Good Faith – a springboard to “Responsible Contractual Behaviour”?

24th June 2020

By Andrew Butler QC

On 7 May 2020, the Cabinet Office issued guidance urging “responsible and fair performance and enforcement of contracts” during the Coronavirus pandemic. This guidance, which does not have legislative force, has caused some head-scratching amongst lawyers. Judges have traditionally been reluctant to muddy the waters of contract law (often murky enough as it is) with vague and subjective notions such as responsibility and fairness. The usual approach is – in simple terms – to hold the parties to the words they have used, imply only such other words as are necessary to make the contract work, and let the rest take care of itself. So what does the Cabinet Office guidance mean, and how, if at all, can the concept of “Responsible Contractual Behaviour” (“RCB”) be shoehorned into the existing law?

Lawyers confronted with the notion of RCB may be put in mind of recent judicial pronouncements about the role of good faith in the contractual context. There is, however, a world of difference between the narrow doctrine of contractual good faith, and the far more wide-ranging notion of RCB, as set out in the Guidance.

Various definitions of what an obligation of good faith involves have been attempted. Perhaps the best-known is that of Vos J in CPC Group Ltd. -v- Qatari Diar Real Estate Investment Co [2010] EWHC 1535, in which an express requirement of good faith was said to oblige the parties:

“to adhere to the spirit of the contract…and to observe reasonable commercial standards of fair dealing, and to be faithful to the agreed common purpose, and to act consistently with the justified expectations [of one another]”.

While such a definition might undoubtedly give rise to subjectivity in its interpretation (just ask any cricket fan about the arguments generated by references to the “spirit” of that game), what is clear is that it is intended to operate within the framework of the contract. More than that, it constitutes an attempt to find out what the contract is really about, and to hold the parties to that. It does not countenance or condone breaches of the contract. It perhaps stops parties from taking unscrupulous advantage of their strict rights – from, to put it in the vernacular, “pulling a fast one” on the counter-party, or taking advantage of some lacuna which had not been observed – but it does not contemplate performance other than in accordance with the contract terms.

By contrast, the Guidance refers, at para.14, to:

“being reasonable and proportionate in responding to performance issues and enforcing contracts (including dealing with any disputes), acting in a spirit of cooperation and aiming to achieve practical, just and equitable contractual outcomes having regard to the impact on the other party (or parties), the availability of financial resources, the protection of public health and the national interest”.

It then lists, in 15 sub-paragraphs, several specific examples of what such behaviour might include. The first seven words of sub-paragraph (a) (“requesting, and giving, relief for impaired performance…”) suffice to show that what the Government is concerned with is a forgiving attitude to non-performance – or, in other words, to breach.

So there appears to be a marked difference between contractual good faith, and RCB.

Nor does it end there. The conventional view in English law – albeit one not shared by many common and civil law systems around the world – is that not all contracts give rise to an obligation of good faith anyway. It is true that, in 2013, Leggatt J (as he then was) appeared to hold that it was appropriate to imply into most commercial contracts a term requiring good faith in performance, saying in a case called Yam Seng -v- International Trade Corporation [2013] 1 All ER (Comm) 1321:

“there seems to me to be no difficulty, following the established methodology of English law for the implication of terms in fact, in implying such a duty in any ordinary commercial contract based on the presumed intention of the parties.” (emphasis added).

But these dicta go further than the conventional approach. Subsequent decisions have given rise to, if not outright disagreement with the approach of Leggatt J, then at least a reversion to the traditional view. For example, Jackson LJ in Mid-Essex NHS Trust -v- Compass Group [2013] BLR 265 stated that there was no general doctrine of good faith in English contract law, but held that such a duty could be implied into certain categories of contract. And in Greenclose Ltd. -v- Nat West Bank plc [2014] 2 Lloyds Rep 169, Andrews J described it as “unlikely” that such a term would arise by implication.

When, then, does a duty of good faith arise, on the conventional view? One important category of contract in which it does so is that of so-called “relational contracts” – contracts that govern not just a single transaction but an entire relationship. Yam Seng itself concerned a relational contract (a distribution agreement). In Bates and others -v- Post Office [2019] EWHC 606, large-scale group litigation arising out of the now-discredited Post Office prosecutions of large numbers of sub-postmasters, Fraser J held that “the concept of relational contracts is an established one in English law”, and furthermore that it is a feature of such contracts that they contain an implied obligation of good faith. That meant, in Fraser J’s view, not merely honesty, but something more: he identified transparency, co-operation, and trust and confidence as being implicitly required by such an obligation.

Other contracts which give rise to obligations of good faith are policies of insurance (at least, prior to the enactment of the Insurance Act 2015); contracts of partnership; some limited aspects of mortgages; and contracts which give rise to fiduciary relationships. Good faith is referred to in numerous European directives which impact on contract law (particularly in the context of consumer protection). It can often be the subject of an implied term, often being invoked (for example) to prevent the arbitrary or capricious exercise of wide-ranging contractual powers. Finally of course, an obligation of good faith can be, and often is, the subject of an express term – as it was in the CPC Group case, quoted above.

But it is submitted that it is somewhat problematic to limit obligations of good faith only to certain categories of contracts. The relational contract cases illustrate this well. In Bates, for example, Fraser J went to great lengths to highlight the defining features of a relational contract. He identified, at para.725, nine such features. The problem is that, however carefully one defines such contracts, there will always be others which fall just outside that definition. It seems unsatisfactory that those contracts should be treated as having been made in a climate in which the parties’ rights and expectations are not to be tempered by notions of good faith, when (in the context of contracts falling just the other side of the line) a very different culture prevails.

There is surely room for an alternative approach, which treats all contracts as being subject to the same implied duty of good faith, albeit that what is required to fulfil that duty may vary depending on the circumstances. Such an approach would seem to avoid an unsatisfactory and binary distinction between contracts which import such a duty, and contracts which do not.

Even if an obligation of good faith were to be treated as an incident of every contract, for the reasons set out above it would take a considerable enlargement of that obligation as it is presently understood before it could be said to equate to anything approaching RCB. But it would represent a step in the direction of the kind of conduct which the Government seems to be calling for.

In the meantime, it is not clear how RCB is likely to be enforced. It may well be that the Courts will have regard to the guidance in considering whether or not to grant interim injunctions in contractual cases; it may be that it will cause a reluctance to hold parties to their contracts on an interim basis, and a move towards requiring applicants to take their chances with a claim for damages. Beyond that, however, it is difficult to see how the call for RCB can be given teeth.

A review of the Government Guidance, compliance with it, and the need for further measures, is promised on or before 30 June. It will be interesting to see what the findings of that review are – or, indeed, whether it takes place at all.

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