Good faith in Contract Law

It is widely assumed that English
contract law does not recognise a general duty of good faith. Instead, the law
has preferred an incremental, piecemeal approach of solving particular problems
as and when they arise; rather than a general overriding notion of ‘good
faith’. For instance, Bingham LJ said in Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd
[1989] 1 QB 433, “In many civil law
systems, and perhaps in most legal systems outside the common law world, the
law of obligations recognizes and enforces an overriding principle that in
making and carrying out contracts parties should act in good faith. This does
not simply mean that they should not deceive each other, a principle which any
legal system must recognise; its effect is perhaps most aptly conveyed by such
metaphorical colloquialisms as ‘playing fair’, ‘coming clean’ or ‘putting one’s
cards face upwards on the table.’ It is in essence a principle of fair open
dealing… English law has, characteristically, committed itself to no such
overriding principle but has developed piecemeal solutions in response to
demonstrated problems of unfairness.

 
Examples of these piecemeal
solutions are not too hard to find. In White & Carter v. McGregors [1962] AC 413, the House of Lords affirmed that it
was open for a contracting party to refuse to accept a repudiatory breach and
(if possible to do so without the cooperation of the other contracting party)
continue with the contract, and bring an action for the agreed price after the
time for performance. Lord Reid however held that there was no notion known to
English law which compelled a contracting party to act reasonably while making
a choice between accepting or refusing a repudiation. Leaving the door slightly
open, however, Lord Reid held “”it might be said that,
if a party has no interest to insist on a particular remedy, he ought not to be
allowed to insist on it
…” This door was pushed further open in a couple
of cases (The Puerto Buitrago [1976] 1 Lloyds Rep 250; The
Alaskan Trader
[1984] 1 All ER 129) but more recently, the position has
been summarized in The
Aquafaith
[2012] 2 Lloyd’s Rep 61: “The arbitrator was wrong to regard the
comments of Kerr J (and all the subsequent references in the authorities to the
need for an extreme case of unreasonableness on the part of the owners to bring
in the exception) as a “gloss” on Lord Reid’s dictum in White &
Carter
and to treat Lloyd J’s
dictum as entitling him to focus on “no legitimate interest”, without
reference to the degree of unreasonableness. When Lord Reid’s speech is read
in its entirety, it is clear that the innocent party’s right to elect is not
trammeled by the need to act reasonably
. It requires something beyond that
before the courts will interfere and prevent the innocent party insisting on
performance of the contract. The
effect of the authorities is that an innocent party will have no legitimate
interest in maintaining the contract if damages are an adequate remedy and
his insistence on maintaining the contract can be described as ‘wholly
unreasonable’, ‘extremely unreasonable’ or, perhaps, in my words, ‘perverse’
.”

 

Another example can be found in
the line of cases exemplified in Socimer
International Bank v. Standard Bank London
[2008] EWCA Civ 116 – where
the question is whether a party which contractually enjoys certain discretion
must exercise that discretion reasonably. Socimer,
and subsequent cases, note that it need not exercise the discretion reasonably:
however, the exercise of discretion must not be so unreasonable as to be
arbitrary. The threshold is thus rationality (somewhat analogous to the Wednesbury
standard which is so familiar to public lawyers). The Court will intervene when
the party has taken a perverse view. 
 

This structure of piece-meal
solutions may well change if the approach recently adopted by Leggatt J. in Yam Seng PTE v.
International Trade Corporation
, [2013] EWHC 111 (QB) gains currency.
Leggatt J. drew on several established lines of authority on the various ways
in which absolute discretions of contracting parties are read down (including
the Socimer line, referred to above).
These lines indicated to the Judge that the traditional view – that English law
looks at good faith with antipathy – is misplaced. The learned Judge then chose
to imply a term into the contract between the parties: the term was implied in
fact (and not in law: thus, the term was based on the presumed intent of the
parties), but the reasoning behind the implication of the term has great
significance. The learned judge started from the proposition in Attorney General of
Belize v. Belize Telecom
[2009]
1 WLR 1988 that implication is part of the broader process of construction of
the contract as a whole. He next considered the tests for interpreting a
contract: one of which is that the contract must be interpreted as a whole in
light of the ‘factual matrix’: Investors Compensation
Scheme
[1998] 1 WLR 896. Leggatt J. then held – and this proposition
appears to me to require further consideration – that this factual matrix
includes “shared values” of the parties. One of these shared values was (and,
indeed, it will be hard to think of a case where counsel would have
instructions to argue to the contrary) was ‘honesty’. If one accepts that Belize
laid down a broader test for implication than was traditionally understood, and
if one accepts that ‘shared values’ are part of the background of fact in which
a contract must be interpreted, this reasoning may well follow. Both those
assumptions are debatable.

 

Leggatt J. however also indicated
that the same result would follow even on the traditional tests of implication.
He held that implication of a good faith duty is necessary for the business
efficacy of most contracts, and is a term which both parties would have
immediately accepted without thinking. This is problematic: while both parties
may testily suppress an officious bystander asking “will you act in good faith?”
with an “Oh! Of course!”, it is unclear if they would do so if the
officious bystander elaborated on what he meant by good faith. Was it a duty to
not make false statements? Was it a duty to bring all relevant information to
the light of the other party? Was it a duty to not give evasive answers if
asked by the other party about one aspect? I am not sure whether all
contracting parties would immediately agree with these types of obligations. In
Socimer, for instance, while Rix LJ
does speak of implication on the basis of ‘good faith’, he does point to the
narrow content of the duty he has implied: he is careful to draw a distinction
between reasonableness in an objective sense, and rationality. The English law
of contract has worked fairly well – indeed, is perhaps the law most favoured
by businessmen – for centuries without an overarching notion of good faith:
what particular business efficacy was lacking is unclear. Ultimately, the
concerns over certainty would persist, with no obvious benefit which is not
found in the already established lines of authority. The implication of the
notion of a duty of good faith on the presumed intention of parties would
perhaps allow a back-door entry to the Court imposing its standards of conduct
on parties under the guise of presumed intention. For a term to be properly
implied, it is not enough to show that there was a presumed intention as to
goods faith: what must be shown is a presumed intention as to the content of
that good faith norm. One could well argue, therefore, that the judge ought not
to have aggregated the several lines of authority to draw a general principle
based on implication. Instead, it was best to leave the several lines of
authority to chart their own courses.

 

Leggatt
J. also was of the view, “In so far as
English law may be less willing than some other legal systems to interpret the
duty of good faith as requiring openness of the kind described by Bingham LJ in
the
Interfoto case as “playing
fair'” “coming clean” or “putting one’s cards face upwards
on the table”, this should be seen as a difference of opinion, which may
reflect different cultural norms, about what constitutes good faith and fair
dealing in some contractual contexts rather than a refusal to recognise that
good faith and fair dealing are required.
” This, it is respectfully
suggested, only highlights the problems with implying a free-standing duty of
good faith: it will be impossible to determine what the standards of good faith
which were presumably intended by the parties are, and is a license for
uncertainty. On the facts, the necessary term to be implied – the duty to not acquiesce
in undercutting of prices by other distributors, on the facts in Yam Seng – could perhaps (though this is
by no means certain: the point seems arguable both ways) have been implied
without having to resort to ‘good faith’. Further, one could also argue that
adequate remedies were available under the Misrepresentation Act, 1967 on the
facts of the case. It is not clear what the notion of good faith added.

 

One area of where an idea of
‘good faith’ may be useful, according to the learned Judge, is the law
governing long-term contractual relations. “While it seems unlikely that any duty to
disclose information in performance of the contract would be implied where the
contract involves a simple exchange, many contracts do not fit this model and
involve a longer term relationship between the parties which they make a
substantial commitment.
” While this point has force, it is only an argument
to suggest that certain contracts must have certain specific duties implied: it
is not an argument for why ‘good faith’ must be implied. In other words,
one wonders whether there is any advantage from shifting the question from
“should there be a duty of good faith?” to “what is good faith?” Ultimately, it
is respectfully (and very tentatively, at this stage) suggested that there is
no need for a general implication of a duty of good faith being incorporated
into commercial contracts under English law.

About the author

Mihir Naniwadekar

1 comment

  • IMPROMPTU 9intending to provoke more thoughts)

    "..English contract law does not recognise a general duty of good faith……"
    May be so, but with all usually trailing "ifs and buts" ; perhaps, even under the Indian contract law. Provided that, one is concerned with a contract of the kind in which the impact/effect is confined to only the rights and interests of merely /solely the 2 parties to the contract agreement; in one's conviction, certainly not of the kind involving the rights and interests of 'third' parties (e.g. stakeholders).

    Incidentally, an interesting point, but for wrong reasons, has surfaced , centered on the very concept of 'good faith'.

    If interested,attention is invited to the lately reported and discussed tax cases in which the taxpayers woes / grouses have come to be exposed consequent upon the tax officers not acting strictly in accordance with the mandates of the law, so also of the mandamus issued by courts.

    To get a glimpse, one may begin with a reading of the court case in front line @Taxguru, titled – "HC issued guidelines to end TDS credit & refund adjustment harassment of Assessee by CPU" ; the BL article @ "Take up TDS problems with deductors, Delhi High Court tells taxmen".
    For more, suggest to read individual's viewpoints aired through the related blogs @ swamilook.

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