English Law is Beginning to Warm Up to an Implied Duty of Good Faith in Contracts

What is the Implied Duty of Good Faith?

Under English law the implied duty of good faith between contracting parties has been described as “playing fair”, “coming clean” and  “putting one’s cards face upwards on the table” in addition to the general expectation of honesty between the parties.

While this particular area of law is still developing, the case that acts as the starting point for the idea of an implied good faith obligation is Yam Seng Pte Ltd v International Trade Corp Ltd (2013) EWHC 111 (QB), [2013] 1 CLC 662.

Yam Seng v Int’l Trade established an Implied Duty of Good Faith in the UK 

In this case,  Leggatt J gave an in-depth analysis of the topic of good faith and within that analysis, he spoke of “shared values and norms of behaviour” which are essential and expected by contractual parties, but are rarely made the subject of express contractual obligations.

Leggatt J explains that what good faith is defined as is dependent on the context, it is an objective test concerned with whether that particular conduct would be considered commercially unacceptable by reasonable and honest people; rather than whether the parties perceive the conduct to be improper or in bad faith. He made mention that in a “relational contract” an implied good faith obligation was necessary for the purpose of business efficacy.

Leggatt J described relational contracts as longer-term relationships that involve substantial commitment and require a high degree of communication, co-operation and predictable performance based on mutual trust and confidence. Joint ventures, franchise agreements and distributorship agreements were cited as examples of relational contracts.

Similarly by analogy, one could argue that the implied duty of good faith would apply in employment or partnership agreements and potentially extend to separation agreements between divorcing or cohabiting partners.

The Implied Duty of Good Faith has been Reaffirmed Recently

Most recently, in the case of Al Nehayan v Kent (2018) EWHC 333 (Comm) [2018] WL 01036160 the implied duty of good faith has been reaffirmed. The case pertained to a joint business venture that had not been as lucrative as anticipated. When the parties embarked on severing their joint venture, one of the parties claimed there was an implied term to give reasonable notice and reasonable terms when terminating the joint venture. The court held that this implied term was one of good faith and upheld it as the venture was based on a long-term collaboration. This was considered a relational contract and the good faith obligation could be implied into the contract. The implication of the good faith obligation was considered essential to be able to give effect to the parties’ reasonable expectations.

The Implied Duty of Good Faith in Practice

The significance of Al Nehayan v Kent is that it could mean English law is beginning to warm up to the idea of an implied good faith obligation. The law is potentially creating scope for implied good faith obligations to be recognised in commercial contracts, particularly where the contract is considered “relational”.

However whilst the law on good faith develops on a case by case basis, parties to contracts should be diligent to expressly draft their good faith requirements into the terms of their contracts, should they wish to hold the other party accountable for not acting in good faith.

The caveat on this topic is that if the UK parties are entering into contracts with parties in the US, Canada or countries in the EU the implied duty of good faith and fair dealing has long been recognised in these jurisdictions and other civil law systems.

If you have legal consulting, recruitment, or mediation requirements, please contact Andre Brady for assistance on 01908 411220 or by email at andrebrady@bradyharvey.com.

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