Courting controversy: High court implies duty of good faith into ‘relational’ contracts

24th October 2018

In a briefing that will be of particular interest to commercial parties involved in long-term, joint venture-type arrangements, Walker Morris explains why a High Court decision that has implied a duty of good faith into a commercial contract is controversial, and considers some practical solutions.

The general rule to date…

English law does not generally recognise a duty to act in good faith when forming or performing contracts (albeit the concept is a familiar one in many civil law jurisdictions).

…and some significant exceptions

In the 2013 case of Yam Seng Pte Ltd v International Trade Corp Ltd [1], Mr Justice Legatt (as he then was) held, in the High Court, that a duty of good faith may be implied into certain types of commercial contracts.

In the 2018 case of Al Nehayan v Kent [2] (in one of his final judgments before becoming Lord Justice and being elevated to the Court of Appeal) Legatt reiterated that a duty of good faith may be implied into ‘relational’ contracts.

What are ‘relational’ contracts?

These are “a category of contract in which the parties are committed to collaborating with each other, typically on a long term basis, in ways which respect the spirit and objectives of their venture but which they have not tried to specify, and which it may be impossible to specify, exhaustively in a written contract.  Such ‘relational’ contracts involve trust and confidence… that the other party will act with integrity and in a spirit of cooperation.” [3].

Relational contracts therefore typically include joint venture agreements, franchise agreements, long-term distributorships, contracts entered into informally between close friends, and the like.

What are the implications?

One of the problems with Yam Seng and now Al Nehayan is that commercial parties cannot now be certain as to whether a duty to act in good faith will be implied into their contractual arrangement[s].  Another is the lack of certainty as to what a duty of good faith actually entails, and therefore what it might require of a contracting party and/or what restrictions it might place on a party’s ability to act in its own commercial interests.

Practical advice

The law on the existence and extent of an implied duty of good faith has been in a state of considerable flux for several years now, and it remains to be seen whether Legatt’s approach will be authoritatively confirmed if/when a case on the point reaches the Court of Appeal.

In the meantime, contracting parties – especially those whose arrangements might be categorised as ‘relational’ – are far better spelling out expressly and in full the precise nature of their contractual obligations to one another.  In particular:

• Where contracts are negotiated between commercial parties and comprehensively expressed in writing, especially where the parties are legally represented, the courts will be reluctant to interfere.
• In accordance with the law on implying terms [4] the courts will not generally imply a duty of good faith into any contract where that would contradict express terms.
• Parties may wish to consider including contractual wording which specifically excludes any implied duty of good faith. (If so, this should be raised sensitively in negotiations, so as not to convey any unintended negative message.)
• Where contracting parties intend and expect one another to act in good faith, they should state that expressly.
• Parties should also state the scope of any good faith obligation: whether it involves more than acting honestly and with integrity; whether it involves any specific duties (such as to consult, to co-operate, or to disclose information); and whether it restricts a party acting in any particular way.
• Parties should state whether any good faith obligation applies to the contract as a whole, or to a particular clause/clauses.

Please contact any member of the Commercial Dispute Resolution Team for further information or advice.

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[1] [2013] EWHC 111 (QB)
[2] [2018] EWHC 333 (Comm)
[3] Ibid. para 167
[4] See our briefing Without the benefit of hindsight: Interpreting and implying terms for further information