Can a duty of good faith be implied into all commercial contracts?

Introduction 

Whilst English contract law does not recognise an overarching implied duty on contracting parties to perform contractual obligations in good faith, developing case law on the subject suggests that, in certain circumstances, the Courts can be willing to imply a context-specific duty of good faith into a contract.

The circumstances in which the Courts may be willing to imply terms were set out by the Supreme Court in  Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited and anor [2015], which confirmed that a term can be implied into a contract if:

1. it is reasonable and equitable to do so;
2. necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;
3. so obvious that ‘it goes without saying’;
4. capable of clear expression; and
5. does not contradict any express term of the contract."

More recently, the Courts have also recognised the implication of a more general implied duty of good faith into a specific category of long-term “relational” contracts. In Bates and others v Post Office Ltd (No.3) [2019], the High Court explained that these are long-term contracts where the parties are committed to collaborating, the contracts require a high degree of mutual trust and confidence communication and co-operation, and (crucially) the objectives of the venture may not be capable of being expressed exhaustively in a written contract. The Court has in other cases (Amey Birmingham Highways Ltd v Birmingham City Council [2018]; Essex County Council v UBB Waste (Essex) Limited [2020]) confirmed that PFIs/ PPPs meet the test of being a relational contract. 

The question before the Court in the recent case of Gian Angelo Perrucci v Orlean Invest Holding Ltd [2022] was whether the Court should imply good faith into a consultancy services agreement, and whether this could be classed as a “relational” contract. 

Background 

The dispute concerned a Consultancy Services Agreement (CSA) entered into between Mr Gian Perrucci and Orlean Invest Holding Limited (“OIHL”) as part of an overarching agreement for Mr Perrucci to resign as director and Vice President of OIHL and to provide OIHL with external consultancy services.

The final terms of the CSA and the overarching agreement had been negotiated and agreed during a meeting between Mr Perrucci and OIHL’s CEO, Mr Fiorini. The CSA recited Mr Perrucci’s extensive experience in the logistics sector and Mr Fiorini’s desire to collaborate with Mr Perrucci as an external consultant given his experience. It was agreed that Mr Perrucci would provide OIHL with external consultancy services over a four-year period in return for a monthly fee of $75,000. 

Mr Perrucci was a long-standing business associate and friend of the OIHL President and majority shareholder, Mr Gabriele Volpi. Through that friendship, Mr Perrucci knew Mr Volpi’s children, including Mr Matteo Volpi.  Mr Matteo Volpi now worked for a competitor business of OIHL’s principal subsidiary, which had been engaged in litigation. 

By a letter dated 28^th January 2021 (“Termination Letter”), OIHL set out to terminate the CSA with immediate effect on the basis that Mr Perrucci had failed to provide the relevant consultancy services, and had provided continued support to the competitor business at which Mr Matteo Volpi worked, in conflict with his obligations under the CSA.

Mr Perruci issued proceedings, alleging that the Termination Letter was an unlawful repudiation of the CSA and that post-termination OIHL had failed to pay the monthly fee for the consultancy services in breach of the CSA.  Mr Perruci stated that he had been at the disposal of OIHL to provide the consultancy services, but had never received a request for such services. Mr Perruci also denied involvement with the relevant competitor, but noted that the CSA did not contain a non-compete obligation in any event. OIHL argued that Mr Perruci was in breach of both orally agreed non-compete obligations (“Oral Conditions”), and that there was an implied term to act in good faith and not to harm OIHL’s interests.

Mr Perruci sought summary judgment of the issues raised. 

The Judgment

With regard to the defence that Mr Perruci had breached orally agreed non-compete obligations, the Court’s conclusion was that the existence of the orally agreed non-compete obligations was a question of fact that required a trial in the absence of documentation to the contrary. Accordingly, the summary judgment application was dismissed. 

The Court also dealt with the implied term that Mr Perruci would act in good faith, and would not harm.

In considering the implication of an obligation of good faith, the Court concluded that the CSA was not a relational contract to which a general duty of good faith could be implied. The CSA was a contract for the performance of consultancy services upon request and Mr Perruci had no continuing obligations under the CSA if he received no such request. The Court highlighted specifically that the CSA did not incorporate any requirement of a commitment to or an expectation of collaboration and/or loyalty, and did not contain any negative obligations to this effect. The Court considered that the argument put forward in relation to the implied obligation of good faith was simply being used “as a vehicle for importing the substance of the Oral Conditions, if it should be found that they were not in fact agreed”. 

Turning to the second implied term that Mr Perruci would not harm OIHLs interests, the Court considered the application of the established “business efficacy” and “obviousness” tests and considered the term to be too “vague and imprecise” to be “so obvious that it goes without saying”. Nor was such a term required in order to provide “practical or commercial coherence” to the CSA. On this basis, the Court concluded that there were no implied terms that Mr Perruci would act in good faith and would not harm OIHL’s interests and this defence was not permitted to proceed. 

Conclusion 

The circumstances in which a duty of good faith can be implied into a contract is a continually developing area of law and the courts appear to be taking a cautious approach to such developments to avoid undermining the fundamental principle of certainty. 

For contractual parties seeking to rely on a duty of good faith, the safest course of action is to ensure that such terms are expressly stated in the contract and that the scope of such an obligation is sufficiently clear to avoid uncertainty.  

Written by Judith Hopper and Alexandra Phillips