Good Faith

Introduction

Watch our In-house Insights: Contract Update webinar here, which covers Good Faith.

Whilst the general position in English law is that there is no overriding duty of good faith, the Courts have in recent years considered whether there are circumstances in which a duty of good faith can be implied.

In the case of Yam Seng Pte Ltd v International Trade Corp Ltd [2013] EWHC 111 (QB), Leggatt J (as was) found that a duty of good faith can be implied into a contract where it is a “relational contract”.  Subsequent cases where a relational contract was found to exist included Bates v Post Office Ltd  [2019] EWHC 606 (QB), Birmingham City Council v Amey Birmingham Highways Ltd [2018] EWHC 3915 (TCC) and Essex County Council v UBB Waste (Essex) Ltd (No 3) [2020] EWHC 2387 (TCC). To read our article on Essex County Council v UBB, please click here.  

However, in subsequent cases the Court made clear that the circumstances in which the Court will find a relational contract and imply such a duty are narrow.  To read more about the test for implied terms, please click here.

In 2023 two further cases saw the High Court rule on the duty of Good Faith: Connoisseur v Koumis [2023] EWHC 855 (Ch) and Phones 4U Ltd (In Administration) v EE Ltd and others [2023] EWHC 2826 (Ch).  In both cases, the Court reviewed contracts with express good faith provisions.   

Connoisseur v Koumis 

The background to this matter was a Joint Venture Agreement between various members of the Koumis family (including two parents and 5 siblings), and the Claimant, being a development company, to develop a property owned by the parents and leasehold land owned by two of the siblings into flats. 

Prior to this case reaching the High Court, four of the siblings had challenged the grant of probate after the parents died, and a planning dispute with the local Council had also reached the Court of Appeal.

The dispute in this case was a claim by the two siblings who owned the leasehold land and the development company arising from the refusal of the father (prior to his death) to grant any long leases of flats, refinance, or sign planning agreements, as well as an alleged failure to share rental income. 

The Court noted that the JVA was not long (8 pages) but did include an express duty of good faith. This meant there was no requirement to imply a term in this case. 

The clause required the parties to “co-operate with the other and act in fairness and in good faith to enable the other to discharge his duties ...”

Judgment

The Court noted that the express duty of good faith in this contract was set out in wide terms. The Court felt therefore that there was no room to imply some further or different duty of good faith. 

In interpreting this clause, the Court considered the principles stated in Unwin v Bond [2020] EWHC 1768, noting that where a party owes a duty of good faith, there will be a “minimum standard” implied, including:

• Acting honestly
•  Being faithful to the parties agreed common purpose
• Not to use powers for an ulterior purpose
• To deal fairly and openly
• To have regard for the other party’s interest.

The Court also considered Re Compound Photonics Group Ltd [2022] EWCA Civ 1371 where the High Court acknowledged the duty to act honestly but noted the other obligations should be construed narrowly, refusing to extend obligations in relation to good faith. Instead, these further obligations must be clearly expressed in the contract drafting. This highlighted the need to apply normal principles of contractual construction to express clauses of good faith and suggests that no minimum standard will be implied into an express clause.

The Court found that, in this case, the father had been required to sign the relevant loan renewals in order to comply with the duty of good faith.

Phones 4U Ltd (In Administration) v EE Ltd and others

This claim, brought by a company in administration against several leading mobile network operators, concerned an allegation that the Defendants had engaged in anti-competitive collusion. 

The Claimant and EE had entered into an agreement had entered into an agreement for the Claimant to supply connections for a 3 year term from 1 October 2012 to 30 September 2015.  Part of the Claimant’s case was that EE had breached both the express term of good faith, and a term that the Claimant said should be implied, by informing the Claimant on 12 September 2014 that it would not extend the contract. 

P4U alleged that the announcement was made to force P4U into administration, allowing EE to then terminate their contract early and avoid further payments.

The contract included an express term, as follows:

“13.2 EE hereby undertakes and agrees that it will in good faith observe and perform the terms and conditions of this Agreement and in particular EE shall, and shall procure that its employees, agents and subcontractors will: 

            13.2.1 comply with all legislations and regulations ...

            13.2.2 supply to P4U from time to time such amount of the then current technical brochures ....

13.2.3 arrange and make available to P4U, should P4U so request, sales and technical training courses ...

13.11 EE hereby undertakes and agrees with P4U that it will act in good faith and not carry out any activity designed to reduce or avoid the making of any Revenue Share Payment(s) to P4U as contemplated by this Agreement.” 

The Court considered two questions:

• Whether the clause imposed a general obligation of good faith; and
• Whether the contract was a “relational” contract. 

Judgment

The High Court refused to imply a general term of good faith into the contract and/or extend the existing express term.

The express term was interpreted narrowly, only in relation to the obligation not to reduce P4U’s revenue and not as a general good faith clause. The Court noted that if this was intended to be a general obligation, it would have been drafted as such. He focused on the practical reality between the parties and their commercial sophistication as reasoning for not widening the express term, noting that the obligation did not fall on both parties:

“I appreciate that, literally read, the clause could be seen as disjunctive, imposing a general and then a more particular obligation. However, this was a professionally drafted and very full contract between sophisticated parties. If they had intended to impose a general obligation of good faith, I consider that they would have done so. And if there were to be such an express, general good faith obligation on EE, I regard it as inconceivable that the contract would not also have imposed the same obligation on P4u.”

In respect of the second question, the Court referred to the judgment of Yam Seng Pte Ltd v International Trade Corp Ltd [2013] EWHC 111:

“Such “relational” contracts, as they are sometimes called, may require a high degree of communication, co-operation and predictable performance based on mutual trust and confidence and predictable performance based on mutual trust and confidence and involve expectations of loyalty which are not legislated for in the express terms of the contract but are implicit in the parties’ understanding and necessary to give business efficacy to the arrangements. Examples of such relational contracts might include some joint venture agreements, franchise agreements and long term distributorship agreements”.

The Court in this case agreed that the EE Agreement had some forms of a relational contract: it had a term of three years with the potential for renewal, and had replaced an earlier agreement, and required the parties to collaborate.  However, the Court then referred to the list of factors set out in Bates v Post Office Ltd (No 3) [2019] EWHC 606 to help determine whether a contract may be relational, one of which is exclusivity.  The Court noted that was no exclusivity in the EE Agreement:

“It is a striking feature of the present case that EE was not only enabling P4u to supply connections to its network but was in competition with P4u in seeking to supply such connections to customers directly.  Indeed, it was EE’s desire to expand its direct retailing and reduce its reliance on indirect retailers that drove its decision underlying this case. I respectfully agree ... that exclusivity is a supporting indication, not a necessary condition, for a relational contract, and I consider that being in direct competition is a strong factor pointing the other way.  At the very least, it would substantially affect what is required by any duty of good faith.”

The Court concluded that there was nothing to prevent EE telling P4u that it would not be resuming negotiations for a new agreement, and that in fact had it omitted to tell P4u it would have been acting in bad faith. 

Points to Note

These cases emphasise the importance of bearing in mind the Court’s longstanding position:

• The Court will generally not extend the interpretation of express good faith clauses beyond the exact wording used, particularly when the contract has been negotiated by sophisticated parties;
• The Court will only imply a general duty of good faith in limited circumstances. Where parties want a duty of good faith to apply, the safest course of action is to include an express provision, and to consider carefully in drafting all the circumstances where it may be required to apply.