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Contractual interpretation – express "good faith" clauses

Published on 09 August 2018

What approach will the courts take in relation to an express "good faith" clause?

The facts

The claimant, Health & Case Management Limited (HCML), is a company who referred patients requiring physiotherapy for treatment. The defendant in this matter was Physiotherapy Network Limited (PNL), a company which had a UK-wide network of clinics specialising in physiotherapy.

The parties entered into an agreement whereby HCML would refer patients to PNL in exchange for a fee (the Referral Agreement). Clause 3.1 of the Referral Agreement stated that HCML would act in good faith to PNL and clause 14.1 included an obligation for both parties to keep all information received from the other confidential.

During 2011, HCML commenced a project to build its own network of physiotherapy clinics under the brand name Innotrex, which became a competitor to PNL. In February 2012, HCML sought an updated list of clinics from PNL, which was to include addresses and contact details (the Database). PNL provided the information believing that HCML was developing a geographical pricing model.

Between 2012 and 2014, HCML decreased the number of referrals it made to PNL and eventually stopped referring patients entirely. PNL accused HCML of using the Database to set up Innotrex.

HCML issued proceedings seeking a declaration that it had not acted in breach of contract or confidence; PNL counterclaimed alleging breaches of the same.

The decision

The court concluded that HCML's conduct was in contravention of the express good faith clause and also infringed PNL's database rights. The judge noted:

  1. HCML did not act in breach of confidence as the terms of the confidentiality clause in the Referral Agreement did not restrict HCML from using the information in the Database themselves.The restrictions only prevented HCML from transmitting the information to a third party;

  2. HCML had not acted in breach of contract by failing to make "circa 700" referrals per month;

  3. HCML had breached the express good faith clause by incorporating Innotrex, competing with PNL, and obtaining the Database on false pretences with the intention to divert referrals from PNL to Innotrex; and

  4. the good faith clause had been breached by HCML by denying that PNL's database had been used when confronted by PNL. HCML were found to have failed to adhere to the spirit of the Referral Agreement.

The court added that HCML continued to benefit from the commercial relationship which, had PNL been aware of the circumstances, would have been terminated.

Why is this important?

This case illustrates how an express good faith clause can rescue the poor drafting of another clause (i.e. the confidentiality clause). Had the good faith clause not been present, PNL would have been unable to enforce their database rights. This judgment adds to the growing area of database rights, with the court rejecting the defence of consent because the consent was given for an untrue reason.

This case also demonstrates the types of behaviour the courts deem to be good or bad faith and what behaviours will breach an express obligation to act in good faith.

Any practical tips?

Contracting parties should carefully consider the insertion and interpretation of good faith clauses. A well drafted good faith clause could help to bolster any weaker clauses but could also provide another contracting party with a useful backstop where disputes emerge.

Contracting parties should also be careful that their confidentiality provisions are robust and work in their favour to avoid the need to rely on good faith clauses.