What has good faith to do with a legal business contract?

28 June 2018

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English law has traditionally favoured the ability of businesspeople to negotiate whatever contracts they want in pursuance of their commercial interests, even if they manage to get the wording of the contract done in such a way as allows them to shaft the other guy. The argument is that it is better to have a contract which gives commercial certainty even if it might be unfair or has loopholes which can be abused.

A few bits of legislation have watered this down, for example when concerned with consumer protection or with big fish businesses imposing unreasonable terms on small fry businesses in their standard form non-negotiable contracts.

There are also detailed laws of interpreting contracts which have developed over centuries to deal with cases where the contract itself is open to interpretation. Judges have tried to use these laws to create what they think are fair results, often using creative arguments to say that the contract says what they think it should have said in order to be fair. But they can’t do this if the contract is clearly worded (although there are one or two other tricks they can sometimes use to get the result they want. There’s a bit more on all this in my next Legal Briefing.)

All this is good for commercial lawyers, because businesspeople need their help to produce clearly worded contracts.

Some judges have in recent years been attempting to bring the concept of ‘good faith’ into English law, by saying that in certain types of longer-term ‘relational’ contracts there should be an implied duty of good faith between the parties. This is an approach more favoured in Europe. But these English judges’ attempts are proving slow to gain any traction, and are resisted by much of the legal world because the rather woolly notion of whatever ‘good faith’ might mean clashes with our traditional approach.

One judge who has made the most effort to bring the ‘good faith’ principle into English law has recently been made a Court of Appeal judge (Lord Justice Leggatt). This helps open the door to more developments on this front, as the Court of Appeal is a much more important court and lower courts have to follow any precedents it sets. One of his final cases in the Commercial Court earlier this year before his elevation (promotion to you and me) further boosted the ‘good faith’ law.

It was quite an interesting case. A sheikh and a hotelier who were (at the time) good friends entered into a joint venture for the development of a chain of hotels in Greece and the Mediterranean, and an online travel service. The hotelier managed the business and the sheikh provided over €30m in funding. But when the ventures started failing, the sheikh wanted to get out of them and asked his less friendly representatives to deal with it. They persuaded the hotelier to enter demerger arrangements on their terms through what the court found to be a combination of blackmail and threats of physical harm. At the same time they were doing a separate deal behind the hotelier’s back.

Judge Leggatt said that in applicable ‘relational’ contracts such as this (a long-term collaboration, for the same aim, between people who on the face of it had a substantial degree of trust and confidence in each other) there is a wide-ranging implied obligation on the parties  “to act honestly and with fidelity to the bargain…to act reasonably and with fair dealing having regard to the interests of the parties (which will, inevitably, at times conflict) and to the provisions, aims and purposes of the contract, objectively ascertained”, and not to be “opportunistic”. He went on to note that “It is unnecessary and perhaps impossible to attempt to spell out an exhaustive description of what this obligation involved.”

If you don’t like it, you can still put an express clause in your contracts saying that there is absolutely no obligation on the parties to show any good faith to each other! Or if this seems a bit rich, you could insert your own clause setting out exactly what kinds of ‘good faith’ obligations you might owe each other, and then stating that no wider obligations can then be implied into the contract.

Case: Sheikh Tahnoon Bin Saeed Bin Shakhboot Al Nehayan v Ioannis Kent (AKA John Kent) ([2018] EWHC 333 (Comm))