How the principle of ‘Good Faith’ can work in your commercial deals.
The principle of ‘good faith’, in normal English, means to act in an honest and sincere way. Whilst we can all agree that the world would be a better place if everybody operated under that maxim, in English contract law the term takes on a somewhat more complex meaning.
In CPC v Qatari Diar 2010, a court ruled that a contractual obligation “to act in utmost good faith” would require a business to:
- Avoid resorting back to the ‘letter of the law’ out of cynicism when things go wrong.
- Remain faithful to the mutually agreed purpose of the contract.
- Act consistently with the expectations of the other party, where they are justified.
- Act in accordance with the industry standards for fair dealing.
Traditionally, English courts been reluctant to enforce contractual obligations to act in good faith and even in more recent times, where courts have been more sympathetic towards clauses imposing such obligations, there is still no doctrine or duty of good faith within English contract law. An express clause obliging parties to act in good faith can be included within a contract; without one, parties are only bound to act in an ‘honest and non-arbitrary’ manner.
Since there is no formal definition of good faith in English contract law, you might ask what you could expect from a ‘good faith’ provision in your contract. This dilemma was tackled in Yam Seng PTE Ltd v International Trade Corporation Ltd , a case involving a distribution rights contract for Manchester United branded fragrance products in the Middle East. While the court expressed doubts that English contract law was ready for a doctrine of good faith, it insisted that in some contracts it is necessary to imply a requirement for good faith.
Why? The court’s view was that, where parties are engaged in a long-term commercial relationship which requires cooperation and predictable performance as well as mutual trust in order for the deal to fulfil its commercial purpose, a degree of good faith was needed.
Working with implied terms is, as ever, a difficult means of approaching contract law. An implied term is (by definition) not written clearly and expressly agreed by both parties. The courts are left to choose what ‘flavour’ of good faith they think should be implied within a contract, if any at all.
This highlights the fact that there is still no definition for good faith in English contract law. Perhaps the closest we have come is in the judgement in another case, Ensign Highways v Portsmouth City Council . Here the court decided that an implied term of good faith was required. In defining what that term would be, the judge concluded that the parties would be obligated “to act honestly and on proper grounds and not in a manner that is arbitrary or capricious.”
Where ‘good faith’ obligations are included as express terms of a contract, acting in a commercially selfish way that results in the detriment of the other party could well amount to a breach of contract.
If you are entering into a contract that you think will require mutual trust, a high degree of cooperation and predictable performance in order to reach your goals, it may be worth exploring how a ‘good faith’ provision might work within your deal. Contact us to talk through the possible risks and opportunities of such an approach, and ensure your contractual agreements support your business relationships as effectively as they can.