The Contractual Duty Of 'Good Faith' ... And Joint Ventures

Increasingly, contracting parties are including an express duty of "good faith" in their contracts. The purpose of this update is to make clients aware of the rights and obligations that inclusion of this duty may entail, with a particular focus on joint ventures.

Highlights

On the law as it stands, English courts will not generally imply a duty of good faith, but will give effect to an express duty of good faith in the contract. Because there is no common law duty of good faith, care must be taken as to how the duty is expressed to operate in the particular contract to avoid unwanted surprises. The manner in which the duty will operate will depend on the particular contractual circumstances. No hard and fast rules can be provided. Nevertheless, some recent judicial comment indicates that parties bound by an obligation of good faith may be obliged to (depending on the circumstances, and amongst other things): (a) Observe reasonable commercial standards of fair dealing;

(b) Disclose facts which would be material to the other party; and

(c) Adhere to the spirit of the contract, and/or the agreed common purpose, rather than relying on a strict interpretation of rights and obligations.

Parties should be aware that the inclusion of a duty of good faith may result in ambiguity, and make it more difficult for parties to rely on the strict wording of a contract. Depending on the circumstances, potentially this may have the effect that a party could be prevented from relying on a technical breach to terminate the contract. Background

The "common law" is a term used to refer to the unwritten English law. The concept of good faith is not generally recognised in the common law relating to contracts. It is recognised in English legislation in specific cases, such as insurance, consumer protection, and property law. Nevertheless, if the parties agree to include the duty of good faith in the contractual documentation, the courts will seek to give effect to it.

In very general terms, the duty is a standard of fair dealing. The inclusion of the duty in contractual documentation can give a party comfort in that the "spirit" of the cooperative relationship relating to the particular undertaking (the business purpose or objective) may be reflected in the contractual documentation. This may therefore be attractive to joint venture participants ("Joint Venturers") who do not know what the future will hold, but have a relationship of mutual trust and dependence...