Issue 25, July 2013

The judge, Leggatt J, had various reasons Welcome to the July edition of Insight, Fenwick What is good faith? why he saw fit to imply these two terms. In Elliott’s newsletter which provides practical the main, it was necessary for terms to be information on topical issues affecting the building, The concept of good faith is subjective implied because the contract was skeletal engineering and energy sectors. and depends very much on the overall terms of the contract and the commercial in form, it had not been professionally context, but good faith essentially means drafted and it did not take into account an In this issue we discuss the recent approach of being honest and “playing fair”. important industry assumption that duty the courts to good faith and the implications free prices would be lower than domestic for commercial practice. A deliberate failure to share information retail prices, which was common ground that is objectively relevant to the between the parties at trial. performance of the contract, for example, would undoubtedly amount to a breach Leggatt J also commented obiter that the of good faith in the case of a long-term contract was a long-term distributorship contract such as a joint venture which agreement which required the parties to requires the parties to work together. communicate effectively and cooperate Good faith would not automatically apply with each other in its performance. to clauses that involve an element of Accordingly, there would probably have Insight discretion, but it may apply to clauses that been an implied obligation upon ITC to involve an assessment or choice as to a keep Yam Seng informed of ITC’s best range of options to which the interests of estimate of when products would be both parties are relevant. available for sale and to inform Yam Seng of any material change in this information Do contracting Recent case law without Yam Seng having to ask. parties have a duty Yam Seng – February 2013 Compass - March 2013 In Yam Seng Pte Ltd v International Trade In Compass Group UK and Ireland Ltd v Mid to act in good faith Corporation Ltd [2013] EWHC 111 (QB), Essex Hospital Services NHS Trust [2013] the parties entered into a contract under EWCA Civ 200, the parties entered into the terms of which ITC granted Yam a long-term facilities contract under under English law? Seng an exclusive agreement in respect the terms of which Compass agreed to of the distribution of fragrances bearing provide catering services to the Trust. the name “Manchester United”. The The reluctance of the courts to imply terms relationship between the parties broke The contract contained a duty to into agreements negotiated between two down and proceedings were brought cooperate in good faith at clause 3.5, commercial parties at arm’s length is well by Yam Seng for breach of contract and which provided: known and is based on the long-established misrepresentation. doctrine of freedom of contract. “The Trust and the Contractor will co- Yam Seng asserted that it was an implied operate with each other in good faith and That said, the courts are on occasion prepared term of the contract that the parties will take all reasonable action as is necessary to imply terms into contracts in circumstances would deal with each other in good faith. for the efficient transmission of information and instructions and to enable the Trust or, where the concluded contract is not clear. In Specifically, Yam Seng argued that ITC had as the case may be, any Beneficiary to derive such cases, the courts will consider what the (i) failed to act with an implied obligation of good faith by prejudicing Yam Seng’s the full benefit of the Contract.” contract would reasonably be understood sales by offering the same products for to mean as a whole against the relevant domestic sale below the duty free prices The question before the court was the contractual background, and in light of the that Yam Seng was permitted to offer; (ii) extent to which this clause provided an knowledge that was reasonably available to instructed or encouraged Yam Seng to overarching obligation on the parties to the parties at the time the contract was entered incur marketing expenses for products operate with each other in good faith into. that ITC was unable or unwilling to supply; even though there was no standalone and (iii) offered false information upon express term to this effect in the contract. Since February 2013, two High Court judgments which Yam Seng relied to its detriment. The contract as a whole was very detailed and one Court of Appeal judgment have been There were no express terms of the and the obligations of the parties and handed down that examine the role of good contract covering any of these points. the consequences of any failures were faith in English law and the extent to which spelt out in explicit detail. The obligation circumstances under which the English courts On the facts, only two obligations were to act in good faith specifically focused on the obligation to take all reasonable might recognise an overarching duty of good implied. Firstly, the court found there action as was necessary for the efficient faith. All these cases took as their starting point was an obligation not to undercut duty free prices, and secondly, there was an transformation of information and the fact that there is no legal principle of good obligation not to knowingly provide false instructions. faith under English contract law. information, and a duty of good faith was implied in both these respects. The first Accordingly, the Court of Appeal This twenty-fifth issue of Insight considers the obligation was contrary to usual standards overturned the decision of the first instance recent approach of the courts to good faith and of commercial dealing and the second court in finding that commercial common the implications for commercial practice. was implied into the agreement between sense did not favour the addition of an the parties as a matter of fact. overarching duty to cooperate in good Issue 25, July 2013

rights on the parties, contrary to the off on completely the wrong footing. parties’ intention. However, this is probably more of a concern than a reality. There are already The court did however accept that, in contracts founded on the concept of Insight principle, an express obligation to act good faith, for example the NEC form in good faith could be pervasive and, which obliges the parties to act in a “spirit depending on the nature and drafting of mutual trust and co-operation”. faith in circumstances where good faith of the clause, it may be possible for it to had been provided for in the contract affect all aspects of the contract. The key question is whether or not there in such a precise manner at clause 3.5. is an overarching duty of good faith? This However, this was not the case here as is something the courts have yet to find, The Trust was not therefore prevented the contract contained an unqualified although parties should bear in mind from awarding service failure points for right to terminate the contract for that the existence of an express good failures in performance as the contract convenience at sub-clause 13.3 to which faith clause may provide a standard expressly contained precise rules for the obligation to act in good faith could against which their own actions may be these matters. Further, it did not matter not possibly extend. SAH had an absolute measured. that the Trust deducted £84,540 for a entitlement to terminate the contract for one-day out-of-date chocolate mousse. any or no reason. The judge, Akenhead Placing the theory aside, if you think it The ability of the Trust to award service J, emphasised that the termination for would be advantageous to include an failure points for poor performance was convenience clause did not contain express obligation to act in good faith in an absolute contractual right. an element of responsibility. The your contract, you should ensure that it is entitlement to terminate the contract drafted carefully so that the extent of the The Court of Appeal emphasised that was absolute and it was obvious to each obligation, particularly in relation to the if the parties had wished to impose an party that they were entitled to terminate rest of the contract, is clear. overarching duty of good faith, they at any time. The court also followed the should have done so expressly. Court of Appeal in Compass in refusing Conclusion to find that there was an implied duty of TSG - May 2013 good faith. We are not yet at the stage where the English courts are ready to imply upon TSG Building Services plc v South Anglia Everything turned on the drafting of the contracting parties a duty to act in good Housing Ltd [2013] EWHC 1151 (TCC) good faith clause. If the good faith clause faith, as is the case in most civil codes. is probably the most important of the had involved an element of discretion, But this is not unexpected as the current three cases to the construction industry it would have been much easier for the approach of the courts is consistent with because it concerns the implication of court to conclude that good faith should the general principle of English contract terms into an ACA Standard Form of apply to the exercise of that discretion. law that a term will not be implied into a Contract for Term Partnering (TPC 2005, But that was not the case here. contract if it would be inconsistent with amended 2008). an express term of the contract. So what does this all mean in TSG contracted with SAH to provide practice? Instead, the courts prefer to consider gas servicing and an associated works what the contract would reasonably be programme in respect of SAH’s housing Should you include an express obligation understood to mean as a whole against stock. Clause 1.1 of the contract provided: to act in good faith in your contract? the relevant contractual background, and in light of the knowledge that was “The Partnering Team members shall work The answer is probably that the reasonably available to the parties at the together and individually in the spirit of existence of an obligation to act in good time the contract was entered into. trust, fairness and mutual cooperation for faith does not necessarily guarantee that the benefit of the Term Programme…” the parties will act in good faith. This is If parties wish to impose a contractual because contracts cannot be expected duty of faith they should do so expressly SAH terminated the contract and TSG to provide for every eventuality or be and in very clear terms. argued that termination was wrongful shaped to suit the peculiarities of every and in breach of clause 1.1. The issue the commercial relationship. The key to court had to decide was whether the a successful contract is a reasonable Should you wish to receive further good faith clause was pervasive such attitude, both in the interpretation of information in relation to this briefing that it applied to the whole contract. any contract provisions that might be note or the source material referred to, unclear, and also in the approach taken then please contact Lisa Kingston. On the facts, there was no suggestion by the parties to any other differences of [email protected]. in the clause that the obligation to act opinion which, if dealt with reasonably Tel +44 (0) 207 421 1986 in good faith extended to all aspects and courteously, should not lead to the Follow us on and for the of the contract. Indeed, it would not development of a formal dispute. be appropriate for a duty of good faith latest construction and energy legal updates to apply to each and every obligation Some may argue that the inclusion of Fenwick Elliott LLP within the contract. If this was the case, an express provision to act in good faith Aldwych House the good faith clause would potentially might imply a lack of trust between 71-91 Aldwych have the effect of undermining other the parties, which may have the effect London WC2B 4HN clauses in the contract that conferred of setting the commercial relationship www.fenwickelliott.com