To what extent is there, in English Law, a duty of good faith, or a general obligation to act fairly? Contracts, particularly construction contracts, tend to include specific dispute resolution clauses providing for a gradually escalating resolution process and often obliging the parties to use their “best endeavours” or to “act reasonably” or “in a spirit of co-operation” to resolve a dispute before resorting to litigation. What do those phrases mean? And how far does the law expect you to go in playing fair, if your contract contains such a clause and more importantly, even if it does not?
It is clear that if the contract contains an express duty to act in good faith, fairly, reasonably or co-operatively the courts will enforce that obligation.
In NEC construction contracts, the parties are required to act in the spirit of “mutual trust and co-operation.” In the case of Costain Ltd v Tarmac Holdings , the court had to consider two contracts, both of which contained this obligation. The obligation was important because one of the two contracts contained a provision that required the parties to refer a dispute to arbitration within a strict time limit. Costain missed the deadline, and the question for the court was whether Tarmac should have warned Costain about the deadline, rather than just keeping quiet and letting it pass. The court said that Tarmac was not required to “nursemaid” its opponent, particularly where both parties were well used to litigation. However, the court went on to say that “sharp practice” would not be condoned; so that Tarmac could not lawfully have done or said anything that lulled Costain into falsely believing that the time bar would not be relied on; and further, that Tarmac was obliged to correct a false assumption obviously made by Costain that the time bar would not be relied upon.
This decision built on the decision in Berkeley Community Villages Ltd v Pullen , in which the contract between the parties imposed an obligation to act “in all matters relating to this agreement ….with the utmost good faith towards each other”. The court construed the clause as “impos[ing] on the defendants a contractual obligation to observe reasonable commercial standards of fair dealing in accordance with their actions which related to the Agreement and also requiring faithfulness to the agreed common purpose and consistency with the justified expectations of the first claimant.”
What if there is no express obligation in the contract on the parties to act towards each other in good faith? The courts have historically been reluctant to imply a duty of good faith, because an implied duty of good faith would require one party to subordinate its commercial self-interest. However, in recent years, the courts have indicated a greater willingness to imply a duty of good faith, most noticeably in relational contracts or where the parties have a discretion, which must be exercised reasonably: “a contractual discretion must be exercised in good faith and not arbitrarily…” It is likely that this trend will continue. In a lecture delivered to the Commercial Bar Association in October 2016, Leggatt J (as he then was) argued for a general principle of good faith in contractual performance. His views are not universally accepted, but given that he now sits in the Court of Appeal, they carry some weight.
So how should you best deal with the uncertainty as to whether you can take an (unfair) advantage over your contracting counterparty? The solution is, as always, careful drafting of your contracts either to include an express duty of good faith, or to exclude it and to prescribe the conduct that both parties expect on a given set of eventualities. You should tread very carefully when you know your opponent is making a mistake and take legal advice as to whether you should warn your opponent.
Other articles from March's newsletter
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