In Good Faith?
It sounds harmless enough. Who wouldn’t want to deal with their counterparties “in good faith?” But these three little words, like their more famous counterparts, can imply more than was intended when included in a commercial contract.
It may surprise readers that in English Law there is no general doctrine of good faith in contracts. Quite the opposite, in fact. Under English Law, the freedom to contract on terms agreed by the parties and to act in individual self-interest is central. The concept of good faith is nebulous and at odds with a requirement for contracts to be certain. So, except in special cases, good faith is not a requirement in commercial contracts unless the parties expressly agree it shall be. It is open to the parties to decide whether the duty will apply to all of the contract or just some elements of it. But it still leaves the question, what does it imply?
What is “good faith?”
Unlike endeavours, which may be “best” or “reasonable”, the Courts are disinclined to agree that good faith comes in shades. Either the obligation exists or it does not and in general, it seems to imply a balancing negative obligation not to act in bad faith.
The definition is developing as cases arise and the factual circumstances are important.
It does imply the parties will not deliberately circumvent the contract or negotiate behind each others’ backs. It also implies honesty and openness in dealings, including where necessary sharing material facts. However, crucially, it does not imply that the parties must abandon their commercial positions or lose specifically negotiated contractual rights. There is an implication that the parties will at least attempt to resolve disputes amicably without the need for formal proceedings.
This may not be a satisfactory definition, but goes to show the concept is woolly and evolving.
Implied Good Faith
There are classes of contract, where there is an implied duty of good faith. This too is a developing area, but in a recent case Bates v Post Office Ltd (No.3: Common Issues) , the courts set out nine factors that established the contract as having an implied term of good faith. In particular contracts that are long-term, collaborative, require a high degree of integrity and fidelity, where one or other party makes a significant investment and where the relationship is exclusive are likely to have an implied duty of good faith.
Good Faith in Consumer Contracts
It is worth remembering that consumer contracts are a separate class of contracts, where good faith (open and honest dealing) on the part of the trader is required.”