Oliver Murrell is the winner of the Newcastle Business and Property Court Prize for the best essay in the Northumbria Bar Students’ Association Essay Competition, announced on 4 October 2021. His essay is below – well done Oliver!
To What Extent Should The Law Recognise A Duty Of Good Faith In Commercial Dealings?
In terms of good faith, English law is “swimming against the tide”.[1] Good faith carries many definitions, but Leggatt J (as he then was) held it to mean: “the expectation a contracting party will act honestly, […] will not conduct itself in a way which is calculated to frustrate […] the contract or which would be regarded as commercially unacceptable… “.[2] A duty of good faith is a hallmark of civil law systems, and has already made surprisingly substantial in-roads into English law. Despite this, English commercial law stands firm: “there is no general doctrine of good faith”.[3] Good faith sceptics often cite two main concerns with a general duty of good faith: uncertainty and infringement of the doctrine of freedom to contract. This essay will argue those concerns are both limited and outweighed by the benefits of a general duty. Comparative sources of civil law and the existing good faith duties in English law are drawn upon to show it is time for the law to recognise a general duty of good faith in commercial dealings. Firstly, however, the current law must be briefly discussed.
The Current Law
English law has rapidly evolved in its acceptance of good faith. It is now firm ground that express duties of good faith in commercial contracts are enforceable.[4] However, Mid Essex NHS Trust v Compass Group (T/A Medirest) determined a duty of good faith which relates to specific contexts or obligations will only apply to those specific contexts or obligations.[5] Additionally, Beatson LJ made it clear a general duty of good faith should not infringe upon more specific provisions.[6] Thus, whilst an express duty of good faith is enforceable, it is conditioned.
Whilst the law on express duties is somewhat clear, the law on implied duties is less so. Generally, there are two strands of cases in which a duty of good faith will be implied: to restrict the exercise of contractual rights or powers and in relational contracts.[7] The first strand of cases were tightened and approved by the Supreme Court in Braganza v BP Shipping.[8] “Braganzaterms” will be implied into a contract to prevent arbitrary, capricious or irrational exercise of contractual powers or rights.[9] The second strand of cases derive from Yam Seng v ITC. Leggatt J in Yam Seng remarked long-term contracts which require close co-operation (relational contracts) will be subject to an implied duty of good faith.[10] Although those remarks were obiter, they were cautiously approved by the Court of Appeal,[11] and have been followed in a number of subsequent cases.[12]
Since Yam Seng, however, cases have been mismatched in the application of implied good faith duties. Severine Saintier noted the courts have retreated behind a traditional fear of good faith,[13] and Fancourt J stated the law “is yet to reach a stage of settled clarity”.[14] The inconsistent recognition of implied duties of good faith in commercial dealings has arguably resulted in the one thing every judge has sought to avoid: uncertainty.
Uncertainty
Speaking extra-judicially, Arden LJ (as she then was) argued in response to Yam Seng that implied duties of good faith diminish certainty.[15] Undoubtedly they do. What exactly composes a duty of good faith is not clear and there is no one set of obligations that encompasses good faith. Accordingly, it is understandable why members of the judiciary fear the implication of good faith in commercial dealings, an industry which requires certainty. Yet, when looking to the French Civil Code, the same criticisms could be levied. There is no definition of good faith, nor are there any indications in the Code as to what obligations or conduct good faith may include. Rather, the general duty of good faith in French law is likened to a duty of loyalty or faithfulness,[16] and is the source for specific rules of conduct and obligations not too dissimilar to English tort law.[17] Resultantly, general duties of good faith, such as in French law, do not create the levels of uncertainty English lawyers fear.
Furthermore, good faith is already a key component of some quasi-commercial contracts in English law. In the “ruthlessly competitive and fast moving” world of derivative trading, the ISDA Master Agreement contains a number of good faith duties.[18] This led Arden LJ to raise the question: “if good faith is such an uncertain and unruly concept, why is it used in ISDA contracts?”[19] More prominently, construction standard form contracts often include general duties of good faith. Julian Bailey described the New Engineering Contract (“NEC”) as the standard bearer for the good faith movement.[20] The jurisprudence which arises from NEC interpretation bears resemblance to Lord Leggatt’s vision for good faith.[21] This demonstrates good faith can, and does, work in practice without causing mass-uncertainty.
Ultimately, arguments of uncertainty fall flat when it is considered general duties of good faith exist in many legal systems, and to some extent in English law. Whilst it is acknowledged a general duty would diminish certainty to some extent, as discussed later, the benefits of recognising duties of good faith outweigh that uncertainty.
Freedom To Contract
Freedom to contract is well recognised as fundamental to English contract and commercial law.[22] Thus, it is also understandable why a duty of good faith is denounced by lawyers who fear it would infringe upon freedom to contract. Jan van Dunné notes there is a recurrent fear by English judges that if they were to accept a general duty of good faith, it would throw other existing obligations “out the window”.[23] However, Dunné argues this fear is rooted in the judiciary misunderstanding good faith in civil law systems, and resultantly misrepresenting good faith in judgments. Lord Hoffman in Chartbrook v Persimmon Homes is a notable example.[24] The reality is the contrary, and exploration of civil law systems and the existing good faith duties in English law reveal this fear is unfounded.
Returning to the French Civil Code, it is clear a contract binds parties as if it were law.[25] The French courts control good faith so as to prevent arbitrary exercise of contractual rights and powers, but still allow contracting parties to exercise those rights and powers to obtain commercial advantages.[26] Whilst the French duty imposes more onerous obligations in some circumstances, those circumstances are limited. In English law, a similar picture is painted. The NEC does not allow contracting parties to escape obligations, and contractual terms are far from subordinate to good faith. Contracting parties are held to the terms of contract, and NEC jurisprudence indicates parties can exercise contractual terms to obtain commercial advantages.[27] As with uncertainty, fears a general duty of good faith would infringe freedom to contract can be eased by reference to comparative examples of good faith in England and abroad.
The Benefits of a General Duty of Good Faith
ADR and early resolution is perhaps where a general duty of good faith could have the greatest impact. Bailey argues that good faith obligations geared towards collaboration would carry rewards.[28] Parties in dispute may well be encouraged to work collaboratively to resolve issues, rather than fight it out in court. It is this advantage that led to widespread use of the NEC in the dispute-ridden construction industry.[29] Additionally, a general duty could prevent disputes before they start. Phillipa Hopkins QC notes the majority of disputes in which good faith arguments arise relate to the exercise of contractual rights and powers.[30] Whilst Braganza terms provide some cover in these cases, the watermark is very high.[31] A general duty of good faith could plug gaps, act as a deterrence to parties, and encourage collaboration to circumvent the need to exercise those rights and powers.
Arden LJ further recognised that, whilst uncertainty will exist, good faith duties bring economic advantages and greater contractual stability.[32] This may countenance uncertainty, as it decreases the likelihood of rights and powers being exercised at uncertain points. Her Ladyship argued that recognising express duties of good faith would make English law more commercially attractive on the global market place.[33] Furthering this notion, it is contended a general duty of good faith would make English law more attractive for international commercial dealings. It would operate to reassure parties their deals are protected by good faith obligations and issues are more likely to be collaboratively resolved.
In short, a general duty of good faith offers a number of commercial benefits. Whilst uncertainly will exist, this is limited and outweighed by the benefits of a good faith duty.
Conclusion
Whilst the law is still far from accepting general duties of good faith in commercial law, it is edging closer. Significantly, two proponents of good faith, Lord Leggatt and Lady Arden, now sit in the Supreme Court. Resultantly, landmark advancements in the recognition of good faith may be on the horizon. Although it may take many years, for the reasons argued above, it is time for the law to recognise a general duty of good faith in commercial dealings.
[1] Yam Seng Pte Ltd v International Trade Corp Ltd [2013] EWHC 111 (QB) [124]
[2] Astor Management AG v Atalaya Mining Plc [2017] EWHC 425 (Comm) [98] (Leggatt J)
[3] Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd (T/A Medirest) [2013] EWCA Civ 200 [105] (Jackson LJ)
[4] ibid
[5] ibid [106]
[6] ibid [154] (Beatson LJ)
[7] Phillipa Hopkins QC, ‘Commercial contracts, individual terms and good faith: where do we go from here?’ (2021) 3 J.B.L. 219, 221
[8] Braganza v BP Shipping Ltd [2015] UKSC 17; 1 W.L.R. 1661
[9] ibid [126] (Lord Neuberger)
[10] Yam Seng (n1) [142]
[11] Globe Motors Inc v TRW LucasVarity Electric Steering Ltd [2016] EWCA Civ 396 [67] (Beatson LJ)
[12] Hopkins (n7)
[13] Severine Saintier, ‘The elusive notion of good faith in the performance of a contract, why still a bête noire for the civil and the common law?’ (2017) 6 J.B.L. 441, 445
[14] UTB LLC v Sheffield United Ltd [2019] EWHC 2322 [196]
[15] Lady Justice Arden, ‘Coming to Terms with Good Faith’ (Lecture at the Singapore Academy of Law, 26 April 2013), 27
[16] Christophe Vigneau, ‘The Obligation of Good Faith in France’ (2011) 32 Comp Lab L & Pol’y J 593, 593
[17] Jan van Dunné, ‘ On a clear day, you can see the continent – the shrouded acceptance of good faith as a general rule of contract law on the British Isles’ (2015) 31(1) Const. L.J. 3, 8
[18] Lady Justice Arden (n15) 3
[19] ibid
[20] Julian Bailey, ‘ Comparing “good faith” in civil and common law systems’ (2019) 35 (4) Const. L.J. 233, 241
[21] ibid
[22] Sir George Leggat, ‘Negotiation in good faith: adapting to changing circumstances in contracts and English contract law – Jill Poole Memorial Lecture, Aston University: 19 October 2018’ (2019) 2 J.B.L. 104, 109
[23] van Dunné (n17), 19
[24] ibid, 21
[25] Article 1134, Section 1, Civil Code (France)
[26] Saintier (n13), 10
[27] Mears Ltd v Shoreline Housing Partnership Ltd [2015] EWHC 1396 (TCC) [70] (Akenhead J)
[28] Bailey (n20), 13
[29] Prof. David Mosely and Shy Jackson, ‘Good Faith and Relational Contracts – Do Enterprise Contracts Offer a Way Through the Woods?’ (A paper presented to the Society of Construction Law at a meeting in London on 4th February 2020), 5
[30] Hopkins (n7) 22
[31] ibid
[32] Lady Justice Arden (n15) 28
[33] ibid, 28