Take this test and find out…
Good faith is what you want to see in your dealings, but is it actually a legal obligation implied in your contract? Six years ago, a case about deodorants ignited a debate on good faith that is still burning. Other countries’ legal systems, both civil law and common law, have a general duty of good faith, so why not English law? Or does it, perhaps, achieve similar results in a different way?
Try this simple test to see if you can spot, in this variety of scenarios, when English contract law might need to think about implying a duty of good faith.
A repair and maintenance contract signed months after work started was, by agreement, applied retrospectively. Before it was signed, however, the parties had agreed and used for more than 12,000 jobs a set of rates that was not in the contract. The employer initially said that there was no need to amend the contract but, after it was signed, they decided that these rates should not have been used and deducted £300,000, claiming that it had consequently overpaid. Breach of implied duty of good faith?
No duty of good faith needed: estoppel by convention kept the employer bound to the non-contract rates for the previous work.
A particularly onerous or unusual contract condition is not drawn to the attention of the other party. Breach of implied duty of good faith?
No duty needed: English contract law requires adequate notice of the condition to be given, if it is to apply.
A landlord’s replies to enquiries before contract, about the presence of asbestos in warehousing, were false. Breach of implied duty of good faith?
No duty required: misrepresentations provide remedies, for example, rescission and/or damages.
The supplier of the front bumper mount for a van manufacturer threatened to stop supplies unless the manufacturer paid compensation for termination of their relationship when the manufacturer subsequently switched to a new design and supplier. To avoid shutting down the production line, the manufacturer paid up, but subsequently sued for the return of its money. Breach of implied duty of good faith?
No duty needed: economic duress, by illegitimate pressure, made the compensation agreement voidable.
A trustee selects a perfectly sensible investment but arranges for a secret commission for themselves. Breach of implied duty of good faith?
No duty needed: a trustee owes a fiduciary duty, which means, in essence, that they cannot use their position for their own private advantage but must act unselfishly in what they perceive to be the best interests of their principal.
Substantial liquidated damages for delay are deducted, in full, under a construction contract even though the employer has taken possession of almost all the work before completion. Breach of implied duty of good faith?
No duty needed: if a liquidated damages clause imposes a penalty, it will be unenforceable.
The concert venue you have hired out to an events company burns down before the first night of the event but the company sues you for breach of contract. Good faith to intervene?
Not needed: the doctrine of frustration can excuse the parties from further performance once a frustrating event has occurred.
When contract documents are put together for execution, an incomplete version of a key pricing document is included by mistake. The error is not spotted until after the contract has been signed. Is a duty of good faith needed to rescue the situation?
No need. The equitable remedy of rectification deals with a common, or unilateral, failure to record an agreement correctly.
A builder under a shipbuilding contract is entitled to a stage payment when the buyer’s representative certifies that a milestone has been reached. What if the milestone is reached but the buyer does not certify? Breach of implied duty of good faith?
No duty needed. If this is not an express contract requirement, a duty to co-operate in the project may be implied.
A contract gives one of the parties a power to make decisions that affect them both. What if that party exercises the right unreasonably?
No duty needed. In any contract under which one party is permitted to exercise such a discretion, there is ordinarily an implied term, in essence that that party will not exercise its discretion in an arbitrary, capricious or irrational manner.
And let’s leave you with this thought. All these examples of how English law deals with different types of unfairness might be said to reflect the concept of fair, open dealing; in other words, good faith. These solutions are, of course, piecemeal, and there is no overriding principle of good faith, but they do tell us that it is alive, well and firmly embedded (under assumed names) in English law.
Jon Olson-Welsh is a partner and Tamsin Travers is counsel in the construction and engineering practice group of Mayer Brown