Commercial Contracts: the duty of good faith

Commercial Contracts: the duty of good faith

The duty of good faith in commercial contracts is limited and must accord with business common sense, the courts have ruled.  

The expert commercial lawyers at top Bahamas law firm ParrisWhittaker have many years’ experience advising clients on commercial contracts.

Business common sense

The interpretation of the terms of commercial contracts regularly exercises the courts, with important lessons for commercial organisations and lawyers alike.  In a recent ruling from the UK’s Court of Appeal, the court had to rule on the interpretation of a contract clause and the duty of good faith.

What’s the background?

The claimant and defendant were party to a Public Finance Initiative (‘PFI’) contract.  One of the parties sought to implement a strategy of imposing maximum ‘Service Points’ for alleged maintenance failures of a highway network in breach of the contract to try force a renegotiation of the contract.  If enough Service Points under the contractual terms were imposed by the claimant, it could terminate the contract. 

At issue was whether this was enforceable.   The court ruled that the duty of good faith in the contract was limited and did not extent to the Service Points regime.  The judge decided that the appropriate term was that which obliged the claimant to act honestly; on proper grounds and not in an arbitrary, irrational or capricious way when assessing the number of Service Points to impose.

The ruling follows an important 2013 ruling where the Court of Appeal refused to imply a term involving deductions in a regime that was similar to this particular case.

Approach to interpretation

Interestingly, the parties and the judge had agreed on the claimant’s summarising of the existing law on the interpretation of contracts:

“the process of interpretation is such that the meaning of a phrase, clause or provision may not be the same thing as the meaning of its words. The Court should be open to the possibility that the drafted words may not reflect the objectively ascertained intention of the parties and that the parties may therefore have used the wrong words or syntax. The Court should be alive to the fact that parties do not normally make linguistic mistakes, particularly in formal documents such as a contract, but that it is nevertheless possible for something to have gone wrong with the language. At the same time, the Court should not attribute to the parties intentions that they plainly did not have.”

What does this mean?

There is no automatic implied duty of good faith in commercial contracts in English law.  If the parties want to impose a duty of good faith in the contract, they must do so expressly – ensuring that the clause is sufficiently wide to cover all conduct in relation to the contract – and clearly drafted.

How can we help?

Contract terms must be clear and unambiguous to minimise the risk of future dispute.  Avoid relying on implied terms such as good faith, as this can lead to litigation. If you have any concerns regarding a commercial contract or lease; you are negotiating contractual terms or you are involved in a dispute with a contractual party, contact the expert commercial lawyers at ParrisWhittaker for urgent advice and representation.

1 Portsmouth CC v Ensign Highways [2015] EWHC 1969 (TCC)