English Contract Law and Good Faith – Still a Way to Go…
A general duty to act in good faith in contractual relationships is a well-known feature of continental legal systems, including Serbian law and the legal systems influencing it (Austria, Switzerland and Germany).
On the other hand, the reluctance of contract law of England & Wales to accept such a general, broad-reaching duty is also well-known. Put in simplest terms, English courts and the Parliament generally see such an obligation as too vague and prefer explicit duties to act in a particular way in well-defined situations.
About a decade ago, Leggatt J (now Lord Leggatt of the Supreme Court) in Yam Seng Pte Ltd v International Trade Corp Ltd ( EWHC 111 (QB)) suggested that refusing such a general duty was going against the tide of international jurisprudence, prompting discussions about a possible change of direction of English law more generally. And yet, as two recent judgments show, such change of direction did yet not materialize.
The first case of interest is the Court of Appeals decision in Faulkner v Vollin Holdings Ltd ( EWCA Civ 1371). The Court heard an appeal against a High Court judgment which found that an explicit obligation in the shareholder agreement to deal at all times in good faith with other shareholders contained certain minimum requirements. Bringing it perhaps close to continental understanding of the term, the
High Court understood the good faith obligation as entailing duties to:
(1) act honestly;
(2) show fidelity to the bargain;
(3) deal fairly and openly; and
(4) have regard to the interests of minority shareholders.
Court of Appeal, however, disagreed and Snowden LJ found that no such universal list can be found, adopting rather a narrower understanding.
Specifically, good faith involved dealing with honesty and, depending on the facts and circumstances, to either act in a commercially acceptable way or more broadly in good faith but only if the broader meaning can be gathered from other terms of the individual contract. Good faith thus largely remains ‘contract-dependent’ and hard to universalise, regardless of explicit wording.
If explicit good faith obligations were circumscribed in this way, it is not surprising that implicit ones also did not receive too much support either. In Candey Ltd v Bosheh ( EWCA Civ 1103) the Court of Appeal clarified that good faith obligations will be implied into so-called relational contracts only in limited circumstances. To clarify, in a rare expansion of good faith in English law, High Court in Bates v Post Office Ltd (2019) found that a general good faith obligation can in principle be implied into ‘relational’ contracts, which meet certain exhaustive characteristics, such as long-term character and need for close cooperation in a venture. But in Candey, the Court of Appeal (Coulson LJ) stated that whether such a duty will be implied still depends on the ordinary and rather strict test of English contract law for implying terms into a contract. As held by the Supreme Court in the recent influential decision in M&S v Paribas, courts should be cautious to imply terms into contracts between sophisticated commercial entities, presumably drafted by experienced legal teams. No such implication took place in Candey.
As English (contract) law is a popular choice in international commercial transactions and often applied in international arbitration, keeping an eye on these developments is relevant for a number of reasons. Yet, there does not seem to be much new to report on the good faith front – those seeking broad obligations should better agree on a different law; those preferring a circumscribed set of obligations can largely continue as until now.