Good Faith Obligations ' Context Is Everything

• Published date: 08 November 2022
• Law Firm: Gowling WLG
• Author: Mr Sean Adams, Emma Carr and Christopher Richards

In a judgment with potentially far-reaching implications, the Court of Appeal has given a restrictive reading of the scope of an express duty of good faith in a shareholders' agreement. In doing so, it reiterated that such clauses must be read in their context, and discouraged attempts to define a set of minimum standards applicable to all good faith clauses. We look at what this means for good faith under English law.

Good faith under English law

Unlike in many civil law systems, there is no general doctrine of good faith in English contract law. A duty of good faith will be implied into certain categories of contracts, such as insurance, employment and partnership contracts. The courts have also implied a duty of good faith in so-called 'relational' commercial contracts - typically those where the parties enter into a long-term relationship, such as joint venture, distribution or franchise agreements. However, the Court of Appeal has previously discouraged judges from looking for "some 'general organising principle' [of good faith] drawn from cases of different kinds", preferring instead to continue developing "piecemeal solutions in response to demonstrated problems of unfairness". While the court will not imply a duty of good faith into a commercial contract lightly, parties are free to include express obligations of good faith in their contracts - but in the event of dispute, it is likely to fall to the courts to determine the scope of that clause, as happened in Compound Photonics Group Ltd, Re [2022] EWCA Civ 1371.

The clause in dispute

In this case, minority...