More than you bargained for: the implied duty of good faith
The recent High Court decision in Bates v. Post Office (No. 3) confirms a general principle that if a contract is a "relational" contract then it will include an implied obligation of good faith. Previously, there had been doubt whether such a general principle exists, as historically this was not an approach recognised by the English courts.
The traditional orthodoxy
Outside of certain limited exceptions (such as employment and insurance contracts), English law has traditionally refused to recognise any overriding principle of good faith between contracting parties. Instead, English law has emphasised the principles of freedom of contract, caveat emptor and contractual certainty, as well as the ethos of individualism (that parties are free to pursue their own self-interest). A general doctrine of good faith was thought to create too much uncertainty by creating obligations that are potentially vague and subjective.
The customary coolness of UK judges towards the concept of contractual good faith can be seen in the 1992 House of Lords decision Walford v Miles, where Lord Ackner described a proposed implied term to negotiate in good faith as "inherently repugnant to the adversarial position of the parties… [and] unworkable in practice as it is inherently inconsistent with the position of a negotiating party."
However, the application of the principle of good faith is evolving.
Express duties of good faith
Since Walford v. Miles, the English courts have considered contracts which contain express duties to act in good faith, and have generally been willing to give effect to those express contractual obligations.
But defining the scope of what an express obligation of good faith means is often complicated in practice. For instance, while an express obligation of good faith will require the parties to act in a way that will allow them both to enjoy the anticipated benefits of the contract, it will not, on the other hand, require either party to give up a freely negotiated advantage embedded in the contract. So there remains a degree of uncertainty what good faith actually means under English law.
Implied duties of good faith
Perhaps the most significant development in this area was the 2013 decision of Leggatt J. (as he then was) in Yam Seng Pte Ltd v International Trade Corporation Ltd in which he held that a duty of good faith could be implied into a commercial contract – specifically into a "relational" contract, being a contract which involves a long term relationship (such as joint venture agreements, franchise agreements and long term distribution agreements).
Given that Yam Seng would seem to go against the traditional orthodoxy of English law, some subsequent judicial and academic commentary (including the leading text, Chitty on Contracts) had cast doubt on whether it established a general principle of English law, or whether it is a one-off case which could be distinguished on its facts.
However, the recent decision of Fraser J. in Bates v Post Office (which runs to 315 pages) sets out a thorough examination of the law on this point, including cases since Yam Seng. Fraser J. not only endorses Yam Seng, but concludes unequivocally that English law recognises a general doctrine that if a contract is a "relational" contract then it will include an implied obligation of good faith. In doing so, Fraser J. expressly disagrees with Chitty. In the absence of any contrary higher authority, this principle must be accepted as good law.
What is a "relational" contract?
The judgement in Bates v Post Office sets out nine non-exhaustive characteristics of relational contracts:
- There are no express terms that prevent the implication of a duty of good faith.
- The contract is mutually intended to be long term.
- The parties must intend their roles be performed with integrity and fidelity to their bargain.
- The parties will be committed to collaborating with one another in performing the contract.
- The spirits and objectives of their venture may not be capable of being expressed exhaustively in a written contract.
- Each party will place trust and confidence in the other, but of a different kind to a fiduciary relationship.
- The contract will involve a high-degree of communication, co-operation and predictable performance based on mutual trust and confidence, and expectations of loyalty.
- There may be a high degree of significant investment, or a substantial financial commitment, by one or both parties.
- The relationship may be exclusive.
What does "good faith" mean?
Fraser J.'s decision in Bates v. Post Office says the concept of good faith means more than just honesty. It goes on to say that good faith (which is sometimes called "fair dealing") includes an obligation to "refrain from conduct which in the relevant context, would be regarded as commercially unacceptable by reasonable and honest people" and an obligation of "transparency, co-operation, and trust and confidence". Such an abstract concept will always be highly dependent on its facts.
Who should watch out for this?
A relational contract will include many types of contracts, so the effects of this decision will be far reaching. Any person or business entering into distribution agreements, franchise agreements, joint venture agreements and other long term, collaborative commercial agreements should be aware that they may now be subject to an implied duty of good faith.
What to do in practice?
A contracting party should decide whether it wishes a contract to be subject to a duty of good faith. If it does not, it may be best to expressly say so in the contract to avoid any risk of the contract being held to be a relational one and such a term being implied into the contract. Such wording could easily be added to the boilerplate wording at the end of the contract. It may lead the counterparty to question why the first party does not wish to be bound by good faith, but this can be countered by the first party saying it does not wish to be bound by such a nebulous and uncertain concept.
If a contracting party does wish the contract to be governed by good faith, again it may be best to expressly say so in the contract rather than rely on the uncertainty of whether the contract would be considered relational. This has the added advantage of allowing the parties to define what good faith means, giving greater contractual certainty.