Most English lawyers learned 'at their mother's knee' that English law – in contrast to many other legal systems – has no overarching principle of good faith and that (generally) no duty to act in good faith will be implied into contracts.

More recently, however, there has been a spate of cases considering both the extent to which, and circumstances in which, good faith obligations might be implied into contracts, and also the issue of how express terms requiring good faith should be interpreted. Is the traditional view of English lawyers under threat?

Implied duties of good faith

In SNCB Holding v UBS AG the court was asked to consider the implication of a duty of good faith arising under complicated banking arrangements. Put simply, the agreement conferred a power on UBS to manage a certain part of the arrangements and it had sought to do so for its own financial benefit and against the interests of SNCB, but still in accordance with the parties' express contractual terms. SNCB argued that UBS was required, by an implied term, to exercise its discretion in good faith and in accordance with the aims of the parties' agreement.

The court first reiterated the traditional position under English law, that:

"Unlike some bodies of foreign law, commercial contracts are not subject to general duties of good faith and fair dealing and it is trite law that a party does not have to exercise his contractual rights, once properly ascertained, reasonably. If he has rights, the law will not concern itself with the motivation or rationale lying behind his exercise of them..."

The court accepted that this principle was subject to the usual rules regarding the implication of terms, such that a term, including one of good faith, could only be implied if it were necessary to make the contract work and not otherwise inconsistent with any express terms. No such implied terms were found to apply to UBS, and aside from a requirement to act honestly, UBS was entitled to act in its own interests to the exclusion of SNCB's.

So far, so good. All is as anticipated.

However, a different approach was taken by the judge in Jacobs UK Ltd v Skidmore Owings & Merrill LLP where a duty of good faith was found to satisfy the test for implication of terms. Jacobs had sued Skidmore for the recovery of unpaid fees. The parties agreed to settle the proceedings for the payment of a certain amount together with a promise by Skidmore, over the next two years, to 'award Jacobs... one or more contracts for the provision of not less than 33500 hours of construction, design and engineering services'. In the absence of such additional work, Skidmore was to pay a further amount to Jacobs.

Skidmore argued that literal effect should not be given to the word 'award', in the sense of contracts actually entered into, as that would allow Jacobs to refuse to accept contracts which Skidmore offered it and thereby trigger the additional payment. Skidmore therefore argued for an obligation requiring it merely to offer contracts to Jacobs. The court disagreed, and found that word 'award' could be given literal effect, if supported by an implied term of good faith:

"I consider that there were general obligations of good faith on both sides in order to make this agreement work.... [Skidmore] had to consider awarding contracts and Jacobs had to consider accepting such awards, both in good faith. Only when an agreement was reached in good faith could there be an award of a contract. Beyond that, on this interpretation, I can see no need for implied terms to achieve mutuality."

Does this decision run counter to the English lawyer's traditional position? Arguably not – or at least, if it does, only to a limited extent. Good faith was only implied because without it the parties' agreement as to the 'award' of contracts would have been unworkable. This very much accords with the traditional English law approach to implied duties of good faith, which views them as a measure of last resort.

A much more liberal approach, however, was suggested in February 2013 in Yam Seng PTE Ltd v International Trade Corporation Ltd:

"Under English law a duty of good faith is implied by law as an incident of certain categories of contract, for example contracts of employment and contracts between partners or others whose relationship is characterised as a fiduciary one. I doubt that English law has reached the stage, however, 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. Nevertheless, there seems to me to be no difficulty, following the established methodology of English law for the implication of terms in fact, in implying such a duty in any ordinary commercial contract based on the presumed intention of the parties... I respectfully suggest that the traditional English hostility towards a doctrine of good faith in the performance of contracts, to the extent that it still persists, is misplaced."

The judge's point in Yam Seng appears to be that while English law does not imply a duty of good faith as a default rule in all contracts, the approach taken in each individual case should be more liberal and that such an implication should, generally speaking, be made 'in any ordinary commercial contract'. Essentially, a default rule by the back door.

Would that open the floodgates to a torrent of cases seeking to rely on this back door to argue for good faith obligations in most cases?

Following the Court of Appeal's decision in Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd, this is unlikely. Commenting generally, the court reminded itself that:

"...there is no general doctrine of 'good faith' in English contract law, although a duty of good faith is implied by law as an incident of certain categories of contract [i.e. such as in employment contracts and partnership deeds]... If the parties wish to impose such a duty they must do so expressly."

Mid Essex concerned a long-term catering contract for a hospital. The contract provided for service failings to be recorded and for certain deductions to be made from payments due to the contractor based upon these failings. The contract gave the hospital discretion as to whether to make these deductions, i.e. they were not automatic. The hospital's position was therefore similar to that of an employer under a construction contract enabling the deduction of liquidated damages for delay. The contractor contended that the hospital's right to make these deductions was subject to an implied term that deductions would not be made in an arbitrary, capricious or irrational manner.

The Court of Appeal rejected the proposed implied term, finding that it was not necessary to make the contract workable. Once service failings had been duly recorded, the hospital was entitled to make the deductions provided for by the contract for whatever reasons it wished. The hospital's discretion applied merely to the exercise of its own contractual rights and there was no need for any implied term in favour of the contractor.

Perhaps, after this recent flurry of activity, the English lawyer can settle back safe in the assumption that his original position – that there is no general doctrine of good faith – still holds good.

Express duties of good faith

Increasingly, however, parties are including express obligations as to good faith (or similar) within their contracts. For example, the obligation on the parties within the NEC suite of contracts to act 'in a spirit of mutual trust and co-operation' is generally assumed to require the parties to act in good faith (although this has not yet been confirmed in case law). A body of law is beginning to emerge concerning how these obligations ought to be interpreted under English law. Key cases include:

  • Berkeley Community Villages Ltd v Pullen: a clause requiring the parties to "act with the utmost good faith towards one another" in the context of a contract for land development was found to impose a duty requiring the observance of reasonable commercial standards of fair dealing, faithfulness to the agreed common purpose and consistency with the justified expectations of the other party
  • Gold Group Properties Ltd v BDW Trading Ltd: a clause requiring each party to "at all times act in good faith toward the other" in the context of a development agreement was found to impose a requirement that the parties act in a way that allowed both of them to enjoy the anticipated benefits of the contract but did not require either to give up a freely negotiated financial advantage clearly embedded in the contract
  • CPC Group Ltd v Qatari Diar Real Estate Investment Company: a clause requiring the parties to act "in the utmost good faith towards each other" in the context of a proposed development project was found to impose a requirement that the parties adhere to the spirit of their contract, which was held to include the seeking of planning consent for the maximum developable area in the shortest possible time, the observance of reasonable commercial standards of fair dealing, faithfulness to the common purpose and consistency with the other's justified expectations.

The clause in Mid Essex required the parties to "co-operate with each other in good faith and... take all reasonable action as is necessary for the efficient transmission of information and instructions and to enable the [hospital] to derive the full benefit of the Contract." The question before the court was whether the clause should be interpreted broadly so that the requirement to co-operate in good faith applied to the whole of the contract, or narrowly, confining it only to the transmission of information and matters required for the hospital's benefit.

The judge in the first instance gave the clause a broad interpretation, emphasising the long-term nature of the contract and the importance of co-operation between the parties. The Court of Appeal reversed this decision, however, finding that the judge had not given proper consideration to the other more detailed provisions of the contract. In the Court of Appeal's opinion, express good faith provisions in large commercial contracts should be read subject to the more detailed provisions of the contract. Lord Justice Beatson noted that:

"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."

Conclusion

For the time being, the Court of Appeal's decision in Mid Essex would appear to have affirmed the traditional approach, restricting implied terms to those which are necessary to make a contract workable. Parties may however continue to try to 'nibble away' at the edges and argue that an implied term is appropriate in their case. We can also expect to see the series of cases concerning the interpretation of express good faith obligations continue as parties seek further clarification both as to the scope of such obligations and their precise effect on their particular circumstances.