Practical Law

In January this year, I wrote about Compass Group (trading as Medirest) v Mid Essex Hospital where the High Court enforced a good faith clause and criticised a party’s conduct (involving a £84,450 chocolate mousse deduction). Having suggested that the courts are now more open to such arguments, the Court of Appeal reversed the decision in March, indicating the opposite.

So is that the end of the road for good faith clauses? Not quite, I suspect, both because of the specific clause used in Medirest and another High Court decision in Yam Seng PTE v International Trade Corporation.

Medirest: What the Court of Appeal decided

In Medirest, the Court of Appeal agreed with the trial judge that the cobbled-together nature of the contract did not assist the parties. It found that the package of contract documents contained some puzzles and inconsistencies, which gave rise to conflict.

However, Jackson LJ went on to identify two possible interpretations of the good faith clause. In his view, the narrow interpretation was the correct one and the good faith obligation was limited by the two specific purposes identified in the clause.

More generally, Jackson LJ observed that good faith duties are heavily conditioned by their context. In this case, good faith meant acting honestly and there was no finding of any dishonesty.

Manchester United eau de toilette, deodorant and body gel

Does good faith simply mean acting honestly and nothing more?

This was very much what Leggatt J looked at in February in Yam Seng, which was all about Manchester United branded toiletries. A proposed distribution agreement fell apart and one party alleged that the other had breached an implied duty of good faith.

Having noted the “traditional English hostility” to good faith, Leggatt J went on to consider whether a duty of good faith could be implied on the basis of the ordinary test for implied terms.

The first step was for him to find that a term could be implied requiring parties to behave honestly. The next step was to identify whether it can go further and apply to conduct such as deliberately avoiding giving an answer, or giving an answer which is evasive, in response to a request for information.

The context and relational contracts

Taking the same approach as Jackson LJ, Leggatt J observed it was all to do with the context. He distinguished a simple contract, where there was no general duty to disclose information, from what he described as a relational contract. In his view, a relational contract may require a high degree of communication, cooperation and predictable performance based on mutual trust and confidence. It may involve expectations of loyalty, which are not legislated for in the express terms of the contract. Those expectations are implicit in the parties’ understanding and are necessary to give business efficacy to the arrangements.

Although he did not have to decide the point in this case, he thought there was nothing novel or foreign to English law in recognising an implied duty of good faith in the performance of a contract.

Five arguments and six responses

Leggatt J did not stop there. He identified five possible arguments against implying a good faith duty (and provided six answers to those arguments):

• Argument: good faith is based on a civil law system. Answer: the content of the duty is heavily dependent on context and is established through a process of construction of the contract, consistent with the case by case approach favoured by the common law.
• Argument: a good faith duty restricts the freedom of the parties to pursue their own interests. Answer: the basis of the duty is the presumed intention of the parties. Parties undertake implicit as well as explicit obligations. (An additional answer is that it is open to the parties to modify the scope of the duty by the express terms of their contract and, in principle at least, to exclude it altogether.)
• Argument: in dealing with good faith, a court imposes its view of what is substantively fair on the parties. Answer: describing the duty as one of good faith “and fair dealing” is advantageous. What constitutes fair dealing is defined by the contract and by those standards of conduct to which, objectively, the parties must reasonably have assumed compliance, without the need to state them.
• Argument: a court may not be willing to interpret a duty of good faith as requiring openness of the kind described as “playing fair'”, “coming clean” or “putting one’s cards face upwards on the table”. Answer: this should only be seen as a difference of opinion, which may reflect different cultural norms, about what constitutes good faith and fair dealing in some contractual contexts.
• Argument: a duty of good faith creates a risk of excessive uncertainty. Answer: this argument is not justified because there is nothing unduly vague or unworkable about the concept.

He then went on to suggest 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.

Good faith: in or out?

We are left with a narrow interpretation of a poorly-drafted (but express) good faith clause, against a willingness to imply a good faith duty where justified by the context (in what was described as a relational contract).

However, these judgments can be reconciled and Medirest is very much based on its own specific facts. The English courts have recently made quite a few decisions on express good faith clauses but the suggestion they can be implied into relational contracts will certainly encourage such arguments when dealing with NEC and other partnering or alliancing contracts. Good faith is fighting back.