O ye of little faith

Last week Rupert Choat looked at the sort of terms that could be implied in construction contracts, one of which was a duty of good faith. As this concept has given rise to conflicting judicial opinion in the two recent cases Rupert mentions, it warrants some further consideration.

To recap, last year, in the case of Compass Group UK & Ireland vs Mid-Essex Hospital Services NHS Trust, concerning a contract for the provision of catering and cleaning services to two hospitals, the NHS trust was held to be in breach of contract in making unreasonable deductions from payments to the service providers and in awarding excessive service failure points. The judge held that the trust was in breach of an implied term not to exercise its right to make deductions and award service failure points arbitrarily, capriciously or irrationally. The trust was also held to be in breach of an express contractual term to co-operate in good faith.

Then in the case of Yam Seng PTE Ltd vs International Trade Corp Ltd (1 February), the court considered whether a duty of good faith governs all contractual relationships, even if it is not expressly stated. As Rupert said, the judge concluded that the traditional English hostility towards a doctrine of good faith in the performance of contracts was misplaced.

This hostility stems from the idea that English law embodies an ethos of individualism, whereby the parties are free to pursue their own self-interest not only in negotiating but also in performing contracts provided they do not act in breach of a term of the contract.

English law appears to be swimming against the tide. A general principle of good faith is recognised in most civil law jurisdictions

However, in this respect, English law appears to be swimming against the tide. A general principle of good faith is not only recognised in most civil law jurisdictions (including those of France, Germany and Italy) but in other common law countries, including the US and Australia. Also, while there may be no such general principle in England, a duty of good faith may be implied in any ordinary commercial contract.

The English approach to the interpretation of contracts has changed recently. Contracts are made against a background of unstated shared understandings that inform their meaning. This can include not only matters of fact known to the parties but also shared values and norms of behaviour. It is not therefore difficult to imply into a contract a term that the parties will abide by standards of commercial dealing which are so generally accepted that they would reasonably be understood to take them as read.

Duties of good faith are likely to be of particular significance in contracts involving a longer-term relationship (“relational” contracts), such as partnership deeds, as opposed to contracts involving a simple transaction. Relational contracts may, in the words of the judge in the Yam Seng case, require a high degree of communication, co-operation and predictable performance based on mutual trust and confidence and involve expectations of loyalty that 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, thus giving rise to an implied term. Most construction contracts are clearly “relational” contracts and might therefore be assumed to include a duty of good faith and fair dealing.

The Court of Appeal, however, allowing the appeal of the NHS trust in the Compass Group case earlier this month, evinced a much narrower approach to the question of good faith. The court ruled that there was no implied term not to act arbitrarily, capriciously or irrationally in deciding to award service failure points or make deductions: there was no need to imply such a term because the contract itself contained precise rules for determining such matters. The court also interpreted narrowly the express duty to co-operate in good faith, ruling that it applied only to the two specific matters mentioned in the same clause - the efficient transmission of information and instructions and enabling the trust to derive the full benefit of the contract. Co-operation on such matters was irrelevant to the levying of deductions. The duty to co-operate in good faith meant only to work together honestly. The trust’s conduct was irrelevant because it did not affect the provision of the services.

Where does this leave the duty of good faith? Its requirements are clearly sensitive to context. However, where a duty to act with good faith - whether express or implied - means no more than to act honestly, it is hard to see that it adds anything much. The starting point of the Court of Appeal was that there is no general doctrine of good faith in English law, the very point that was effectively challenged by the judge in the Yam Seng case. These two broadly diverging strands of judicial opinion will no doubt be addressed in due course by the Supreme Court.

Rachel Barnes is a consultant at solicitor Beale & Company