The development of good faith in English contract law

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Posted in:Corporate and Commercial, HR and Employment|May 26, 2015 | Join the mailing list

Parties often expressly agree to act in good faith when contracting with each other, partly because there is no general doctrine of good faith in English law. This allows for flexibility and for the parties to pursue their own self-interest and construct
wording in order to create a duty of good faith.

An express duty of good faith has been summarised by the High Court as being an obligation to “adhere to the spirit of the contract, to observe reasonable commercial standards of fair dealing, to be faithful to the agreed common purpose, and to act consistently
with the justified expectations of the other party”. The courts have also suggested that bad faith is an essential ingredient of a breach of good faith.

Implied terms, such as the duty to act honestly and to act rationally, influence the way in which contracts are interpreted and enforced in practice. “A thread runs through our contract law that effect must be given to the reasonable expectations of honest
men” – (Lord Steyn, 1997). This practice helps to give business efficacy to commercial transactions without the need to have a doctrine of good faith.

In a 2013 High Court case (Yam Send Pte v International Trade Corporation Limited), the court established a core duty of honesty by combining the concept of good faith with implied contractual terms. It is based on the presumed intention of the parties, respects
the parties’ autonomy and would be specific to the particular context in which it arises.

It is becoming more common to include express duties of good faith in commercial contracts. Including this duty within an agreement can help to bridge any gaps in the contractual relationship and encourage both parties to act in a fair and honest way. An express
duty of good faith is also unlikely to cut across other specific contractual provisions, so should not undermine the overall deal.

Should you have any queries regarding the subject matter of this article, or need any assistance in connection with commercial contracts, please contact
Stephen Foster, Partner in the Corporate and Commercial Department at
stephenf@berg.co.uk or telephoning 0161 833 9211.

The information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice.  No responsibility for its 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 this article.

 

 

 

 

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