COVID-19 and Duties of Good Faith Under English law

June 25, 2020

As part of its response to the coronavirus pandemic, the UK government issued guidance on 7 May 2020 ‘strongly encouraging’ contractual parties to ‘act responsibly and fairly in the national interest in performing and enforcing their contract’ (the Guidance).1 That call was reiterated in a supplement published on 30 June 2020 which also confirmed that the Guidance would remain in place indefinitely.

The guidance makes clear that it does not override any legal rights or obligations that the parties may have under the terms of the contract or otherwise in law, custom or practice (including any equitable relief).

It does, however, raise the question of English law’s approach to express and implied obligations of Good Faith and the extent to which the English courts might take the Guidance into account (if at all) when considering parties’ conduct.

The meaning of “Good Faith” in English law

Unlike some other jurisdictions, English Law does not recognise a general duty of Good Faith applicable to all contracts.2 However, the English courts have increasingly shown themselves willing to give effect to express contractual terms requiring parties to act in Good Faith and, in certain circumstances, to imply a duty to act in Good Faith.

The English courts’ reticence to recognise a general duty of Good Faith dealing is generally attributed to a reluctance to interfere with principles of freedom of contract and contract certainty together with a difficulty in defining precisely what “good faith dealing” means and encompasses.

In CPC Group Ltd v Qatari Diar Real Estate Investment Company,3 the Court, considering an express obligation for the parties to act in “utmost Good Faith” described the general principle as a duty “to adhere to the spirit of the contract, to observe reasonable commercial standards of fair dealing, and to be faithful to the agreed common purpose, and to act consistently with the justified expectations of the parties.

In Bates v Post Office (No 3),4 the Court went further, determining that the duty of Good Faith, such as it existed, went beyond a duty to act honestly and required the parties to refrain from behaviour that the reasonable and honest person would consider commercially unacceptable with reference to the specific powers assigned under the contract.

The Guidance encourages parties to go further than the current limits on Good Faith dealing identified by the English courts, making clear that “Fair and Responsible Contractual Behaviour” includes “being reasonable and proportionate in responding to performance issues and enforcing contracts (including dealing with any disputes), acting in a spirit of cooperation and aiming to achieve practical, just and equitable contractual outcomes having regard to the impact on the other party (or parties), the availability of financial resources, the protection of public health and the national interest.” This appears to encourage a positive duty to consider the interest of other parties to a contract.

Express contractual duties to act in Good Faith

Notwithstanding that there is no general duty of Good Faith under English law, parties are nevertheless entitled – and increasingly choosing to – incorporate express Good Faith obligations into their contracts. The English courts have generally strived to give effect to these provisions but, in the absence of a general definition of “Good Faith, have been required to interpret the specific words chosen by the parties on a case by case basis to ascertain the true intention of the parties.

In Berkeley Community Village Ltd v Pullen,5 the Court upheld an express term in a property development contract that the parties would act with the “utmost Good Faith towards one another and [would] act reasonably and prudently at all times.” Under the contract, the property developer agreed to use its expertise to maximise the potential of the land for development in return for a fee payable upon sale of the land with consent for development. The developer spent considerable time and effort promoting the land for development and, in doing so, enhanced the prospect of the land obtaining a planning consent of considerable value. The landowner sought to take advantage of the resultant increase in value by seeking to sell before formal planning consent had been granted, meaning the developer would be entitled to no fee. The Court found this conduct to be in breach of the duty to act in Good Faith and issued an injunction restraining the proposed sale.

The English Courts have, however, imposed a number of limits on the import of express Good Faith provisions. In particular, they have found that a general term requiring the parties to act in good faith will not be interpreted to cover the same ground as other, more specific provisions or to cut across them.6 A party exercising its right to terminate a contract or to rely on explicit rights it has in a contract will not be in breach of a duty of Good Faith. The Courts have also held that a Good Faith obligation does not require parties to “give up a freely negotiated financial advantage clearly embedded in the contract.”7

Similarly, a general obligation to act in good faith will not be taken to create new obligations that would otherwise need to be the subject of an express term.8 Further, the English courts have held that a clause requiring the parties to act in Good Faith does not create “a duty to prefer the interests of the other contracting party” but, instead, “a duty to recognise and to have due regard to the legitimate interests of both the parties in the enjoyment of the […] contract”.9 The Courts have also indicated that it is unlikely that a party would be deemed to have breached a duty of Good Faith unless it can be shown that they have acted in bad faith.10

More problematic have been clauses requiring parties to negotiate in good faith. Here, there have been clear rulings to the effect that these provisions amount to nothing more than an agreement to agree and so cannot be enforced.11 The rationale for that view has been that negotiations necessarily require a party to protect its own commercial interests and so there is no objective standard against which a duty to act in good faith can be assessed. The English courts have, more recently, sought to give effect to parties’ commercial agreements where possible and, in some instances, have been prepared to enforce contracts where significant aspects have been left for future agreement.12 However, parties should be aware that leaving significant aspects of their commercial agreement for future “negotiation in good faith” carries a significant risk that they will be left with no enforceable right if negotiations break down.

While the English Courts may be prepared to take the Guidance into account when measuring a party’s conduct against any contractually prescribed standard of reasonable or good faith dealing, there seems little prospect of them going beyond the limitations on the scope of good faith clauses, outlined above. Accordingly, the Guidance will not be a bar to parties relying on clear contractual rights and obligations even where the contract also contains a general provision requiring that they act in Good Faith.

Implied duties of Good Faith

General implied duty of Good Faith

Where the parties have not expressly included Good Faith provisions in a contract, the English courts have in certain circumstances implied contractual terms broadly similar to a duty to act in Good Faith. The Supreme Court has however indicated that it will not interfere with a detailed agreement negotiated by the parties by implying a term merely because it appears fair.13

In the pioneering case of Yam Seng Pte Ltd v International Trade Corp Ltd,14 the court ruled that a requirement of Good Faith could be implied in any ordinary commercial contract where it is consistent with the presumed intention of the parties. Yam Seng concerned an exclusive agreement for the distribution of fragrances in certain markets. The claimant alleged that the defendant supplier failed to act in good faith as it had sold into its retained markets at prices which undercut those set in the distribution agreement. The defendant was also alleged to have provided false information to the claimant. The court held that the defendant had breached a duty of faith to the claimant, which the court upheld in the form of an implied duty of honesty in the provision of information and an implied duty not to undercut prices in third party contracts. In his later ruling in Astor Management v Atalaya Mining, Legatt J voiced his criticism of the lack of a systemic approach to prohibiting commercially unacceptable behaviour, noting that the duty of Good Faith was a “modest requirement” to remedy this and a “lesser duty than the positive obligation to use all reasonable endeavours to achieve specified result.” Legatt J did, however, offer a note of caution that the English courts were unlikely to recognise a requirement of Good Faith as a duty implied by law into all commercial contracts.15

Later judgements have given a relatively narrow interpretation to Yam Seng, restricting the circumstances in which duties of good faith will be implied.

First, duties of good faith will only generally be implied into so-called ‘relational’ contracts.16 The characteristics relevant to whether a contract is a relational one or not have been found to include that: the contract is a long term one with the mutual intention of a long term relationship; the parties must intend their roles to be performed with integrity and fidelity to their bargain; the parties will be committed to collaborating with one another in the performance of the contract; the spirits and intentions of the venture may not be capable of being expressed exhaustively in a written contract; and the contract will involve a high degree of communication, co-operation and predictable performance based on mutual trust and confidence and expectations of loyalty.17

Even where there is a relational contract, however, the Court will only be prepared to imply a duty of good faith (or terms amounting to it), where it meets the usual requirements for the implication of terms under English law; namely that the term is necessary to give business efficacy to the contract or in order to give effect to what was so obvious that it went without saying. In TAQA Bratani Limited & Ors v Rockrose UKCS8 LLC,18 the Court found that, although the contracts in question were arguably “relational,” no duty of good faith should be implied as the clause relied upon provided an absolute and unqualified power and so it was impermissible to imply a term which qualified what the parties had agreed between them and the implication of a duty of good faith was not required to make the contract work.

The implication of terms amounting to a duty of good faith remains rare under English law and the Guidance will not change the analysis on whether or not a term should be implied into an existing contract. Similar to express duties of good faith, however, the English courts may be prepared to take the Guidance into account when measuring a party’s conduct against any measure of good faith that has been implied.

Conclusion

The Guidance expresses the UK government’s desire that parties should be sympathetic to the difficulties caused by COVID-19, when exercising their contractual rights. However, it is of no binding effect and does not alter those rights or parties’ contractual obligations.

Although the Guidance may be taken into consideration to some extent where the court is required to measure a party’s conduct against an express or implied duty to act in good faith, those obligations remain relatively rare and are subject to limitations on their scope which the Guidance will not change. Similarly, the Guidance will not lead to the English Courts implying a duty to act in good faith where it would not otherwise have done.

Parties may well want to be seen to be giving effect to the Guidance and there will, in many cases, be valid commercial reasons for withholding enforcement of strict contractual rights in the present circumstances. However, parties should be careful when doing so to ensure that they consider carefully any rights they may be giving up and ensure that, by holding off on strict enforcement, they are not inadvertently waiving breaches or otherwise giving up rights on which they may wish to rely in the future. Reliance on the Guidance will offer no protection.

Footnotes

1) Guidance on responsible contractual behaviour in the performance and enforcement of contracts impacted by the Covid-19 emergency.
2) While insurance contracts are subject to a duty of utmost good faith, that duty is enshrined in statute and its scope has been carefully demarcated and refined through years of case law.
3) [2010] EWHC 1535 (Ch) at para [246].
4) [2019] EWHC 606 (QB) at para [711].
5) [2007] EWHC 1330.
6) Mid Essex Hospital Services NHS Trust v Compas Group UK and Ireland Ltd (t/a Medirest) [2013] EWCA Civ 200.
7) Gold Group Properties ltd v BDW Trading Ltd [2010] EWHC 1632 (TCC), at 91.
8) Bristol Rovers (1883) Ltd v Sainsbury’s Supermarkets Ltd [2016] EWCA Civ 160.
9) Ibid at [90].
10) CPC Group Ltd v Qatari Diar Real Estate Investment Co [2010] EWHC 1535 (Ch) 14 at para [240].
11) Walford v Miles [1992] 1 All ER 453.
12) See, for example, MRI Trading AG v Erdenet Mining Corporation LLC [2013] EWCA Civ 156.
13) Marks & Spencer Plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72.
14) [2013] EWHC 111 (QB) at para [131].
15) Astor Management AG v Atalaya Mining plc [2018] 1 All ER (Comm) 547 at para [98].
16) Yam Seng Pte Ltd v International Trade Corp Ltd [2013] EWHC 111 (QB); Greenclose Ltd v National Westminster Bank Plc [2014] EWHC 1156 (Ch); Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd (t/a Medirest) [2013] EWCA Civ 200.
17) Bates v Post Office (No. 3) [2019] EWHC 606 (QB).
18) [2020] EWHC 58 (Comm).