A return to no duty of good faith in English contracts

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Posted in:Corporate and Commercial|April 8, 2013 | Join the mailing list

We have previously questioned whether an implied duty of good faith could be enforced under English law.  Previously there had been a clear precedent that no such duty existed.  However, under recent case law the position began to be called
into question with decisions such as the High Court’s ruling in Mid Essex Hospital Services NHS Trust v Compass Group UK & Ireland Ltd (t/a Medirest) [2013] EWCA Civ 200, where a term incorporating a duty of good faith was enforced.

When last commenting on this topic the case had not been to the Court of Appeal who have now overturned the earlier decision of the High Court that allowed such a duty could be implied in certain circumstances.  The Court of Appeal restated
the English courts’ traditional approach that there is no general principle of good faith in contracts.  It has not been revealed whether this decision will be appealed and therefore the matter will come under scrutiny again in the Supreme Court.

Two main issues were before the court:

1. whether there was an implied term to act reasonably; and

2. whether there was a breach of an express obligation of good faith contained in the contract.
As to the first point, Lord Justice Jackson concluded that there was no general obligation on a party to act reasonably in a long-term contract.  If there is a question of trust then such provisions can be expressly put into a contract to allow for the usual
routes of breach of contract to be pursued.

The Court of Appeal referred to, Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB), in which the High Court held that in order to rely on a duty of good faith; it must be done expressly as no general doctrine of
good faith exists.
As to the second point, Jackson LJ agreed with the NHS trust and held that the obligation of good faith was not a general one, and was limited to the specified aims set out in clause; namely, the efficient transmission of information; and to enable the trust
to derive the full benefit of the Contract.  The clause could not be expanded and applied to the contract more generally.
The Court of Appeal held that hostile behaviour by a party does not, in itself, breach any contractual duty under English law.  If the parties to a contract wish to impose a general duty of good faith in contracts, they must do so expressly without ambiguity. 
Although this case may still be appealed and the approach of the Court of Appeal may be reversed by the Supreme Court, for now English Law has returned to its traditional state.  If a party wishes to rely on a duty of good faith it must be clearly stated within
the contract.

Should you have any concerns regarding your existing contracts, or seek guidance and advice in relation to drafting new commercial contracts please contact Stephen Foster, Head of Corporate at
stephenf@berg.co.uk or by telephoning 0161 833 9211.

The information and opinions contained in this article are not intended to be comprehensive or to provide legal advice.  No responsibility for article’s accuracy or correctness is assumed by Berg or any of its partners or employees. 
Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of the contents of this article.

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