As an Australian-qualified lawyer, any judicial mention of “good faith” in the English courts piques my interest. Australian courts readily imply broad duties of good faith into commercial contracts. By contrast, you don’t need to look further than Chitty on Contracts, Vol 1 (Sweet & Maxwell 32nd ed, 2015), paragraph 1-039, to find that “in English contract law, there is no legal principle of good faith of general application”. That is, until members of the judiciary, such as Leggatt J began to warm up to the idea. However, in its unanimous judgment in MSC Mediterranean Shipping Company S.A. v Cottonex Anstalt, the Court of Appeal has curbed this enthusiasm.
Shipping carrier MSC agreed to ship 35 containers of raw cotton from Iran and Dubai to Bangladesh for Cottonex, who had sold the cotton to one of its buyers under an ongoing supply contract.
While the cotton was en route to Bangladesh, the market price of cotton collapsed and Cottonex’s buyer paid for the cotton but refused to collect it. The port authorities refused to allow the cotton to be unloaded so MSC was unable to reclaim its containers and Cottonex was unable to return them.
Under the shipping contract, from the day that the containers were put ashore in Bangladesh, Cottonex had a 14-day grace period before it was obliged to return the containers to MSC. If it failed to do so, demurrage (the shipping equivalent of liquidated damages) became payable at a daily rate until Cottonex returned the containers to MSC. There was no limit, either in amount or time, on the demurrage charges.
MSC issued proceedings claiming demurrage until Cottonex returned its containers. Unsurprisingly, Cottonex argued that the contract was repudiated and demurrage was only payable until that date.
Leggatt J champions good faith…
Like me, Leggatt J is an advocate of good faith. He concluded that MSC could not affirm the contract because it had no legitimate interest to insist on keeping the contract in force. However, he also thought that the legitimate interest principle could be seen in a wider context:
“There is increasing recognition in the common law world of the need for good faith in contractual dealings.”
He went on to say that further impetus has been given to this development by the unanimous judgment of the Supreme Court of Canada in Bhasin v Hrynew, 2014 SCC 71, which held that good faith in contractual performance is a general organising principle of the common law of contract which underpins and informs more specific rules and doctrines.
In this context he referred to the specific rule, firmly established in English law, that in the absence of very clear language to the contrary, a contractual discretion must be exercised in good faith for the purpose for which it was conferred, and must not be exercised arbitrarily, capriciously or unreasonably (in the sense of irrationally) (Socimer International Bank Ltd v Standard Bank London Ltd).
While recognising that this line of authority has been concerned with the exercise of discretionary powers conferred by the express terms of the contract, he considered that this also applies where the choice whether or not to terminate the contract in response to a repudiatory breach is one which arises by operation of law. In his view, in each case one party to the contract has a decision to make on a matter which affects the interests of the other party to the contract whose interests are not the same. The same reason exists in each case to imply some constraint on the decision-maker’s freedom to act purely in its own self-interest.
This conflicts with cases such as TSG Building Services Plc v South Anglia Housing Ltd, in which Akenhead J refused to imply a term of good faith, albeit in the context of an express right to terminate for convenience.
However, it is consistent with his own judgment in Yam Seng PTE Ltd v International Trade Corporation Ltd, where he proclaimed that the “traditional English hostility towards a doctrine of good faith in the performance of contracts, to the extent that it still persists, is misplaced”.
… and the Court of Appeal dismisses it
The Court of Appeal decided that the legitimate interest principle did not apply in this case because MSC lost the option to affirm the contract once the contract was frustrated when it became clear that further performance would be impossible.
In his leading judgment, Moore-Bick LJ dismissed Leggatt J’s reliance on good faith. He echoed the reminder in Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd (t/a Medirest) that “there is no general doctrine of good faith in English contract law”.
Moore-Bick LJ warned:
“The recognition of a general duty of good faith would be a significant step in the development of our law of contract with potentially far-reaching consequences.”
Wary of the courts interfering in parties’ commercial bargains, he continued:
“There is in my view a real danger that if a general principle of good faith were established it would be invoked as often to undermine as to support the terms in which the parties have reached agreement.”
Leggatt J’s attempt in Yam Seng to establish that a duty to act in good faith should be implied in the performance of long-term “relational contracts” has also been rejected by another recent Court of Appeal decision.
Where does this leave us?
There are countless “piecemeal solutions” in English law targeting “demonstrated problems of unfairness”. These include implied terms, contractual interpretation, misrepresentation, and promissory estoppel, to name a few. The Court of Appeal commented that:
“the better course is for the law to develop along established lines rather than to encourage judges to look for what the judge in this case called some ‘general organising principle’ drawn from cases of disparate kinds.”
The message that there is no organising principle of good faith in English law could not be more clear.
Brexit may now make it even more unlikely that England will follow European contract law, which reflects the civil law notions of good faith of France and Germany. For now, England continues to chart its own course in the common law world.