It is a well-established principle of English law that there is no general doctrine requiring parties to act in good faith in commercial contracts. Instead, English law has developed "piecemeal solutions in response to demonstrated problems of unfairness". This can sound crass and the antithesis to all commercial acumen – surely, contracting parties should act in good faith in their commercial deals? Doesn't that make good business sense?
Historically, the English courts have been reluctant to introduce a good faith doctrine, on grounds that it would undermine contractual certainty. To impose such a duty on parties would interfere with the principle of contractual freedom and, if parties were bound to act in good faith, the ethos of individualism in English law might be lost.
We also have a number of existing rights and principles that a court can look to in order to hopefully address any obvious unfairness in dealings. To add an extra layer of good faith to this, has historically been one step too far in Pandora's box of judicial law making.
However, change is in the air, which we see with the proposal to introduce the concept at the Pre-action Conduct stage. Perhaps well-established principles have become a bit rigid or tired or not fit for today's commercial dealings. Regardless of the reasons behind the move, we are seeing significant steps being made towards the good faith principle.
Good faith, unique among equals?
We already have some examples and interpretations of the good faith concept in English contract law. Parties can choose to expressly include the obligation within their contract. There is the 'Braganza duty' (from the Supreme Court case of the same name), which requires a party exercising a contractual discretion to do so rationally and not capriciously or arbitrarily. Finally, in very limited circumstances, the courts can imply a general duty of good faith to imply other duties. This is generally in circumstances where there is a long term 'relational' contract between the parties. Although the law "has not yet reached a stage of settled clarity" on this point, factors that may indicate a 'relational' contract include where there is an exclusive relationship, the parties have trust in each other and intend their roles to be performed with integrity. In all of these scenarios, however, good faith is a blend of other standards or the catalyst leading a court to something else. Standing alone, we've no clear sight on what it looks like or might add to contractual relations.
If faith is a belief in something which we cannot see or, the assurance of what we hope for, contracting parties should expect a standard under the "faith-rule". This expects the conclusion of the contract on anticipated terms. If the standard of faith is a 'good one' which is better than routine or normal behaviour, a defendant will not have to have acted in 'bad faith'. It would simply need to be shown that the defendant acted below the anticipated contractual standard.
So, we've established we're looking at something which places a standard on contracting parties where they will be more than routine or normal partners to the deal and, in doing so, a contract will exist at the end of the negotiations in the form and purpose as both intend.
Supreme Court says "you [not] gotta have faith"
The courts have previously implied contractual terms attempting to categorise what good faith might be. However, the Supreme Court has previously indicated that it would not interfere with a negotiated contract by implying a term simply because it would be fair.
In Sheikh Al Nehayan v Kent good faith was summarised as:
"an obligation to act honestly and with fidelity to the bargain; an obligation not to act dishonestly and not to act to undermine the bargain entered or the substance of the contractual benefit bargained for; and an obligation to act reasonably and with fair dealing having regard to the interests of the parties (which will, inevitably, at times conflict) and to the provisions, aims and purposes of the contract, objectively ascertained".
However, Leggatt LJ stated that the obligation of fair dealing was not intended to be demanding and did no more than require a party to refrain from conduct, which would be regarded as commercially unacceptable by the reasonable and honest person.
A similar definition was also recently affirmed by the Court in Bates v Post Office (No 3) where it was determined that the duty of good faith went beyond a duty to simply act honestly. Instead, it required the parties to refrain from behaviour that the reasonable and honest person would regard as commercially unacceptable with reference to the specific contract.
The meaning of an express obligation for the parties to act in "utmost good faith" was considered in CPC Group v Qatari Diar Real Estate Investment. It was described as a duty “to adhere to the spirit of the contract, to observe reasonable commercial standards of fair dealing, and to be faithful to the agreed common purpose, and to act consistently with the justified expectations of the parties".
Finally, the judgment in Yam Seng Pte Ltd v International Trade Corporation stated that a requirement of good faith could be implied into any commercial contract where it can be shown to be consistent with the presumed intention of the parties. However, this approach has not been widely adopted in later cases, with much narrower interpretations being applied.
England & Wales, last to the party?
Although the concept of good faith exists in other jurisdictions, there still remain issues surrounding exactly what that looks like and the role it plays within the specific legal system.
In the United States, good faith is clearly set out in the Uniform Commercial Code which provides that "every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement".
Good faith is similarly codified in German law, which sets out the superior ethical principles of treu und glauben (sincerity and faith) to the execution and formation of contracts. The German Civil Code establishes the obligation to execute contracts in good faith and states that contract interpretation should be made in light of good faith. The German Courts have attempted to define the obligation to execute contracts in good faith and what steps the parties are required to take. However, the difficulty lies in establishing a single concept and definition that is applicable across a multitude of scenarios. In practice this provision does not always constitute a legal basis upon which to act.
In French Law, despite the French Civil code specifying that agreements must be executed in good faith, they have found it difficult to state exactly what is meant by the concept of good faith and contractual loyalty. Good faith is classically defined as the expression of the duty of loyalty by each party, so as to not to encourage doubt in the parties' intention to observe the contract. The parties must act towards one another with loyalty, without fraud or malice. However, this classic definition has also been subject to differing interpretations by the French Courts.
Under Australian contract law, the role of good faith remains unsettled. Assuming a contract does not contain an express obligation to act in good faith, a question arises as to when contracting parties would be bound by an implied duty. There are two differing approaches for this. The first is that it is appropriate to imply into all commercial contracts as a matter of law that the parties will act in good faith towards each other. The second approach rejects this notion and suggests that a duty of good faith may be implied based on the intentions of the parties; therefore in this scenario there is no universal approach for all commercial contracts, but a focus on the individual parties to the contract.
Good faith, hurdles to overcome
Establishing a general doctrine of good faith in all commercial contracts under English law holds many potential implications. The first is a potential impact on the bargaining power between parties in commercial contracts where there is often an inherent imbalance of power; for example a landlord and tenant in a commercial lease. Should an obligation to act in good faith result in a party relinquishing a freely negotiated advantage which is clearly set out in a contract?
The notion of acting in line with the 'expectation' of the other parties may also provide a rationale for the necessity of a general doctrine, as it would seek to safeguard the expectations of commercial parties. Contracts do not account for every contingency and will always ultimately be incomplete. Just because a contract does not include an express duty of good faith does not mean that the parties do not expect it.
Indeed, an express provision is often not included precisely because it is simply assumed that the other party would perform in such a way. Therefore, a general doctrine of good faith might only be seen as simply enforcing behaviour, which is already expected in a commercial contract, rather than violating commercial freedom. The question is: just how prevalent and ingrained is the expectation of good faith? Would a general contractual duty just confirm what the vast majority of parties expect in any event? Or would it be seriously disruptive to contractual relations as we know them?
The meaning of good faith will also differ widely depending on the specific context of the contract. This poses the question of whether it is possible to establish a general doctrine of good faith, in circumstances where a clearly defined concept, applicable to all, cannot exist. Care would also be required to ensure that there is no removal (or perceived removal) of contractual freedom between parties negotiating a contract. A general obligation should not go further than what is simply required. Unless clearly defined, it is possible that we may find ourselves in a situation similar to other jurisdictions, where the general doctrine is codified, for example, in the Commercial Rent (Coronavirus) Bill ("CRC Bill"), but its role in commercial contracts is not fully established and remains debated in the Courts and academic circles.
Further, the courts would have to grapple with arguments that are likely to be counterfactual i.e., what has not happened: "Had the defendant acted in good faith, x would have happened. It didn't happen and I've lost out." The difficulty there of course, is that the claimant has two hurdles of proof to overcome: first that there has been a lack of good faith; and second, what the outcome would have been if good faith had been observed.
The courts are going to have to decide in any given context, what is good; what is below good; and what might be above good and, therefore, outside of the scope of the rule.
Recent developments towards a doctrine of good faith
There is an abundance of case law discussing the circumstances in which a duty of good faith may be implied, as well as from emergency pandemic guidance from the UK government:
- In May 2020, as part of its response to the coronavirus pandemic, the UK government issued guidance which strongly encouraged “responsible and fair behaviour in contractual arrangements” where parties are “materially impacted by COVID-19”, and this should apply “throughout the contracting chain”. This guidance was seen by many to be similar to a duty to put aside the adversarial norm of contractual negotiation and enforcement.
The guidance encouraged responsible and fair behaviour, "aiming to achieve practical, just and equitable contractual outcomes having regard to the impact on the other party…".
Although the Guidance was not binding and did not override parties' contractual rights and obligations, we continue to receive this high-minded view from government, in today's legislative proposals such as the CRC Bill.
It's not an entirely convincing view for the long-term, however, when viewed outside the prism of a national emergency such as a global pandemic.
- The Civil Justice Council has also recently announced a consultation on the role of Pre-Action Protocols in the modern legal system. As part of this, a potential reform would be to introduce an obligation on the parties to act in 'good faith' before commencing legal proceedings, to include engaging in formal alternative dispute resolution ("ADR") as well as informal without prejudice negotiations. Although existing Pre-Action Protocols recognise the value of ADR and encourage the use of it by the parties, this is currently a suggestion, rather than an obligation. The introduction of an obligation to act in good faith could be an introduction of the doctrine through the Civil Procedure Rules, rather than legislative reform. That would be an awkward introduction for the principle – not to mention another Protocol hurdle allowing parties to weaponise the use of the Protocols even further than some currently do.
The driver behind a formal good faith principle is entirely laudable. However, pinning down the level of what is or is not 'good' has clearly proven difficult, if not impossible, for other jurisdictions. It is also unclear, philosophically, just what a 'good faith' principle might add to the existing party. For want of a better illustration, the disco of English contract law is in full swing, the dancefloor is full. Good faith is going to have to bring some stellar dance moves, if it's going to make any impact at the party. Otherwise, it should just wait this one out.