UK: Practical tips on duties of good faith

The nature and extent of duties of good faith in English law remains controversial.

We have tracked these developments for many years through a practice note for Practical Law (available here) which provides a detailed and comprehensive overview of the current state of the law. This article is not intended to summarise that note but rather to provide practical tips on using these duties in practice.

1. Identify which aspect of good faith might be engaged

The starting point is that there is no general doctrine of good faith in English contract law. Instead, duties of good faith can affect a commercial contract in three distinct ways:

• The parties can expressly agree that they will act in good faith. As they are “masters of their own contractual fate” such express duties are not, in principle, controversial. However, what these duties require in practice may well be.
• Under the “Braganza” duty, a party must exercise a contractual discretion in good faith and not arbitrarily or capriciously. This duty has been recognised by the Supreme Court on multiple occasions, so its existence is not in doubt, albeit the boundaries of the duty have expanded gently over time.
• Finally, the courts might imply a general duty of good faith in a contract, or use the concept of good faith to imply other fact-specific duties. The scope, and even the existence, of these implied duties remains subject to debate.

While the three duties influence each other and the courts do, on occasion, elide them, it is generally helpful to consider each duty separately. They are based on different authority and subject to different policy considerations.

2. Implied duties of good faith; are you in the zone?

The most contentious of these duties is implied duties of good faith for which the "law has not yet reached a stage of settled clarity" (Cathay Pacific Airways Ltd v Lufthansa [2020] EWHC 1789).

The debate about implied duties of good faith is largely a balance between certainty of contract and the desire to provide more flexible and equitable solutions to perceived injustice. The fear is that implied duties of good faith would create too much uncertainty by creating obligations that are potentially vague and subjective. This could undermine the goal of contractual certainty, on which English law places great weight.

However, this assessment should be mainly driven by the underlying commercial context rather than a blanket approach based on an assumed type of contract or business sector. The assessment is likely to be a product of the complexity of the relationship and the extent to which the relevant issue is expressly dealt with in the contract, as illustrated in the simplified diagram set out below.

The concept of a “zone of good faith” is underpinned by the current approach to implying a duty of good faith and the limited scope of the duty (both discussed further below). In particular:

• The seminal decision on implied duties of good faith, Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] EWHC 111, involved a complex and long-term commercial arrangement that was governed by a “skeletal document which [did] not attempt to specify the parties' obligations in any detail”. That the Court would seek to fill the gaps with an implied duty of faith is not a surprise.
• Similarly, a long-term joint venture to develop hotels and an associated travel business was a relational contract subject to an implied duty of good faith (Al Nehayan v Kent [2018] EWHC 333). This is partly because given the complexity of the arrangement “it may be impossible to specify, exhaustively in a written contract” all the obligations of the parties.
• Given that the complexity of different relationships varies greatly, this means that implied duties of good faith can arise even in relation to long and professionally drafted agreements. For example, in Amey Birmingham v Birmingham City Council [2018] EWCA Civ 264 the Court of Appeal commented that a 25-year PFI contract could be classified as a relational contract and given the "massive length" of the contract, the parties should not latch onto "infelicities and oddities" to disrupt the project and maximise their own gain.
• However, where a pricing mechanism in a long-term aircraft engine maintenance contract gave one party an option to switch to a more advantageous pricing model, there is no need to fetter the exercise of that option with a duty of good faith. The issue is clearly addressed in the contract (Cathay Pacific Airways Ltd v Lufthansa [2020] EWHC 1789).
• Similarly, the exercise of a contractual right to terminate the defendant as operator of the joint venture following a majority vote and having given the specified notice was equally not fettered by any duty of good faith. The contract clearly addressed the issue and “where the parties have used unambiguous language, the court must apply it” (Taqa Bratani Ltd v Rockrose UKCS8 LLC [2020] EWHC 58).

Approached in this way, implied duties of good faith would be constrained to complex relationships where the parties have not expressly addressed the issue in their agreement. Fears this could either undermine the express terms of the contract or upset financial markets, where many contracts are one-off and transactional, seem unlikely to materialise.

3. Identify the basis for the duty: Implied term or relational contract?

Even within the “zone of good faith”, a duty will not necessarily arise and further analysis will be needed. Determining if an implied duty arises requires an assessment of the two competing visions for this duty:

• On the one hand, the decisions in Yam Seng and Al Nehayan suggest that where a contract is “relational”, a duty of good faith will be implied by law. The decision as to whether the contract is relational should be largely based on the criteria set out in Bates v Post Office Ltd (No.3) [2019] EWHC 606. These include factor such as whether the contract is long term, requires collaboration or involves significant investment by either party. 
• In contrast, other decisions subject this implied duty to the strict tests for the implication of terms in fact, which might typically only allow an implied duty of good faith to arise where it is needed to give the contract commercial or practical coherence (UTB LLC v Sheffield United [2019] EWHC 2322). 

It is not clear which of these visions from the progressive or conservative wings of the judiciary will win out. However, it is worth noting the recent elevation of Lord Leggatt, whose positive views on duties of good faith are clear both from his decision in Yam Seng and his later decision in Al Nehayan.

4. Don’t overestimate the strength of an implied duty of good faith

An express and implied duty of good faith are both likely to require the parties to avoid conduct that would be regarded as "commercially unacceptable" by reasonable and honest people. This duty of good faith will not cut across any hard contractual rights and, for implied duties of good faith in particular, is likely to be constrained in its effect.

For example, the Court was happy to accept a 25-year PFI contract was a "paradigm example of a relational contract in which the law implies a duty of good faith" (Essex County Council v UBB Waste [2020] EWHC 1581) without finding that any of the Council’s actions came close to the “sharp practice” indicative of a breach of a duty of good faith.

5. Plead at your peril

The final point is that the assertion that a party has not acted in good faith is a serious allegation. The courts will expect the party making the allegation to plead its case in sufficient detail so that the other party knows exactly what breach is alleged and when it took place.

This is not a point to raise lightly. In Essex County Council v UBB Waste [2020] EWHC 2387 the court concluded that to plead a breach of good faith without proper foundations may be considered out of the norm and thus justify an order for costs on an indemnity basis.

By Peter Church