Duty of Good Faith

Parties will often make references to good faith obligations in their general commercial contracts and energy trading documentation. Such obligations are usually enforceable under English law if they are expressly agreed, though there is no implied duty on the parties. This is different to the approach taken by many civil law jurisdictions where a duty is usually implied into the contract without reference.

This Client Alert briefly explains what a duty of good faith is, how it can be incorporated into an English law contract and what constitutes breach. It explains why care should be taken before agreeing to an express duty of good faith and that a better approach is to draft complete contracts rather than rely on ambiguous catch-all provisions.

Implied Duty

Under English contract law, there is no implied duty of good faith though parties are free to contractually agree to an express duty of good faith. The rationale for this revolves primarily around certainty of contact, which is a cornerstone of English contract law. Judges feel that a generic overarching obligation to act in good faith is too vague and subjective.

Express Duty

So long as parties make it clear that they wish to impose an express duty of good faith, the exact language used in the contract to do so is relatively flexible.

Good faith obligations have been found to arise from language requiring the parties to “act in absolute faith” (Horn v Commercial Acceptances [2011] EWHC 1757), “act with the utmost good faith” (CPC Group Ltd v Qatari Diar Real Estate Investment Company [2010] EWHC 1535). It is not even necessary to use the words “good faith”, as the obligation was found to apply where parties had agreed to “resolve disputes by friendly discussion” (Emirates Trading Agency LLC v Prime Mineral Exports Private Ltd [2014] EWHC 2104).

Additionally, unlike with the distinction between reasonable endeavours and all reasonable endeavours, the courts do not seem to put any discernible emphasis on levels of good faith – i.e. you must either act in good faith or not.

Parties may agree to apply the duty only to certain obligations in the contract and not to the performance of the contract as a whole. Care should be taken when drafting such provisions to ensure that the intention of the parties is adequately reflected.

What Does Acting in Good Faith Mean?

What is required of an express duty to act in good faith will largely depend on the commercial context and should be assessed on a case-by-case basis. Case law has given hints on how the court frames the duty generically, though there are no hard and fast rules. In the CPC Group case referenced above, it was decided that the duty requires a party to:

adhere to the spirit of the contract, to observe reasonable commercial standards of fair dealing, to be faithful to the agreed common purpose, and to act consistently with the justified expectations of [the other party].

An express duty is unlikely to cut across other contractual rights such as an express termination right or requires a party to give up its own commercial interests. Other cases have provided further piecemeal clarifications such that the duty requires a party:

to prevent any action that frustrates the purposes of the agreement (Berkeley Community Villages Ltd v Pullen [2007] EWHC 1330);
to disclose material facts to the other party (Horn and others v Commercial Acceptances Ltd [2011] EWHC 1757). This is particularly important and is something which commercial lawyers should rigorously check as it is out of step with typical practice and requirements; and
from knowingly providing false information on which the other party will rely (Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] EWHC 111).

What Constitutes Breach?

In the CPC Group case referenced above, the court stated that it is hard to comprehend how a breach may arise without a party acting in bad faith. By implication therefore an express duty of good faith merely prevents a party from acting in bad faith, rather than imposes an active duty for the party to act in good faith. The requirement to prove a party acted in “bad faith” is therefore a tall order.

Conclusion

Although express clauses requiring parties to act in good faith are commonly found in English law contracts, care should be taken before agreeing to them, as it is difficult:

to determine the exact meaning of the obligation in the commercial context;
to fully understand the scope of the obligation and whether it applies to the entire contract or only certain specific provisions; and
to enforce the obligation due to the requirement to prove the other party acted in bad faith.

As ever, it is always more prudent to specify exactly what the parties are expected to do rather than relying on generic catch all provisions.

About the Author

Nic Horsfield is an LNG and energy law expert based in Singapore with over 12 years experience in global energy markets.

Please call him on +65 8792 9080 or click here to email him to discuss anything contained in this article or any other energy law related queries.

The information contained in this Client Alert is intended to be a general guide only and not to be comprehensive, nor to provide legal advice. You should not rely on the information contained in this Client Alert as if it were legal or other professional advice.

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