Although the courts have and continue to state that there is no general duty to act in good faith in relation to a contract, why is it that there seem to be more cases than ever centering on the meaning of ‘good faith’? Or, indeed, arguments that one party has some form of implied obligation to act in good faith in relation to the other? What does ‘good faith’ mean in practice and how can you use this in your contracts?
What does acting in “good faith” mean?
In one case, the court summarised it as meaning that it required a party to “adhere to the spirit of the contract, to observe reasonable commercial standards of fair dealing and to be faithful to the agreed common purpose”. However, it is clear that what the express duty of good faith means ultimately depends on the commercial context of the particular contract, i.e. the specific facts and background.
In recent cases, the English courts have decided that ‘the duty’ can prevent any action which would frustrate the purpose of the contract. ‘The duty’ can also require the disclosure of material facts to the other party (e.g. the parties had agreed that “each party shall act in absolute faith towards the other”). It can prohibit knowingly providing false information on which the other party will rely (‘the duty’ was used to imply this term) as well as prohibit the improper accessing of the other party’s computer systems or records.
At the same time, the scope of ‘good faith’ has its limits and ‘the duty’ will not (i) stop a party from exercising any clear, express rights in the contract (ii) require a party to give up its commercial interests or subordinate them to the other party’s interests (for example, in a property case, the court felt that the obligation of good faith did not require revenue sharing terms to be renegotiated because of a sudden downturn in the market) or (iii) convert an ‘agreement to agree’ clause into a binding obligation.
The courts have also decided that implying a duty of good faith where none is expressed is likely to arise only in exceptional cases where it is essential to allow the contract to work effectively.
Should you include an express duty of good faith?
Yes. Having an express clause can help deal with any gaps in the relevant contract and encourage the other party to act in a reasonable way. If you do use an express obligation to use good faith, however, do note that the phrase has no universally accepted meaning, and can lead to creative arguments as to what ‘the duty’ means in practice, which can lead to uncertainty.
There is simply no getting away from the fact that it is always better to include detailed terms about any matter that needs to be covered by the contract rather than relying on a general duty of good faith. If an express duty of good faith is used, as much detail as possible should be added to explain (i) what course of action should be taken and/or (ii) whether action should be taken within a certain timescale and/or (iii) any other detail added which helps define what the good faith obligation means in practice.
What should you be doing with “good faith” clauses?
Whilst using a good faith term can certainly help to deal with gaps in any contractual wording or procedure, it is important to remember that it is always preferable to expressly state in detail what the parties are meant to do or refrain from doing rather than relying on the vague concept of good faith to do so. If used, the express words ‘good faith’ or something similar should be used, as wording less clear may be taken by the courts as meaning that there is no duty to act in good faith at all. Finally, specify whether the duty applies to all terms of the contract or only certain provisions. This is important as recently the courts have tended to limit good faith to the specific clauses in which it is mentioned, in the absence of more explicit wording.