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Good Faith in English Contract Law: Where Are We Now?

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About The Author

Jamil Mustafa (Private Law Editor)

Jamil is currently undertaking pupillage at a commercial chancery chambers, after obtaining an Outstanding on the BPTC at BPP University and a Distinction on the BCL at Oxford. His main legal interests are contract, tort and equity. Before the law, Jamil graduated with an MPhil in American History with Distinction from Clare College, Cambridge, and with First Class Honours in Government and History from the LSE. Outside academia, Jamil enjoys cricket, rugby and rowing and is a staunch supporter of Manchester United FC.

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

Mr Justice Leggatt

The English law of contract stands apart from the USA and most civil law jurisdictions by virtue of its rejection of a general requirement of good faith in contractual performance.

The traditional hostility of English law to a general duty of good faith arises from its perceived inconsistency with the common law principle of freedom of contract and the competitive ethic underlying English contract law. Parties stand in an adversarial position to each other in contractual negotiations: it is assumed that if parties intended performance in good faith they would have expressly said so. Therefore, imposing such a duty on them, it is felt, wrongly forces an uncertain conception of how parties should conduct their relations upon them.

This article, building on the prescient analysis undertaken by Anirudh Mandagere for Keep Calm Talk Law, will evaluate the current position of English law in respect of a general duty of good faith in contractual performance with reference to Transatlantic legal scholarship and more recent case law. It will argue, in the same vein, that the longstanding argument of English law that any such duty is contrary to freedom of contract is not only flawed in principle, but injurious to the very certainty that the orthodox position in English law seeks to protect. It will do so by way of answering five simple and related questions:

  1. What is a general duty of good faith?
  2. Why is one needed?
  3. Has English contract law not done just fine without one?
  4. Where does the law stand at present?
  5. What does this mean?

What is a General Duty of Good Faith?

The most logical place to start is to define the duty in question. Indeed, a longstanding criticism of a duty of good faith is the supposed uncertainty as to what it means, giving rise to fears of unbridled judicial discretion to determine standards of contractual morality.

However, the problem of defining good faith is perhaps more apparent than real. A solution was offered by Robert S. Summers, an American legal academic, back in the 1960s. Summers argued that some words or phrases do not have a positive meaning of their own, but rather take meaning from the contexts or realms of discourse in which they are used. He identified the concept of ‘good faith’ as such a phrase, with the consequence that rather than having a defined meaning, the duty functioned as an ‘excluder’.

Accordingly, rather than prescribing conduct (by having a positive meaning), a requirement of good faith proscribes heterogeneous forms of bad faith, and thus has no single meaning. By ruling out forms of bad faith, the duty strives to uphold ‘reasonable commercial standards of fair dealing’: this has been the definition relayed in the US Uniform Commercial Code since 2003, and in Section 205 of the US Restatement (2nd) of Contracts (1981) before that.

This analysis seems to have recently made its way across the Atlantic: when invoking the concept of good faith, English courts have recently resorted to define the term consistently with the 'excluder' analysis. For example, in CPC Group Ltd v Qatari Diar Real Estate Investment Co [2010] Vos J stated the obligation of good faith entailed observation of ‘reasonable commercial standards of fair dealing’. Meanwhile Leggatt J stated in Astor Management v Atalaya Mining [2017] that the concept reflects the ‘expectation’ that the other party does not act in such a way that ‘would be regarded as commercially unacceptable by reasonable and honest people’.

Further, guidance as to what ‘reasonable and honest people’ will expect is obtainable from examining the particular social norms that prevail in the industry which the contracting parties inhabit. In view of this, the argument that a general requirement of good faith is undefined or uncertain lacks foundation. The mistake has been to seek to define a term that is inherently context-dependent. One may compare it to the longstanding common law notion of ‘reasonableness’ in English law, which suffers no such similar criticism, and similarly adapts to the scenario in which it is invoked.  

Why is One Needed?

This idea of ‘expectation’ further provides a rationale for the necessity of a general duty of good faith. Although imposing a form of ‘contractual morality’, as famously stated by Robert S. Summers, the requirement of good faith is in fact a modest requirement, which seeks nothing more than to safeguard the expectations of commercial parties.

English law is presently beholden to the falsehood that commercial parties, unless they expressly agree to one, are opposed to a duty of good faith, so imposing one contravenes freedom of contract.

However, as argued by Paul MacMahon, contracts are necessarily incomplete; they do not provide for every contingency. So, that parties do not expressly include a duty of good faith does not mean that they would not have, had they specifically considered such a duty when contracting. This is indeed the basis upon which terms are implied in fact. Moreover, it is hard to imagine any reasonable party objecting to a duty of good faith in performance. Thus, that parties do not expressly include a duty of good faith is most likely because they expect the other to perform in such spirit.

A general duty of good faith is best seen then as enforcing expected commercial behaviour, rather than contradicting them or violating freedom of contract. Such a duty fills those gaps where parties fail to expressly address the duty, and ensures that parties’ legitimate expectations of their counterparty in performance are not flouted.

Moreover, this does not negative the competitive ethic that underlies English contract law – that parties stand in an adversarial position to one another in contractual negotiations. Rather, it impedes purely self-interested dealing by condemning forms of bad faith that are unacceptable to any reasonable commercial person, ensuring that parties respect one another’s legitimate interests, which they clearly expected would be the case at the time of contracting.

Clearly then, a general requirement of good faith is not an imposition; it is something that would ensure the enforcement of what parties legitimately expect from each other in contractual performance.

Has English Contract Law Not Done Just Fine Without One?

But is it fair to say that up to now English contract law has generally failed to uphold parties’ expectations of one another in performance?

The short answer is no: as articulated by Bingham LJ in Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989], English law has achieved much the same effect as a general requirement of good faith by adopting ‘piecemeal solutions’ to problems caused by unfairness. These have by far included the legislative regulation of certain contractual terms. The courts have also held certain classes of contract to require ‘utmost good faith’ whilst simultaneously striking down penalty clauses.

But the law ought to be rational, much like games ought to be played according to declared rules. This is fostered by the use of a good faith provision which simply ensures co-operative dealing in accordance with agreed, minimum standards. English law is currently irrational in that, while eschewing a general requirement of good faith in deference to certainty, it has nonetheless acknowledged that the absence of such a duty can produce undesirable outcomes, and has taken bespoke action in different cases to remedy this.

For example, in the unreported case of Bournemouth and Boscombe Athletic FC v Manchester United FC (1980) an implied term in fact was added into the contract by the Court of Appeal to the effect that the parties to a football transfer - where the sum payable for the player was to be paid in two batches - had a duty of co-operation (i.e. to perform in good faith) where the second batch would only become payable if the transferred player scored a certain number of goals. The Court of Appeal therefore held that Manchester United (the buyer) had been in breach of contract by giving the player insufficient opportunity to score the requisite goals to trigger the payment.

Although the result achieved by the implied term in fact here was much the same as were it to result from a general requirement of good faith, the important distinction between the two is that the  latter introduces greater transparency and clarity. If both parties knew and understood that their contract was subject to a duty of good faith prior to the disputed matters, the parties would likely have behaved accordingly in performance of the contract, and even if they had not, the case plausibly would not have led to formal proceedings, and in any event, would have been resolved more swiftly and in less costly fashion.

Moreover, English law’s aversion to a general requirement of good faith is not as steadfast as might first appear.  As opposed to its continental civil law counterparts, where such a duty is implied into all contracts by law – for example by Paragraph 242 of the German Civil Code (BGB) – English law’s tools of implication do not extend so far, and are limited to the particular factual matrix of the case at hand.

English law has in some respects mitigated this, in that it has recognised a duty of good faith implied in law in performance in consumer and employment contracts, and even in some categories of commercial contract – namely relational and collateral tendering contracts, as noted by Jackson LJ in Mid Essex Hospital Services NHS Trust v Compasss Group UK and Ireland [2013].

But this has the effect of undermining the very certainty that English law’s rejection of a general requirement of good faith is supposed to protect. Parties are even less certain of their contractual obligations where courts sporadically rely on ancillary doctrines as surrogates for a general duty of good faith. Often, they only learn they are under an implied, specific duty to perform in good faith when they are held to be in breach of said duty. A general duty would eradicate this current uncertainty, as opposed to compound it as critics of the requirement would argue.

Where does the Law Stand At Present?

English courts have long realised the expedience of the requirement of good faith, and hence have been willing to enforce express duties to act in good faith, notably in CPC Group Ltd v Qatari Diar Real Estate Investment Co [2010], where a duty of good faith was found but not breached in a dispute concerning a joint venture, and prior in Berkeley Community Villages Ltd v Pullen [2007], where an owner’s intended sale of land would have placed them in breach of such a duty to their counterparty developer.

The difficulty that troubles English courts presently appears not to be the content of the duty of good faith as such, but the way in which the duty is included in contracts. Hence, Leggatt J caused a stir by his remarks in the case of Yam Seng Pte Limited v International Trade Corp [2013], where he called for the implication of a term requiring performance in good faith in all commercial contracts to safeguard the reasonable expectations of parties (on much the same analysis as above).

Longmore LJ in Ilkerler Otomotiv v Perkins Engines Co Ltd [2017], discussed Leggatt J’s remarks in Yam Seng and stated that although Leggatt J’s influential dicta called for co-operation in performance of a contract, that did not extend to co-operation in relation to termination, which would severely limit the scope of any requirement of good faith, for example to prevent a party with a unilateral contractual right to terminate a contract to do so without good reason. Longmore LJ did not offer any more substantive analysis than this. :

English law seems to have taken to the distinction made by Leggatt J in Yam Seng, between relational and other contracts in order to justify implying a general requirement of good faith in some contracts and not others. As Andrews J stated in Greenclose Ltd v National Westminster Bank [2014]:

[T]here is no general doctrine of good faith in English contract law and such a term is unlikely to arise by way of necessary implication in a contract between two sophisticated commercial parties negotiating at arms’ length.

This distinction seems to derive from weddedness to the notion of freedom of contract, and that the courts should not interfere with the contracts of sophisticated commercial parties save in special circumstances. Indeed, even Leggatt J recognised in Yam Seng that the ‘the implication of an obligation of good faith is heavily dependent on the context.

Conclusion: What Does this Mean?

It is argued that,if the status quo is that which was stated above, it is an unsatisfactory one. If the concern of the courts is now not so much the content of a duty of good faith- as appears to be the case in light of seeming adoption of the 'excluder' analysis and enforcement of express terms to that effect- then this concern is not warranted.

A requirement of good faith does nothing more than ensure that the expectations of parties are fulfilled, not contravened. The sooner the courts realise this and accept a general requirement of good faith in contractual performance and enforcement, English contract law will be more transparent and certain, which the current state of the law is ostensibly supposed to defend.

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Tagged: Contract Law

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