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In Good Faith or Bad – Does it Matter?

The High Court has recently had to consider whether it could imply a term into a commercial contract that a party should not terminate the contract in bad faith.  The Claimant and the Defendant had entered into an agreement which provided that they would each act in good faith towards the other in the exercise of all the rights and obligations under the contract.  The Claimant argued that implying the term was necessary to give effect to the long-term quasi partnership nature of the relationship between the parties.  The Claimant argued that the Defendant’s right to terminate the contract would not be, and could not be, exercised other than in good faith and/or in a manner that would unreasonably deprive the Claimant of its accrued and future rights under the agreement and that it could only exercise the right to terminate for a proper purpose and not arbitrarily, capriciously or unreasonably.

The Judge accepted that it is a well-established principle that in the absence of very clear language to the contrary contractual discretion must be exercised in good faith and not arbitrarily or capriciously and that normally any discretion must be exercised consistently with its contractual purpose.

The Judge felt that there were insuperable obstacles to the Claimant’s contentions.  He did not feel it was necessary to imply into the agreement any duty of good faith or a limitation constraining the Defendant’s freedom to exercise the right of termination in its own interest.  His said that there was no general doctrine of good faith in English contract law.  A duty of good faith was implied in certain categories of contract, but in all categories of contract such a duty would only be implied where the contract would lack commercial or practical coherence without it.

The Judge said he was unable to identify any facts forming part of the commercial background or any aspect of the relationship between the parties which would indicate that the agreement would lack commercial or practical coherence without the implication of a good faith term of the type argued for by the Claimant.

The Judge’s view was that such a term as the Claimant sought would be inconsistent with the express termination provisions of the contract.  The right to terminate could be exercised irrespective of the Defendant’s reasons for doing so.  The only question for the Defendant was whether the conditions laid down in the contract for termination had been met.  If they had, the contract could be terminated whatever the Defendant’s reasons might be.

A useful reminder that good faith is not always necessary where a party wants to exercise a contractual remedy; it can put its own interests first.

If you require any further advice please contact James Staton on 01274 377651.

About the Author

James Staton

Partner

James is a Partner and Head of the Dispute Resolution team and primarily handles commercial…

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