Re-visiting good faith in English contract law

07 August 2013

It is (at least, was) a well-established principle that there is no general duty of good faith in English contract law. Such a duty arises in certain categories of contracts, for example insurance contracts, employment and partnership contracts, contracts governing other fiduciary relationships and those where an express term to that effect is incorporated. However, until recently there remained hostility towards the introduction of a general duty to act in good faith.

There have been in the last 12 months a couple of court decisions which challenged what many see as the historical position for the concept of good faith under English law. There have now been some further court decisions.

Suggestion of a potential implied duty of good faith in certain contracts 


The Judgment of Mr Justice Leggatt in the case of Yam Seng Pte Limited v International Trade Corp Ltd [2013] EWHC 111 (QB) set the cat amongst the pigeons in February.

Leggatt J found that a duty of good faith could be implied into English contract law in certain circumstances - this including in the context of a distribution agreement, which was the subject of the dispute before him.

In his Judgment Leggatt J said he doubted that English law had reached the stage where "it was ready to recognise a requirement of good faith as a duty implied by law, even as a default rule, into all commercial contracts", however, he went on to say that there is no difficulty "in implying such a duty in any ordinary commercial contract based on the presumed intention of the parties". He then implied a duty, and found the defendant in breach, indeed repudiatory breach, of it.

There was speculation that this decision may have laid the foundations for a general duty to act in good faith to be developed (see further our alert on this case). Not so fast say the Court of Appeal and the High Court in decisions that have followed in recent months.

 

Court of Appeal reviews Medirest


We reported last year on the High Court decision on Mid Essex Hospital Services NHS Trust (the Trust) v Compass Group UK and Ireland Limited (trading as Medirest).

In this case the parties entered into a long term outsourcing agreement for the provision of catering and cleaning services. The agreement required Medirest to comply with minimum service levels and provided for service failure points and payment deductions to be made in the event of failures. There was an express obligation on the parties to cooperate in good faith.

Issues arose with the services provided by Medirest and the consequent award of service failure points and service credits. Medirest objected to the way in which the service credits had been calculated and objected generally to the Trust's conduct under the agreement (pointing to £46k in service credits for a box of out of date ketchup sachets as an example).

Medirest terminated, claiming the Trust was in breach of its contractual obligations to act in good faith. The Trust also terminated, under the contract, for the number of service failures. It was common ground that the Trust was entitled so to do; so the first issue was whether, having sought to terminate first, Medirest's termination was valid and lawful.

The High Court found that in awarding service points for failures by Medirest the Trust had exercised its discretion to do so in a manner that was contrary to the obligations on the parties to act in good faith. The Trust had also breached an implied term not to exercise its discretion to award service failure points in a way that was arbitrary, irrational or capricious; the court also held that the Trust was in breach of its express duty to cooperate in good faith. Medirest was therefore entitled to terminate the agreement.

The Court of Appeal disagreed with the High Court Judge. There were express terms in the agreement that dealt with the awarding of service points for failures by Medirest, and which set out any deductions the Trust was entitled to make as a consequence.

If Medirest failed to meet its required standards of service, this would trigger the Trust's right to award service failure points under the agreement. Those contractual provisions did not anticipate the exercising of any discretion. The Trust had a choice whether to waive its contractual rights but was under no obligation to do so; once it did not waive, the number of points to be awarded, and the amount to be deducted from payment to Medirest, was simply as detailed in the agreement. There was, therefore, no need to (and no basis on which to) imply a term into the agreement that in awarding service points the Trust would not act arbitrarily, capriciously or irrationally.

The Court of Appeal also found that the contractual duty on the parties to cooperate in good faith did not extend to the circumstances of this dispute. Whether service points were awarded or not did not require cooperation from Medirest; the Trust had an absolute contractual right to award service failure points and it did not therefore breach its express duty to cooperate in good faith when choosing to do so.

Two out of the three Court of Appeal Judges referred to the Yam Seng case. Neither accepted that there was an implied duty to act in good faith in this case (thereby treating Yam Seng in a narrow way) or that the express duty to act in good faith was open-ended.

Lord Justice Jackson referred to the decision in Yam Seng but at the same time reaffirmed the general view that "there is no general doctrine of good faith in English contract law" and that "If the parties wish to impose such a duty they must do so expressly." Lord Justice Beatson acknowledged the consideration given by Leggatt J to the question of implying a duty of good faith into a contract; however, he decided that the general obligation on the parties to work in good faith should not be broadened in this case and no implied duty existed.

The Yam Seng case could have been seen as potentially laying the foundations for a wide implied duty to act in good faith in general commercial contracts to be developed. However the decision of the Court of Appeal in the Medirest case suggests those foundations are not yet on a firm footing. The Court of Appeal chose to reiterate the traditional position that there is no general duty of good faith in English contract law.

 

 

TSG Building Services


The High Court then also considered good faith again in the recent case of TSG Building Services PLC v South Anglia Housing Limited [2013] EWHC 1151.

In this case TSG agreed to provide South Anglia with a gas servicing and associated works programme for South Anglia's housing stock of around 5,500 houses. The contract was for a fixed period of four years. The contract could be extended by a further year by South Anglia. The contract included a right for either party to terminate for any reason at any time on three months' notice: a "termination for convenience" clause.

South Anglia chose to exercise this right to terminate for convenience 13 months into the contract. South Anglia gave no reason for its decision to bring the contract to an end.

Clause 1.1 of the contract provided as follows:

"The Partnering Team members shall work together and individually in the spirit of trust, fairness and mutual co-operation for the benefit of the Term Programme, within the scope of their agreed roles, expertise and responsibilities as stated in the Partnering Documents, and all their respective obligations under the Partnering Contract shall be construed within the scope of such roles, expertise and responsibilities, and in all matters governed by the Partnering Contract they shall act reasonably and without delay."

The contract also included partnering objectives, to include "trust, fairness, mutual cooperation, dedication to agreed common goals and an understanding of each other's expectations and values."

TSG believed South Anglia had chosen to terminate the contract because it had proposed a pricing change - as provided for in the contract terms. TSG therefore commenced an adjudication (this was a construction contract) and won a claim for £400,000.

This went to the courts. TSG claimed South Anglia had, in terminating the contract, acted in breach of express and implied duties to use good faith. South Anglia said there was no such duty to use good faith.

Akenhead J found that South Anglia had properly terminated the contract. He found that clause 13.3 allowed either party to terminate for "any or even no reason". The parties had intended that the clause would allow just that and clause 1.1 would not work to impose a duty on South Anglia to act reasonably in exercising its "unqualified and unconditional right" to terminate.

The Judge also found that there could be no implied term requiring South Anglia to act in good faith when giving notice of termination under clause 13.3. To imply such a term would be contrary to the express provisions of the contract; there was therefore no scope for an implied duty in those terms to be incorporated.

Akenhead J did refer to the Judgment of Mr Justice Leggatt in Yam Seng, however, he went on to say that "Because cases and contracts are sensitive to context, I would not draw any principle from this extremely illuminating and interesting judgment which is of general application to all commercial contracts".

 

 

So what is the current position on good faith?


Such is the importance of any development of a duty to act in good faith in general commercial contracts it seems likely that this issue will be addressed again by the court in the near future.

We are definitely still in the 'watch this space' territory - however, there appears to be reluctance on the part of the Court of Appeal - and other High Court judges - to build on the foundations laid by Mr Justice Leggatt in Yam Seng.

Wragge & Co's experts provide some action points to consider.

 

 

 

 

 


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