Shifting attitudes to the duty of good faith

Expressly defined good faith clauses could soon start to be included in more commercial contracts, predicts litigation specialist John Flint, partner at Clarke Willmott LLP in Manchester.

He says there is a significant shift in judicial attitudes when it comes to ‘relational’ contracts – that is to say, a contract whose effect is based upon a relationship of trust between the parties.

“Essentially good faith could be described as acting honestly in the performance of contractual obligations and being loyal to the bargain,” said John.

“Traditionally the English courts have avoided implying a duty of good faith into commercial agreements, requiring instead that parties expressly impose such a duty.

“However, this interpretation is widening with an increasing number of litigants finding recourse for what they consider to have been sharp commercial practice but where previously, in the absence of express obligations, no remedies were available.

“To that extent, it therefore promotes a better and more ethical way of doing business.

“The concept of good faith is still developing and it is a relatively uncertain concept – we await a decision from the higher courts on the subject, and the floodgates are not going to open for the idea to be applied in all commercial contracts.

“But, in the meantime, we may start to see the inclusion of expressly defined good faith clauses in more commercial contracts. And if leads to a better and fairer way of doing business, it should be welcomed.”

Good faith obligations can often be crucial to prevent one party to a bargain taking an unfair advantage over the other by acting solely in its own commercial self-interests while technically not breaching the express terms of the contract.

Earlier this year the High Court ruled in favour of the Justice for the Subpostmasters Alliance over claims the Post Office has abused its position to unlawfully suspend, sack, prosecute and criminalise people who run branch Post Offices over ‘stolen’ money.

The judge allowed that far from being a standard business contract, Post Office and sub-postmasters had a “relational” contract which puts responsibilities on the Post Office to recognise what the judge called their “uniquely unequal” relationship.

“This is a good example of the High Court liberally applying duties of good faith to contractual obligations to help achieve what it perceived to be a fair and equitable outcome”

John Flint says if a party entering into a contract does not wish for the duty of good faith to arise it should expressly state this in the contract to prevent the risk of such a duty being implied further down the line. Where the parties consider what good faith means in advance and define this in their contract, they can enjoy more certainty.

John is a Partner in Clarke Willmott LLP’s commercial and private client litigation team and specialises in complex high-profile commercial litigation disputes. For further information contact: [email protected].