16 January, 2024
English contract law has long been regarded for its emphasis on the principle of freedom of contract, allowing parties to negotiate and agree to terms that suit their interests. In limited circumstances however, an obligation of good faith can be implied into commercial contracts, which significantly affects the way in which parties can exercise their rights under a contract. Recent decisions in the courts of England and Wales have highlighted the importance of ensuring that commercial contracts are drafted to accurately reflect the parties' intentions, especially in respect of the inclusion of a duty of good faith. This article explores the circumstances under which a duty to act in good faith may be implied into contracts and examines the impact of landmark cases that have shaped this evolving legal landscape.
English contract law does not recognise a general duty of good faith in contractual relationship. The general starting position when interpreting English commercial contracts is that parties are free to pursue their own interests, subject to the applicable statutory and common law restrictions (see for example, the Unfair Contract Terms Act 1977 and the common law principles restricting the use of limitation of liability clauses). However, as commercial relationships grow more complex and interconnected, the courts have increasingly started to recognise the need for fairness and cooperation in certain situations.
One scenario where a duty to act in good faith may be implied is in long-term commercial relationships, such as joint ventures, partnerships or franchise agreement. In such cases, the parties may implicitly owe each other a duty of honesty, fairness and cooperation. This will be implied in fact on the basis that a duty of good faith is required to give the agreement commercial coherence. Courts may infer this duty based on the presumed intention of the parties, the nature of the relationship and the reasonable expectations of the parties involved.
This approach was explored in detail in the landmark decision of Yam Seng Pte Ltd v International Trade Corporation Ltd  EWHC 111 (QB). In this case, the court recognised an implied duty of good faith in a distribution agreement, emphasising the need for the parties to act honestly and observe reasonable commercial standards of fair dealing. This obligation was implied in fact, by virtue of the long-term relationship between the parties that required mutual trust, confidence and loyalty. In this case, the court also found that the contract is question was relational in nature, which is another method through which good faith obligations can be implied.
Relational contracts are long term agreements where the parties are committed to collaborating with each other and intend for their roles to be performed with integrity, trust and confidence, amongst other factors. The case of Bates v Post Office Ltd (No.3: Common Issues)  EWHC 606 (QB) grappled with the issue of implied obligations of good faith, in which it was held that there was an implied duty of good faith in contracts governing the relationship between the Post Office and its sub-postmasters. In this instance, the contract was held to be relational, and as such, an obligation of good faith was implied into the contract and relied upon by the claimant sub-postmasters.
The implication of a duty of good faith in this case meant the parties were required to refrain from "conduct which in the relevant context would be regarded as commercially unacceptable by reasonable and honest people". The Post Office had suspended and terminated some sub-postmasters' contracts on erroneous grounds, which is one way in which the Post Office was found to be in breach of its implied obligations to act in good faith.
The implied duty to act in good faith is gradually finding its place within English contract law, challenging the traditional notion of complete freedom of contract. Long-term relationships and the overall factual context of the agreement are key factors in influencing the implication of such a duty.
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