Acting in Good Faith

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The English Courts have for many years made it clear that in any commercial agreement, if the parties intend to “behave nicely”, this should be specifically written into the contract as a “good faith” clause.  If one party is concerned that the other might play tricks, the inclusion of this clause is extremely important – in addition to more specific restrictions.  Unless there is a good faith clause, parties are not under a duty to act in good faith.

The Courts’ attitudes towards this is, thankfully, shifting.   This is particularly in relation to “Relational Contracts” which are contracts which involve an ongoing relationship between the parties.  Examples include Shareholders Agreements, Consultancy Agreements and Employment Contracts.  The change of approach is important for ongoing business relationships.

What is good faith?

Good faith is the term given to the intention of parties to a contract acting honestly in the performance of the contract, and observing reasonable commercial standards of fair dealing.  It also applies to an intention that the parties will “refrain from conduct which in the relevant context, would be regarded as commercially unacceptable by reasonable and honest people” (Bates v Post Office Ltd (No. 3) [2019] EWHC 606(QB)) .

Since 2013, the English Courts have decided a number of cases on the basis of implying a requirement of good faith into contracts where has not been specifically required.  In the 2014 Data Capture Limited case, it was decided that it would “strike at the heart of the trust which is vital to any long-term commercial relationship” if the requirement for good faith was not implied into the contract.  In the Bates v Post Office Ltd case, the term was implied even though one party did not believe the contract to be a relational contract.

If it isn’t included can I rely on it?

It is important to be aware that if a contract doesn’t include a good faith clause, it may be possible to persuade the courts to imply a requirement for good faith if one of the parties has failed to “play fair”.

As a result, if for some reason a party does not want there to be a duty of good faith, the contract should expressly state this to ensure that it is not implied at a later date.  However, we would expect most commercial relational contracts to include a good faith clause.