Do Contracting Parties Have A Duty To Act In Good Faith Under English Law?

The reluctance of the courts to imply terms into agreements negotiated between two commercial parties at arm's length is well known and is based on the long-established doctrine of freedom of contract.

That said, the courts are on occasion prepared to imply terms into contracts in circumstances where the concluded contract is not clear. In such cases, the courts will consider what the contract would reasonably be understood to mean as a whole against the relevant contractual background, and in light of the knowledge that was reasonably available to the parties at the time the contract was entered into.

Since February 2013, two High Court judgments and one Court of Appeal judgment have been handed down that examine the role of good faith in English law and the extent to which circumstances under which the English courts might recognise an overarching duty of good faith. All these cases took as their starting point the fact that there is no legal principle of good faith under English contract law.

This twenty-fifth issue of Insight considers the recent approach of the courts to good faith and the implications for commercial practice.

What is good faith?

The concept of good faith is subjective and depends very much on the overall terms of the contract and the commercial context, but good faith essentially means being honest and "playing fair".

A deliberate failure to share information that is objectively relevant to the performance of the contract, for example, would undoubtedly amount to a breach of good faith in the case of a long-term contract such as a joint venture which requires the parties to work together. Good faith would not automatically apply to clauses that involve an element of discretion, but it may apply to clauses that involve an assessment or choice as to a range of options to which the interests of both parties are relevant.

Recent case law

Yam Seng - February 2013

In Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB), the parties entered into a contract under the terms of which ITC granted Yam Seng an exclusive agreement in respect of the distribution of fragrances bearing the name "Manchester United". The relationship between the parties broke down and proceedings were brought by Yam Seng for breach of contract and misrepresentation.

Yam Seng asserted that it was an implied term of the contract that the parties would deal with each other in good faith. Specifically, Yam Seng argued that ITC had (i) failed to act with an implied obligation of good faith by prejudicing Yam Seng's sales by...