REUTERS | Arnd Wiegmann

Contracting to use good faith

In 1992, the House of Lords said that a contractual obligation to exercise good faith was “…inherently repugnant to the adversarial position of the parties when involved in negotiations… [which] is unworkable in practice…” (Walford v Miles 1992 AC 128). It refused to imply such an obligation during pre-contract negotiations. 20 years later, has anything changed?

Caveat emptor is a basic facet of English commercial law and there is no general notion of good faith, as confirmed recently in ING Bank v Ros Roca SA. The problem seems to be uncertainty and the court’s reluctance to make findings about what has been described as “commercial morality”.

Do people listen?

Whatever the courts may say, good faith clauses seem more popular than ever and have led to a series of cases covering (for example) a loan agreement (Horn and others v Commercial Acceptances Ltd) and property development agreements (CPC Group Ltd v Qatari Diar Real Estate and Berkeley Community Villages v Pullen).

The news from Singapore

The Court of Appeal in Singapore recently reviewed decisions from Singapore, England and Australia and decided not to follow Walford v Miles.

HSBC Institutional Trust Services (Singapore) Ltd v Toshin Development Singapore Pte Ltd [2012] SGCA 48 was a rent review case where it appeared that, prior to the rent review, the landlord had approached all of the 8 international valuers who could have been nominated to determine the new rent. As part of the overall decision, the court looked at a clause requiring the parties to “in good faith endeavour to agree on the prevailing market rental value”.

The court made the point that while the parties were seeking to negotiate the new rent, this was not the same as pre-contractual negotiations. There was a contract in existence. The court recognised the tension between negotiation from a position of self-interest and the maintenance of good faith in attempting to settle disputes, but held the clause to be enforceable. The court observed that such clauses were in the public interest since they help to resolve disputes. It identified the core meaning of such a duty as being about “fairness and honest dealing”.

Back in the construction world

Clause 10.1 of the NEC ECC requires the parties to act in a spirit of mutual trust and cooperation. The JCT followed the NEC, introducing an optional good faith obligation to encourage collaborative working in 2009 (and as part of the 2011 Partnering Charter).

It looks like good faith clauses are here to stay. Which means it is time to look at the strange case of the chocolate mousse…

The £84,450 chocolate mousse

In Compass Group UK and Ireland Ltd (trading as Medirest) v Mid Essex Hospital Services NHS Trust, Medirest provided catering services at the hospital under an agreement which had a mechanism for making financial deductions based on performance failures. This led to the Trust making deductions for a chocolate mousse for being one day old, £96,060 for 3 day old bagels and £46,320 for out of date ketchup sachets.

The Trust sought to defend itself by saying it had no choice but to follow the contractual mechanism and that it was preserving taxpayers’ monies. The court had no sympathy and held that such actions were in breach of the express obligation in the agreement to “co-operate with each other in good faith”. It found the calculations to be absurd and noted the need to exercise discretion in good faith and not in an arbitrary, capricious or irrational manner.

Has anything changed?

The courts certainly seem much more open to arguments based on good faith. The Singapore decision is interesting because it recognises that negotiations continue after contract execution, for example seeking to agree the value of variations or negotiating the final account. If the standard form used contains a good faith clause, the court may rely on it to censure inappropriate behaviour.

The Trust’s behaviour in Medirest certainly fell into that category of conduct. The court was also not persuaded by the argument that the Trust was simply applying the contract terms. This decision is certainly relevant to any parties seeking to use the literal meaning of the contract to produce absurd results.

Is it a change? In most cases the usual remedies under the contract or in tort should be the answer. But in the few cases, where the position may be less clear, an argument based on a good faith clause is less likely to be dismissed by the courts.

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