The duty of good faith in commercial agreements20 Feb, 2020 - Commercial contracts | by Grosvenor Law
In the first of a series of blogs on commercial contracts, Michelle Quinn addresses whether a duty of faith can be implied in the same.
For a long time, the English courts have been reluctant to imply a duty of good faith into commercial contracts and instead approached the matter on the basis that, if the parties wished to impose a duty of good faith on one another, they must do so expressly.
However, some recent case law suggests that, in certain types of commercial contracts, it may be appropriate to imply a duty of good faith. Those contracts have been referred to in the case law as “relational contracts”.
At the outset, it is useful to consider what we mean by “good faith”. Unfortunately, there is no set definition of “good faith” and it remains heavily dependent on the particular circumstances. However, at the very heart of any attempt to define “good faith” is the concept of “honesty” in the dealings between the parties.
Even more unfortunate for contractual counterparties attempting to determine whether an implied duty of good faith will apply in their contract, there are also no set circumstances in which a duty of good faith would definitely be implied. Nevertheless, there have been a number of cases in recent years that have considered what amounts to a “relational contract” such as to give rise to an implied duty of good faith. Some of the factors that the court will consider include:
- Does the contract involve a long-term relationship between the parties, for example franchise and joint venture agreements?
- Is the contract one that requires a high level of co-operation and collaboration between the parties?
- Is the contract one that requires a high level of trust and confidence between the parties?
- Are there any specific terms of the contract that would prevent a duty of good faith from being implied?
- Did the parties intend that their roles should be performed in good faith, that is, with honesty in their dealings?
These are just some of the factors that the English courts will consider; there are others. In addition, there is no one factor that will automatically give rise to an implied duty although an express term excluding such duty would likely be determinative.
Notwithstanding those recent decisions, the case law remains unclear and it may be difficult to assess in any given set of circumstances whether the English courts would imply a duty of good faith in a particular contract. As such, the prudent approach would be to consider, at the point of drafting an agreement, whether to expressly include or exclude a duty of good faith. Where the parties have expressly excluded a duty of good faith, it is extremely unlikely that the English courts would go behind that and nevertheless find such an implied duty to exist.
Michelle Quinn is Counsel and a senior associate at Grosvenor Law. She regularly advises in complex commercial matters, including in fraud, conspiracy, insolvency and breach of privacy disputes.
The contents of our blog posts do not constitute legal advice and are provided for general information purposes only