E. Good faith

There is no general duty to perform contracts in good faith under English law. The following observations of Bingham LJ in Interfoto at 439 are often quoted when describing the English approach to good faith.

"In many civil law systems, and perhaps in most legal systems outside the common law world, the law of obligations recognises 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."

The piecemeal approach to unfairness to which Bingham LJ referred includes:

• Construction. Construing express terms to avoid an apparently unfair and unreasonable result.

• Equitable doctrines and statutory discretions. Certain equitable doctrines address unfairness in a contractual context, in particular promissory estoppel. In addition certain statutes confers certain discretions on the courts to choose between available remedies, taking into account what would be equitable. For example under the Misrepresentation Act 1967 s.2(2) the court has a discretion to award damages in lieu of rescission in respect of negligent misrepresentation, where this would be equitable.

• Implication of terms at common law. Implying an obligation to act in good faith into certain types of contract as a matter of law (discussed further below).

• Implying terms in fact. Implying terms in fact, based upon the intention of the parties (discussed above). The above list of commonly implied terms (cooperation, non-prevention, right to terminate an indefinite contract, contractual discretion must not be exercised arbitrarily) all seek to address unfairness.

Whilst these examples show that fairness can be relevant in English contract law, the reluctance of the courts to recognise a general principle of good faith is mainly attributed to:

• The desire to avoid uncertainty. Lord Hoffman stated "The existence of an undefined discretion to refuse to enforce the contract on the ground that this would be "unconscionable" is sufficient to create uncertainty" (Union Eagle Ltd v Golden Achievement Ltd [1997] A.C. 514).

• The need to preserve the freedom of the parties. Parties should be free to pursue their self-interest both in negotiations and performance, provided no contract term is breached.

However, as noted by Leggatt J in Yam Seng PTE Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB) (01 February 2013), in refusing to accept a general obligation to act in good faith, the UK legal system is swimming against the tide:

• Civil law systems. Most civil law systems, including Germany, France and Italy, recognise a requirement of good faith. These laws influence European Directives, which in turn are implemented into English law. For example, the Unfair Terms in Consumer Contract Regulations 1999 contain a reference to good faith.

• European harmonisation. Attempts by the Lando Commission and the European Commission to harmonise European law embody a general duty to act in good faith (CESL update: Autumn 2012).

• Common law systems. Other common law systems also recognise a doctrine of good faith; it has long been recognised in the USA and is well established in Australian law. The doctrine has its advocates in New Zealand there is strong authority that it is recognised in Scottish law.

In Yam Seng Leggatt J suggests that:

• A requirement to act in good faith can be implied by reference to the parties' intentions. Citing the Belize test for implication of terms, Leggatt J comments that the relevant background to a commercial contract includes shared values and norms of behaviour, including an expectation of honesty, fidelity to the parties' bargain and other standards of commercial dealing, breach of which might be described as "improper", "commercially unacceptable" or "unconscionable". With regard to honesty, in some contexts it might be dishonest to keep silent after discovering that information previously provided to another party is or has become false, to deliberately avoid giving an answer, or to give an answer which is evasive, in response to a request for information.

• Many terms which are frequently implied in fact could be characterised as obligations to act in good faith. The implied obligations to cooperate, not to exercise a discretion arbitrarily and to bring onerous or unusual terms to the other party's attention described above could, amongst others, be characterised as aspects of an obligation to act in good faith. The terms implied by Leggatt J into the distribution agreement at issue were an obligation on the supplier not to knowingly provide false information to its distributor and not to approve a domestic retail price for a product which undercut the duty free retail price.

• Interpreting good faith in this way is consistent with recent case law considering express obligations to act in good faith. In a property dispute an express obligation to act with the "utmost good faith" was interpreted as a contractual obligation to observe reasonable commercial standards of fair dealing, to be faithful to the parties' agreed common purpose and to behave consistently with the justified expectations of the claimant (Berkeley Community Villages Ltd & Anor v Pullen & Ors [2007] EWHC 1330 (Ch)).

• In "relational contracts" specific expectations apply. "Relational contracts", which include some joint venture agreements, franchise agreements and long term distributorship agreements, require a high degree of communication, cooperation and predictable performance based on mutual trust and confidence and involve expectations of loyalty. Whilst these are not legislated for in the express terms of the contract they are implicit in the parties' understanding and necessary to give business efficacy to the arrangements.

It remains to be seen whether, as a result of Leggatt J's judgment in Yam Seng, the courts will be more ready to imply terms to reflect shared values and norms of behaviour (in particular in "relational contacts") and to characterise these as aspects of good faith. Recent cases considering the judgment include:

• The Court of Appeal case of Mid-Essex Hospital Services in which Beatson LJ appeared to take Leggatt J's concept of good faith into account in interpreting an express good faith obligation and, citing Yam Seng said that "there is no general doctrine of “good faith” in English contract law, although a duty of good faith is implied by law as an incident of certain categories of contract".

• The High Court case of TSG Building Services in which Akenhead J commented (somewhat ambiguously) of Yam Seng "Because cases and contracts are sensitive to context, I would not draw any principle from this extremely illuminating and interesting judgment which is of general application to all commercial contracts".

• The High Court case of Hamsard 3147 Ltd (t/a Mini Mode Childrenswear) & Anor v Boots UK Ltd [2013] EWHC 3251 (Pat) (31 October 2013) in which the court refused to imply a duty of good faith into an interim agreement and found, obiter, that the most any implied obligation of good faith would have involved would have been a duty to deal on an open and collaborative basis (there could be no implied obligation of good faith so as to constrain the exercise of a party's contractual right to terminate and decide whether or not to order products).

• Bristol Groundschool Ltd v Intelligent Data Capture Ltd & Ors [2014] EWHC 2145 (Ch) in which the High Court found that a hybrid between a joint venture and product distribution agreement was a "relational" contract of the kind referred to in Yam Seng and a duty of good faith could be implied. The duty extended beyond honesty to prevent the parties behaving in a way that would be regarded as "commercially unacceptable" by reasonable and honest people in the particular context involved. The judge appeared to suggest that the neutral treatment of Yam Seng in the Court of Appeal case of Mid-Essex Hospital Services meant that earlier decisions cited to the court which contradicted Yam Seng could be disregarded.

• In the High Court case of D&G Cars Ltd v Essex Police Authority [2015] EWHC 226 (QB) (13 February 2015) both parties accepted that there was an implied condition that they should act in good faith and the judge agreed. The judge identified the relevant elements of good faith as honesty and the wider concept of integrity. The contract under consideration was a relational one because of its length, the fact that it would govern a large number of individual transactions and its subject matter (the recovery and handling of vehicles for the police). Failing to seek consent for the retention (and not crushing) of a particular vehicle was a breach of the requirement for integrity.

• On an application for summary judgment in relation to a property development agreement the court found no arguable case for implying a term permitting either party to terminate at will if there was a breakdown of mutual trust and confidence between the parties (Chelsfield Advisers LLP v Qatari Diar Real Estate Investment Company & Anor [2015] EWHC 1322 (Ch) (15 May 2015)).