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Do I have to demonstrate good faith?

A number of countries, particularly our fellow EU member states, have a statutory duty of good faith, meaning any party that enters into a contract must act dutifully and in good faith towards all other parties to that contract. For example, the German Civil Code states that every contracting party “has a duty to perform according to the requirements of good faith, taking customary practice into consideration”.

But like a number of commonwealth legal systems, English law has steadfastly refused to follow suit. The English system, rightly or wrongly, has taken the view that if the contracting parties wanted to be bound by a duty of good faith then they would have expressly written it into the contract.

Indeed, when considering this very question in 1989, Lord Justice Bingham stated with absolute clarity that English law has “committed itself to no such overriding principle”.

So why write an article on something that doesn’t exist?

The answer is because a recent court judgment has said that a duty of good faith could be implied into “relational contracts par excellence”.

What does a duty of good faith mean? Good question, and one that the courts haven’t yet answered.

What is a “relational contract par excellence”? An equally good question, and another one that the courts haven’t yet answered.

You’ll quickly spot a pattern.

Undoubtedly we will, over time, get some clarification as to which types of contracts we’re talking about, and what the duty actually means but, for the moment, we are left in a state of limbo where it may be best to assume a court would imply a duty of good faith into your company’s contracts with suppliers, partners and customers.

But is that necessarily a bad thing?

Well, if your company acts honestly, reasonably and with integrity at all times, then such an implied duty is not really going to make much of a difference. And surely that describes the majority of trading companies, so why worry?

It is going to become more and more relevant when there is a dispute between contracting parties, as it will have an impact on the tactics that each party can employ during the initial attempts to resolve the dispute and subsequent legal action. Any tactic that isn’t entirely above-board, open and candid could well risk falling foul of that implied duty of good faith, thus creating a liability in itself.

Your company could, of course, include a clause in its contracts to the effect that the implied duty of good faith doesn’t apply … but doesn’t that raise the risk of the other contracting party reasonably inferring that you are considering acting in bad faith? That’s not going to be a great start to any business relationship.

So, that’s as clear as mud.

Perhaps we can look back in a year’s time and find more judicial commentary to explain exactly what this recent court judgment actually means in reality when drafting, interpreting and disputing a contract. Or maybe the judgment will have been criticised and overturned and we will once again have put the United Kingdom at odds with our European partners.

 

These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.

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