Good Faith And Contract Termination

Deciding whether to terminate a contract, whether at common law for an alleged repudiatory breach or under a specific term in the agreement, is rarely easy. Get it wrong and you may be in breach yourself. In several cases over the last couple of years, parties have tried to impugn their counterparty's termination by alleging a failure to act in good faith. Recent decisions have provided important guidance on whether a requirement to act in good faith can apply when exercising termination rights.

The developing concept of good faith in English contract law

There has, traditionally, been no general duty to act in good faith towards your counterparty under English contract law, other than in a few well-established and restrictive categories of case. But Yam Seng Pte Limited v. International Trade Corporation Limited [2013] EWHC 111 (QB) held that in certain circumstances the court should imply a duty of good faith (or fair dealing) into the parties' contract. Leggatt J identified joint ventures, franchises and long-term distributorship agreements as non-exhaustive examples of "relational" contracts in which an implied duty of good faith may, depending on the context, arise. However, it was unclear to what extent courts would, in future, imply obligations of good faith either into these types of contract, or more generally. The aspects of the parties' relationship to which any implied duty of good faith would apply were, similarly, uncertain. Specifically for current purposes, must a party ever act in good faith when exercising a right to terminate the contract?

Express termination rights in the contract - are they subject to implied duties of good faith?

Monde Petroleum SA v. Westernzagros Ltd [2016] EWHC 1472 considered whether an express right to terminate a contract was subject to an implied term that the party terminating must act in good faith.

The parties entered an agreement for Monde (MP) to provide consultancy services to Westernzagros (WZ) to assist WZ in its negotiations with authorities in the Kurdistan region of Iraq for an oil exploration and production sharing agreement (EPSA). MP received monthly consultancy fees and, in the event that the EPSA was executed and various other conditions met, had an option to acquire a 3% interest in the project. WZ and Kurdistan signed an EPSA in 2006, but over the following months Kurdistan insisted on various amendments which made the arrangement less economically attractive to WZ. In March 2007, WZ served notice on MP to end the consultancy agreement, relying on its express termination rights under that contract. Among other issues, MP...

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