Good Faith

What is a duty of good faith?

'An obligation to observe reasonable commercial standards of fair dealing in accordance with the parties' actions'

What is the function of commercial law?

- 'To allow commercial men to do business in the way they want to do it' - Lord Devlin in Kum v Wah Tat Bank - The facilitation of commercial transactions - Predictability is fundamental - the courts have consistently promoted considerations of certainty over fairness and justice

What are the post-Yam Seng cases?

- Mid Essex Hospital Services NHS Trust v Compass - Bristol Groundschool v Intelligent Data Capture - Portsmouth v Ensign Highways - D&G Cars v Essex Police

Where is good faith currently recognised?

A general obligation of good faith is recognised by most civil law systems and has been gaining ground in common law jurisdictions including Canada, Australia and New Zealand.

What does Goode say about absence of a doctrine of good faith?

Absence of a doctrine of good faith is 'one of the most remarkable and the most reprehensible features of the English law of contract'

Whittaker

Argues that if Leggatt J's observations mean no more than that it is open to a court to find an implied good faith term, then they are fairly uncontroversial; however if his observations argue for the imposition of a general requirement of good faith in performance (even in the guise of an implied term) then they invite the courts to go *well beyond the proper function of judicial law-making.*

Portsmouth CC v English Highways

Case involving service points - local authority contracted with business to do maintenance work - council would award points when Ensign made mistakes; the more points, the more severe the penalty, from increasing monitoring or terminating the contract. Issue was whether the council had acted appropriately in awarding so many service points over such a period of time. Held: a duty to act fairly when awarding service points might be taken to include wider considerations expanding beyond the circumstances of the breach it was a contract requiring the exercise of contractual rights, not balancing fairness. Held that the express obligation to act in good faith applied only to the clause containing it, not the whole contract, so didn't apply to clause 24 which set out the point system.

David Campbell

Contrary to popular belief, the judgement of Leggatt J in Yam Sen demonstrates that the English law does have a doctrine of good faith.

D&G Cars v Essex Police

Given instructions to crush car but mixed it with another vehicle - essex police suspended contract in response so D&G cars sued authority for breach of contract. Held: there was an implied term to act with honesty and integrity. Long term relationship between the parties = it was appropriate to consider the type of conduct the parties would expect from one another. The particular nature of the contract = good faith was important tot the contract.

CPC Group v Qatari Diar (2010)

Held that an obligation to act in good faith precluded from a party cynically resorting to the black letter of the law - this required observing reasonable commercial standards of fair dealing, being faithful to the agreed common purpose and acting consistently with the justified expectations of the parties.

Mid Essex Hospital Services NHS Trust v Compass

Held that the express term imposing an obligation to cooperate in good faith was limited to the remits of the bit of the contract it was inserted into - it didn't apply to the whole contract. Cautioned of the danger of extending good faith obligations too far when contracts are carefully negotiated and carefully drafted.

Why is the incremental approach a good approach?

It means good faith is judged on a subjective basis and therefore is much more specific to what kinds of obligations and conduct the parties would reasonably expect from one another.

Which cases are thought to have failed to take into account the fundamental principles of certainty and finality?

Kleinwort and The Golden Victory

What happened in Yam Seng? (2013)

Leggatt J found that a duty of good faith could be implied into commercial contracts base don the presumptions of the parties, though he doubted that English law was ready to recognise a requirement of good faith implied into all contracts. Such a clause was more likely to be implied into relational contracts - contracts which involve a longer term relationship and a high degree of communication and cooperation between the parties. From a claimant's perspective an allegation of an implied duty of good faith may, in the right circumstances, be a useful tool in the armoury.

What is the traditional approach in England to good faith?

Lord Ackner in Walford v Miles - took a stringent view against bringing the idea of good faith into contractual negotiations. His language was inherently repugnant to the adversarial position of the parties.

What are the consequences of Yam Seng, Bristol Groundschool v Intelligent Data Capture, and D&G Cars v Essex Police?

Parties negotiating longer term agreements which may be considered "relational" should be aware of the possibility of broader duties of good faith being imposed. It may be advisable to seek to limit or exclude such duties, where possible, or incorporate more specific terms seeking to define their nature and extent.

Bristol Groundschool v Intelligent Data Capture

The High Court implied a duty of good faith into a long-term agreement between two commercial parties. In doing so, it endorsed the analysis of Leggatt J in the 2013 case of Yam Seng, which has been seen as the watermark of such duties, despite the fact that subsequent first instance cases have retreated from it. This decision demonstrated that the courts may be prepared to imply a duty of good faith into contracts which require a high degree of cooperation and communication between the parties. From a claimant's perspective an allegation of an implied duty of good faith may, in the right circumstances, be a useful tool in the armoury. The agreement in the case did not fall squarely into the categories of 'relational' contracts given in Yam Seng, but the court nevertheless implied a duty of good faith.

Sealey & Hedley

The concept of good faith seems impossible to define with any precision

What is the incremental approach?

The courts rely on case-by-case examinations of behaviour; this means that even though individual acts when viewed separately may not be indicative of bad faith, those acts may constitute bad faith when viewed as a pattern of behaviour within the specific context of the agreement between the two parties.

What has Lord Steyn said about the need for a duty of good faith in English law?

The resulting uncertainty from the current incremental approach is a result of the subjective test. He advocates for a more objective test which would set the standard to be observed in commercial dealings.