So what is the back story?

Good faith – no general principle applicable to contracts

Firstly it is, and continues to be, well understood that in contrast to some other legal systems there is no general obligation of good faith under the English law of contract. In the words of a recent judgment of the UK Supreme Court

But, in contrast to many civil law jurisdictions and some common law jurisdictions, English law has never recognised a general principle of good faith in contracting. Instead, English law has relied on piecemeal solutions in response to demonstrated problems of unfairness²:

Good faith as an implied contract term

When will good faith obligations arise in connection with a contract? Aside from cases where good faith is an express term of a contract the question is whether such an obligation is to be implied as a term of a contract. 

There are two types of contractual implied term. The first is a term to be implied into a particular contract in the light of the express terms, commercial common sense, and the factual circumstances known or reasonably available to the parties at the time the contract was made. The second type arises where the law, sometimes by statute sometimes through common law, effectively imposes terms into certain types of relationships unless such a term is expressly excluded³. 

In the latter case a duty of good faith is implied by law in certain categories of contract such as contracts of employment, contracts of insurance or partnership agreements. However as a consequence of the decision in Yam Seng Pte v International Trade Corp [2013] EWHC 111(QB) it s now possible to claim that a good faith obligation may be implied in so called “relational” contracts. Such relational contracts:

“…may require a high degree of communication, cooperation and predictable performance based on mutual trust and confidence and involve expectations of loyalty which are not legislated for in the express terms of the contract but are implicit in the parties’ understanding and necessary to give business efficacy to the arrangements.”⁴

This has led to the avalanche of cases referred to earlier where claimants have attempted to show their contract was “relational” in order to establish an implied good faith obligation.

What are the characteristic of a “relational contract”?

The following, non exhaustive, characteristics of a relational contract⁵ were approved in the Court of Appeal judgment in Candey “merely as a sense check rather than a series of statutory requirements“:

1. There must be no specific express terms in the contract that prevents a duty of good faith being implied into the contract.
2. The contract will be a long-term one, with the mutual intention of the parties being that there will be a long-term relationship.
3. The parties must intend that their respective roles be performed with integrity, and with fidelity to their bargain.
4. The parties will be committed to collaborating with one another in the performance of the contract.
5. The spirits and objectives of their venture may not be capable of being expressed exhaustively in a written contract.
6. They will each repose trust and confidence in one another, but of a different kind to that involved in fiduciary relationships.
7. The contract in question will involve a high degree of communication, co-operation and predictable performance based on mutual trust and confidence, and expectations of loyalty.
8. There may be a degree of significant investment by one party (or both) in the venture. This significant investment may be, in some cases, more accurately described as substantial financial commitment.

The Court of Appeal judgment in Candey v Bosheh

Candey were a firm of solicitors. They agreed to act for Bosheh in litigation on the basis of a conditional fee agreement (“CFA”). Under the terms of that agreement Bosheh would pay Candey a fee if there was a recovery but nothing if they lost the case. In the event Bosheh settled their dispute on a “drop hands” basis and there was thus no recovery and no fees payable to Candey.

Candey brought proceedings against their now former client Bosheh on the basis that the CFA was a relational contract and that client was in breach of a duty of good faith, by settling the underlying litigation on terms which meant that Candey had no express entitlement to their fees.

The judge at first instance rejected the argument that the client Bosheh owed their lawyers a duty of good faith observing that there was no authority to support the argument that a client owes his solicitor a duty of good faith and the solicitor’s fiduciary duty to the client would displace such a finding.

The Court of Appeal considered the matter first by reference to the usual test for implied terms, and then by asking whether this was a relational contract.

They did not accept that the normal rules for implication of terms into contract would here imply a good faith obligation into the CFA. Such an obligation was not so obvious that it went with saying and it was not necessary to make the CFA contract work.

Separately the court did not accept that the CFA was a “relational” contract having regard to the characteristics listed above and rejected the argument that a good faith obligation would thereby be implied by law. They concluded:

In short, this was an ordinary solicitors’ retainer which happened to be on a CFA basis. There are thousands of those in operation at any one time in the UK. Nobody has ever suggested before that they are relational contracts, or that in every CFA, the client owed the solicitor a duty of good faith.

Conclusions

The Court of Appeal finding on this case is not in itself surprising. That a client might owe a duty of good faith to his lawyer was described as a startling concept. However some of the comments are of interest because they seem to suggest that we have reached a high water mark where good faith allegations are concerned. Whilst the concept of good faith being implied into relational contracts remains intact it looks as if it may in the future be more difficult to successfully argue for its application. In referring to the prior avalanche of claims based to alleged relational contracts the court added cryptically, “Only a relatively few have succeeded“, which may be an indication as to how they viewed the situation.

The pointers suggest that the future trend may be away from allegations that a contract is “relational “ and back towards consideration of whether under the normal rules a good faith term is to be implied in any given contract. In the words of the court:

“Putting (it) another way, it might be said that the elusive concept of good faith should not be used to avoid orthodox and clear principles of English contract law.”

Note the reference to “the elusive concept of good faith” which appears to accept that it may arise but leaves open just what this might amount to in any give context.

A further point – Fiduciary relationships distinguished from good faith obligations

The court confirmed that the CFA was a fiduciary relationship, with Candey owing a fiduciary duty, or an obligation of “loyal subordination” of its own interests to those of the Boshehs and that such a duty was different to the trust and confidence of a good faith obligation in a relational contract. There is nothing new here as this merely reaffirms the existing law. However it is worth drawing attention to this fundamental difference.

[1] Candey ltd v Bosheh [2022] EWCA civ 1103

[2] Affirming the earlier decision in Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] 1 QB 433 at 439 

[3] Europa Plus SCA SIF & Ors v Anthracite Investments (Ireland) Plc [2016] EWHC 437 (Comm) at paragraph 33

[4] Yam Seng Pte v International Trade Corp [2013] EWHC 111(QB)

[5] Bates v Post Office [2019] EWHC 606

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No universally applicable duty of good faith in commercial contracts

The judgment confirmed that under English law there is no general duty of good faith in all commercial contracts.  However such a duty would be implied into contracts that were considered “relational”.

Relational contracts

A “relational” contract has been described as contract that involves a high degree of communication, co-operation and predictable performance based on mutual trust and confidence and expectations of loyalty “which are not legislated for in the express terms of the contract but are implicit in the parties’ understanding and necessary to give business efficacy to the arrangements”.

Whether any contract is relational is heavily dependent upon context, as well as the terms. The circumstances of the relationship, defined by the terms of the agreement, set in its commercial context, is what decides whether a contract is relational or not.

The court considered[2] that the following characteristics are relevant as to whether a contract is a relational one giving rise to an implied duty of good faith or not:

1. There must be no specific express terms in the contract that prevents a duty of good faith being implied into the contract.
2. The contract will be a long-term one, with the mutual intention of the parties being that there will be a long-term relationship.
3. The parties must intend that their respective roles be performed with integrity, and with fidelity to their bargain.
4. The parties will be committed to collaborating with one another in the performance of the contract.
5. The spirits and objectives of their venture may not be capable of being expressed exhaustively in a written contract.
6. They will each repose trust and confidence in one another, but of a different kind to that involved in fiduciary relationships.
7. The contract in question will involve a high degree of communication, co-operation and predictable performance based on mutual trust and confidence, and expectations of loyalty.
8. There may be a degree of significant investment by one party (or both) in the venture. This significant investment may be, in some cases, more accurately described as substantial financial commitment.
9. Exclusivity of the relationship may also be present.

This was not considered as an exhaustive list. No single one of the above list was determinative, with the exception of the first one (express terms). If the express terms prevent the implication of a duty of good faith, then that will be the end of the matter.

The court noted that an imbalance of power between the parties was not a factor that had any effect of whether a contract was a relational one.

What is a duty of good faith?

The judge stated that where duty of good faith is implied in a contract,

“This means that both the parties must refrain from conduct which in the relevant context would be regarded as commercially unacceptable by reasonable and honest people. Transparency, co-operation, and trust and confidence are, in my judgment, implicit within the implied obligation of good faith.”

A duty of good faith is more than a duty to act honestly or, alternatively, not to act dishonestly[3].

Also it is more than an implied term merely not to do anything to frustrate the purpose of the contract.

Duty of good faith to be distinguished from a fiduciary duty

The judgment confirmed that obligation to act in good faith is not the same a fiduciary duty quoting the following from an earlier judgment[4].

“… ‘relational’ contracts involve trust and confidence but of a different kind from that involved in fiduciary relationships. The trust is not in the loyal subordination by one party of its own interests to those of another. It is trust that the other party will act with integrity and in a spirit of cooperation.”

Implied terms

The court upheld the view that there are two types of implied terms[5].

First, there are those terms which are implied into a contract where it is necessary to give business efficacy to the particular contract in question. Second, there are those terms which are implied into a class of contractual relationship e.g. relational contract, unless the parties have expressly excluded it.

If a contract was “relational” then a good faith obligation would be implied and this could give rise to a number of implied obligations. In the particular judgment concerned the court implied seventeen separate provisions that arose out on the good faith obligation  In parallel the court implied other terms were considered necessary on the grounds of business efficacy.

Express terms imposing a duty of good faith

An obligation of good faith will only be implied in the absence of express terms on the subject. Express provisions dealing will good faith may restrict or prevent any implied obligations of good faith.

Comment

The duty of good faith may appear deceptively simple. However if a contract is a relational one then the existence of a duty of good faith may be portal through which many obligations may be implied As mentioned previously in the Bates case no less than seventeen provisions were implied as a consequence of the good faith obligation. The nature of the good faith obligation in the context of any particular relational contract may be a source of dispute in the future.

[1] Bates v Post Office Ltd (no 3) [2019] EWHC 606 (QB)

[2] At para 725

[3] para 711

[4] Sheikh Al Nehayan v Kent [2018] EWHC 333 (Comm)

[5] Geys v Société Générale [2013] 1 AC 523

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