest may have alleviated any concern regarding the likely approach to narrow express terms. In this regard Beatson LJ said:

“The contract in the present case is a detailed one which makes specific provision for a number of particular eventualities… In a situation where a contract makes such specific provision, in my judgment care must be taken not to construe a general and potentially open-ended obligation such as an obligation to “co-operate” or “to act in good faith” as covering the same ground as other, more specific, provisions, lest it cut across those more specific provisions and any limitations in them.”

TSG Building Services: Good faith is not applicable to termination

TSG Building Services Plc v South Anglia Housing Ltd [2013] EWHC 1151 (TCC) concerned interpretation of the good faith provisions of an amended partnering contract. The relevant clauses provided:

“1.1

The Partnering Team members shall work together and individually in the spirit of trust, fairness and mutual co-operation for the benefit of the Term Programme, within the scope of their agreed roles, expertise and responsibilities as stated in the Partnering Documents, and all their respective obligations under the Partnering Contract shall be construed within the scope of such roles, expertise and responsibilities, and in all matters governed by the Partnering Contract they shall act reasonably and without delay…

13.3

If stated in the Term Partnering Agreement that this clause 13.3 applies, the Client may terminate the appointment of all other Partnering Team members, and any other Partnering Team member stated in the Term Partnering Agreement may terminate its own appointment, at any time during the Term or as otherwise stated by the period(s) of notice to all other Partnering Team members stated in the Term Partnering Agreement.”

Akenhead J found a “very substantial” amount of matters to which clause 1.1 could apply; but termination, under clause 13.3, was not one of them. The Judge was in no doubt that the parties had contracted for an unqualified right to terminate at any time. Interestingly he stated that whether or not a general duty of good faith did fall to be implied it would not and could not “circumscribe or restrict” clause 13.3.

As for Yam Seng, Akenhead J opined:

“Because cases and contracts are sensitive to context, I would not draw any principle from this extremely illuminating and interesting judgment which is of general application to all commercial contracts. I do not see that implied obligations of honesty or fidelity to the contractual bargain impinge in this case at all.”

Upholding the underlying principles

Interdependency is an accepted reality of most construction projects. With that in mind, parties already prioritise project success above technical wins or point scoring, because the bigger picture in terms of successful projects (increased efficiency, increased confidence and increased investment) speaks industry-wide. The government’s Efficiency Reform Group recently announced half-year savings of £5.4 billion and attributed £700 million of that sum to “reviewing and reshaping large scale projects (including construction) and stripping out inefficiencies”.

The case for an implied duty of good faith in commercial contracts will certainly appear before the English courts again. Opinion on the realistic value of such a duty has been mixed but it is conceivable that one could be recognised. As express terms incorporating good faith grow in popularity, there is likely to be a developing body of case law interpreting them. Recent case law suggests that such terms have the potential to develop the underlying principles of fair and open dealing more rapidly than a general implied duty. In this regard it is worth noting that the JCT 2011 (by optional wording in Schedule 8) and NEC3 (by clause 10.1) standard forms include clauses imposing good faith obligations.

It is not clear what attempting to incorporate common-sense cooperation into bilateral construction contracts will achieve. It may be greater mutual cooperation giving rise to greater efficiency, or uncertainty and litigation. There is also the possibility that it will have no appreciable effect on the sector. However what is clear is that the courts will give effect to the express terms of the contract, in the context, and that performing in good faith is unlikely to prevent reliance upon other clear contractual rights.

In Yam Seng, Leggatt J surmised that resistance to construing good faith as broadly as putting one’s cards face upwards on the table should be seen as a difference of opinion, reflecting current cultural norms about what equates to good faith in the contractual context, as opposed to indicative of a refusal to recognise that good faith is required.

Restricting good faith to specific contractual obligations, if not yet customary, would seem to be a reasonable approach that is not inevitably inconsistent with recognition of the importance of fair and open dealing in the performance of construction contracts.