You’ve been asked to include a ‘good faith’ provision in an agreement.  In principle it sounds fine – you’re a decent sort after all – but what exactly does it mean and does it matter if the words are there or not?

‘Good faith’ is an abstract term that is used to describe subjective honesty between parties to a contract. It is important as it can establish how the parties should conduct themselves throughout the contract’s life. Whilst it is widely accepted that there is no overriding concept of good faith in English contract law, this has been scrutinised by the courts regularly over the years.  The Court of Appeal[1] recently reiterated that the courts should not establish a general principal of good faith in commercial contracts as this could undermine the right of the parties to agree their own terms. English law has, however, developed piecemeal solutions in response to certain problems of unfairness.

Can we have good faith in a contract?

Although the courts have so far rejected a general principle of good faith, parties can choose to create a duty of good faith in their contracts and there are different phrases that can all have this effect. A clause requiring resolution of dispute by friendly discussion has, for example, been viewed as an obligation to negotiate in good faith.  Also, the courts do not appear to distinguish between the degrees of good faith despite use of words such as ‘utmost’ or ‘absolute’ (you can’t be more good or less good!).

Should we include our own general principle of good faith?

Inserting a general principle of good faith into a contract can be a risky business. The courts have held that a general ‘good faith’ provision in a contract will not necessarily:

  • require a party to give up a freely negotiated financial advantage;
  • apply to all parts of the contract in all circumstances; or
  • cut across other, more specific, provisions in the contract.

So if you do want to include a duty to act in good faith, you are generally better to consider what clauses you want it to apply to rather than including an overarching provision. Even then, you shouldn’t blindly rely upon it.

Being bad

So, can we all act as badly as we want?  In a word: no.  The fact that there is no general duty of good faith does not mean that a party will not have a remedy where it has suffered because the other party has acted in bad faith. There are a variety of remedies and duties under English law (each of which could form the basis of a blog post in its own right), including:

  • actions for misrepresentation in respect of false statements which induced the other party to enter into the contract;
  • a claim because of a loss as a result of deceit or fraud by the other party;
  • the rule of estoppel, which prevents a party from denying or contradicting something he has previously claimed and allowed the other party to rely upon;
  • the rules on the interpretation of contracts which may in some circumstances imply certain terms, such as acting reasonably when exercising discretion; and
  • fiduciary duties (certain duties owned by one person to another because of the nature of their relationship, generally where one party is in a position of trust).

It is clear to see that even without the concept of good faith there are often remedies available where the other party to a contract does act with “bad faith” although the availability of such remedies will always depend on the circumstances.  It is also worth noting that some types of relationship include a duty to act in good faith imposed by statute (such as consumer and insurance law, the latter recently changed however).

So do we accept the requested amendment?

Well, as we’ve said, there’s no overarching principle of good faith that will be implied by the courts in commercial contracts but there are remedies for certain aspects of ‘bad behaviour’ and if you’re concerned about specifically including the clause then you can point to these where appropriate to push back on the request.  Many parties who enter into English law contracts are still not comfortable with the ambiguity of the term.

If you are, however, happy with the concept being included in the contract, consider where it’s most appropriate and include clear and concise wording specifically in those provisions rather than having a catch all provision that may not always be effective but could cause confusion.

For more information, email blogs@gateleyplc.com 

[1] MSC Mediterranean Shipping Company SA v Cottonex Anstalt  [2016] EWCA Civ 789


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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.