Commercial Contracts: Duty of Good Faith

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A recent ruling of the UK’s High Court makes clear when the obligation to act honestly and with integrity will be implied into a commercial contract. The court was required to consider in what circumstances a requirement to act honestly and with integrity would become an implied term of a commercial contract and, furthermore, what behavior would trigger a breach of that obligation.

When will the parties to commercial contracts be legally required to act honestly and with integrity? The expert commercial litigation team at Bahamas law firm ParrisWhittaker is highly experienced in advising and representing businesses on their commercial contracts and the extent of their obligations to each other.

1. A recent ruling of the UK’s High Court¹ makes clear when the obligation to act honestly and with integrity will be implied into a commercial contract. The court was required to consider in what circumstances a requirement to act honestly and with integrity would become an implied term of a commercial contract and, furthermore, what behavior would trigger a breach of that obligation.

What Did the Court Decide?

The proceedings followed the claimant’s failure to carry out an instruction of the defendant police authority to crush a vehicle under the terms of a contract which specified the procedure for disposing of recovered vehicles. The vehicle concerned became part of the claimant’s own fleet of vehicles, explaining to the court that the body swap had been undertaken as a training exercise for its apprentices. Under the contract terms, the police authority could terminate the contract in the event of material breach.

The court found on the facts that there had been two material breaches: the claimant company should have obtained consent; and there had been a clear breach of an implied term to act with integrity.

Duty of Good Faith

The court considered the circumstances in which a duty of good faith is implied into commercial contracts. The judge set out the criteria on which he decided that the term was implied: the features of the contract in issue in this case warranted the inclusion of the implied term.  In addition, it was a “relational contract par excellence,” as the contract created a relatively lengthy period of contractual relationship between the parties, during which there were going to be a very large number of individual transactions undertaken under the auspices of the contract.

He took the view that there may well be acts which breach the requirement of undertaking the contract with integrity which it would be difficult to say were definitely dishonest. Such acts would compromise the mutual trust and confidence between the parties in this long-term relationship without necessarily amounting to the telling of lies, stealing or other definitive examples of dishonest behaviour. He ruled that acts which would “compromise the mutual trust and confidence” between the parties would be a key factor to consider.

What are the implications?

If you are in negotiations for ‘relational contracts’, it is important to consider the risks of being subject to implied duties of good faith, and to act honestly and with integrity. There are potential consequences should this implied term be breached.

Incorporating express terms dealing with the nature and extent of the duty of good faith within the contract may be advisable. However, what may amount to a breach of this requirement may not be straightforward.

How Can We Help?

The commercial litigation lawyers at Bahamas law firm Parris Whittaker have years of experience advising commercial organisations on their commercial contracts and the extent of their duties, including that of good faith. Contact us straightaway for urgent, strategic advice.

1D&G Cars Ltd v Essex Police Authority [2015] EWHC 226 (QB)