Practical Law

English law has, to put it mildly, a fractious relationship with the concept of good faith. There is a deep-rooted scepticism towards it that has often manifested as outright hostility: Lord Ackner famously described the duty to negotiate in good faith as “inherently repugnant to the adversarial position of the parties” (Walford v Miles). Indeed, the Supreme Court has recently confirmed that there is no general principle of good faith in English law (Times Travel (UK) Ltd and another v Pakistan International Airlines Corp).

It has been said that good faith is “a topic that has been written about at inordinate length, by an almost intolerably wide group of people – some worth reading, some not.” Despite this foreboding context, it is a prescient time to consider good faith further. Following Yam Seng Pte Ltd v International Trade Corporation Ltd there has been a rapid development of the law on implied obligations of good faith in commercial contracts. After some initial confusion as to the test to be applied when seeking to imply a term of good faith, the Court of Appeal in Candey Ltd v Bosheh and another has now provided some welcome clarity. 

Relational contracts

Yam Seng established that, in an appropriate case, a term of good faith can be implied as a matter of fact. This was most likely to be the case with relational contracts. Such contracts are typically long-term and require collaboration between the parties, but in ways that have not been, or cannot be exhaustively specified in the written contract. Consequently, they necessarily involve trust and confidence between the parties (Al Nehayan v Kent).

The existence of relational contracts as a matter of English law was confirmed in Bates v Post Office Ltd (No.3). Fraser J held that this was a specie of contract into which an obligation of good faith would be implied. He went on to present a non-exhaustive list of characteristics for determining whether a contract is relational. These included that:

• The parties intend that their respective roles be performed with integrity.
• The contract involves a high degree of communication, co-operation, and predictable performance.
• The contract is based on mutual trust and confidence, and expectations of loyalty.

Such contracts can be contrasted with transactional contracts, namely, those involving a one-off exchange.

What is the test for implying a term of good faith?

The case law following the decision in Yam Seng produced a plethora of different approaches to implied terms of good faith. There appeared to be a fundamental confusion as to whether a term of good faith was to be implied as a matter of fact or law.

In Yam Seng, Leggatt J implied duties of good faith in fact. In Al Nehayan v Kent he appeared to drift away from this approach. He implied a term of good faith on the basis that the contract was relational. However, he stated obiter that he would have come to the same conclusion by applying the test for the implication of a term in law as set out by Lord Wilberforce in Liverpool City Council v Irwin. This alternative approach was potentially significant. Implying a term in law avoids the strict test of necessity affirmed by Lord Neuberger in Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd and another. If both routes are open to a party with a relational contract, it is difficult to see why they would trouble themselves with the former. The latter lowers the bar to success significantly.

Subsequent decisions reinforced this confusion. Bates seemed to endorse the implication in law of an obligation of good faith in relational contracts: “I consider that there is a specie of contracts, which are most usefully termed ‘relational contracts’, in which there is implied an obligation of good faith.” (Paragraph 711, Bates.)

In Essex County Council v UBB Waste (Essex) Ltd Pepperall J, with the qualification that Fraser J’s nine factors should not be applied too rigidly, followed Bates. He held that the parties’ contract was a “paradigm example of a relational contract in which the law implies a duty of good faith”.

UTB LLC v Sheffield United Ltd and others  provided a stark contrast. Fancourt J endorsed the approach taken in Yam Seng and Al Nehayan v Kent of implying a term of good faith in fact. However, he declined to follow Bates. Fancourt J held that the correct approach was to assess whether a reasonable reader of the contract would consider an obligation of good faith as necessary for the proper working of the contract. In his view, it was inappropriate to substitute this approach with a consideration of whether the contract was relational.

In TAQA Bratani Ltd and others v Rockrose, Philip Pelling QC (sitting as a judge of the High Court) took a similar view to Fancourt J. He accepted that the parties’ contract was “at least arguably” a relational contract. However, he rejected the notion that this automatically led to the implication of a term of good faith.

Fancourt J’s approach was also endorsed by Falk J in Russell v Cartwright and others. Similarly, in Teeside Gas Transportation Ltd v Cats North Sea Ltd and others, Butcher J took the view that even when one is dealing with a relational contract, “an implication of a duty of good faith will only be possible where the language of the contract, viewed against its context, permits it”. Again, this appears to amount to a rejection of the view that such a term is implied in law by virtue of the fact that the parties have a relational contract.

In Cathay Pacific Airways Ltd v Lufthansa Technik Ag John Kimbell QC (sitting as a Deputy Judge of the High Court) declined to choose between either approach. He held that a term of good faith may be implied as a matter of law into a relational contract. Alternatively, such a term could be implied as a matter of fact following the usual tests for implied terms.

Some of these cases were decided within months of each other. However, they display completely different views of the state of the law. The problematic nature of this inconsistency is reinforced when we consider that the results of these cases may well have differed if we were to switch the judges hearing them. Consider a hypothetical in which Fancourt J sat on Bates instead of Fraser J. Under Fancourt J the claimants would have needed to satisfy the stricter test for the implication of a term in fact. They would not have succeeded in implying a term of good faith simply by establishing that the contract was relational. It is entirely possible that, contrary to the actual decision, they would have failed.

Candey Ltd v Bosheh

Some welcome clarity has now been provided by the recent Court of Appeal decision in Candey Ltd v Bosheh. Coulson LJ noted the different approaches taken by the courts in recent years. He provided a helpful summary of the test for implying a term of good faith in law on the basis that a contract is relational, and the test for implying such a term in fact. He did not, however, choose between them. He applied both in turn, concluding in both instances that no term of good faith was to be implied. In considering whether the contract was relational, he used Fraser J’s checklist in Bates as a “sense check rather than a series of statutory requirements.” It seems, therefore, that parties can get two bites at the apple when trying to imply a term of good faith. They can first attempt to imply it in fact. If they are unable to meet the strict test of necessity, it is also open to them to seek to persuade the court that their contract is relational.

Concluding thoughts

Following some initial confusion as to the courts’ approach to the implication of terms of good faith, the Court of Appeal in Candey Ltd v Bosheh has clarified matters. The issue will be addressed first by considering the usual test for implying terms in fact, and then by asking whether the contract is relational. Significantly for practitioners, both routes to implying a term of good faith into their contracts remain open. Accordingly, a party’s chances of relying on the repugnant have arguably increased following Candey Ltd v Bosheh.