What does a duty to act in good faith mean?

21 / 12 / 2016

In England there is no overriding law or principal of law that we must act in good faith to one another. Nor is there a law that the parties to a contract must negotiate, perform their obligations or exercise their rights under a contract in good faith to one another.

There is no universal definition of good faith which is used in legislation or that the courts rely on when settling disputes.  A duty of good faith has been described by the courts as ‘playing fair’, ‘coming clean’ or ‘putting one’s cards face upwards on the table.’  When put in this way, it may feel like something that should go without saying, however this is not always the case.  The approach to good faith and dealing with unfairness in English law has been piecemeal at best:

  • Specific types of contract impose duties on one party to act other than in their own interest, for example, an agent must act honestly and not allow its interests to conflict with those of its principal.
  • In relational contracts which involve a high degree of cooperation and mutual trust such as franchise agreements and joint venture agreements, although there may be no express term in the agreement to act in good faith, a duty to act honestly is implicit and necessary to give business efficacy to the relationship.
  • Insurance contracts are unique in their requirement that the parties act in utmost good faith and disclose all material facts to the insurer.

Should parliament create a legal duty to act in good faith?

English law has resisted increasing pressure to document a duty to act fairly or in good faith. Opinions are divided on whether such a duty should be enshrined in English law.  Why might this be the case?

The strongest argument against a legally recognised principle of good faith is a need to preserve the freedom of the parties to pursue their own interests both in negotiations and performance of a contract.  Some believe such a duty would be at odds with adversarial contract negotiations and it would introduce uncertainty that could enable one party to avoid a contract.

The approach of English law is at odds with other common law countries, for example the United States of America and Australia; both have well-established doctrines of good faith.  France and Germany which are both dominant in the creation of EU law recognise a requirement of good faith.  We have seen this influence from Europe in certain types of consumer contracts.

Do express terms to negotiate in good faith work?

Obligations to negotiate in good faith have not found favour due to concerns that an “agreement to agree” is too uncertain to enforce.  If no agreement is reached, it is difficult to decide whether termination was in good or bad faith and the extent of any loss.

Express contract terms to act in good faith

During recent years the courts have been asked to consider what an express duty to act in good faith means.  If a contract contains an express obligation to act in good faith, the courts are likely to enforce it, but there is no consistency as to what this will mean.  The outcome is heavily dependent upon the facts of the case.  To date obligations to act in good faith have been applied restrictively in the context of the relevant provisions of the contract rather than an as an overriding duty.

One area which has seen a lot of litigation is agreements where a property developer contracts with a land owner to use their expertise to maximise the development potential of a piece of land, often through the implementation of a planning permission in return for either a fee or share of the profits.  These types of agreement usually place obligations on the parties to act in good faith towards one another and to use reasonable endeavours at all times to achieve the aim of the contract.  It is clear from the cases that the nature of a duty of good faith is fact specific, however one recurring principle is that good faith does not require the other party to give up a freely negotiated commercial advantage.

A recent example is Bristol Rovers v Sainsbury’s Supermarkets Ltd.  The parties entered into a conditional agreement for purchase of a site on which a new supermarket and football stadium would be built.  Sainsbury’s were contractually obliged to use “all reasonable endeavours” to obtain a joint planning consent which was acceptable for the proposed development.  Each party was to act in good faith in relation to their respective obligations under the agreement and to assist the other in achieving an acceptable planning permission.  When Sainsbury’s were issued with a planning consent which did not allow deliveries to the store before 6am Sainsbury’s considered that the planning consent contained onerous conditions and it was unacceptable to them.  Sainsbury’s made an application to vary the planning conditions but this was refused.  At this point Sainsbury’s pulled out of the deal and terminated the agreement on the basis they had complied with their obligations.  Bristol Rovers argued that Sainsbury’s had to comply with the “spirit of the contract” and not to resort to its black letter.  The court ruled in favour of Sainsbury’s and said that Sainsbury’s had complied with an express contractual term and so it could not be the case that Sainsbury’s had acted other than in good faith.

A general implied term to perform contracts in good faith?

One method the courts use to resolve disputes is to imply terms into contracts based upon the intentions of the parties.  Some commonly implied terms are obligations to cooperate and to bring onerous terms to the other party’s attention.  Both would probably fall within a duty of care if it was ever formalised.  However following a Supreme Court case in 2015 (Marks and Spencer plc v BNP Paribas Securities Services Trust Company Jersey Ltd) the courts will usually be limited to implying terms into a commercially negotiated contract only if it is necessary for business efficacy or obviousness.  Fairness of the contract is not an overriding factor and a court will not correct a bad bargain for one party.

What should you do?

In the current climate it seems unlikely that England will adopt a rigid legal definition of good faith or a principle requiring conduct to accord with it and so legal advice is recommended when entering into a contract.

Given the lack of legal clarity as to what good faith could include, if the parties to a contract wish to document that each is to act fairly, cooperate, not withhold information or to act in good faith the contract should expressly set out what is required of the parties in order to meet these obligations.  For example, what steps are the parties expected to take? The extent of their time and monetary commitments?  The agreement should clearly set out the obligations of each party and how far they extend so there are no grey areas.