Implied Good Faith - Lost at Sea Following Court of Appeal Shipping Case?
Thursday, 29th September 2016
This article considers the commentary on implied obligations of good faith in the recent Court of Appeal decision in MSC v Cottonex Anstalt  EWCA CIv 789 ("Cottonex") which suggests that the recent trend in favour of an implied obligation to act in good faith in English contract law is not good law.
Is there an implied duty of good faith in English contract law?
Just over a year ago, before the recent Cottonex appeal, Ashfords wrote an article on the emerging principle of an implied duty of good faith (that article can be found here). The article referred to the fact that:
"A duty of good faith has never been entirely at ease in English contract law. The preferred view of the Courts has traditionally been that two (or more) commercial parties negotiate at arm's length and are each capable of looking after their own interests".
Nevertheless, the article acknowledged the emerging trend for the Courts to recognise an implied duty of good faith, particularly in what have been referred to as "relational" contracts (such as franchise agreements, distribution agreements and joint venture agreements). Interestingly, the leading case on good faith in relational contracts was heard by Mr Justice Leggatt - the same judge who first heard the Cottonex case, in which he commented on the "increasing recognition in the common law world of the need for good faith in contractual dealings".
The Court of Appeal clearly disagreed, stating:
"The recognition of a general duty of good faith would be a significant step in the development of our law of contract with potentially far-reaching consequences. In my view the better course is for the law to develop along established lines rather than to encourage judges to look for what the judge in this case called some 'general organising principle' drawn from cases of disparate kinds"
Rather than a general principle of implied good faith, the Court of Appeal stated that it prefers "piecemeal solutions in response to demonstrated problems of unfairness", and that this "may be reflected in the court's response to questions of construction and the implication of terms". To put it another way, the Court of Appeal are saying that it may be open to the Court, when interpreting what the parties have agreed, to prefer an interpretation that reflects a fair outcome rather than an interpretation that reflects an unfair one. This is not a requirement for the parties to act in good faith towards one another but a suggestion that the Courts may effectively act in good faith towards the parties, where appropriate applying fairness in determining disputes. The latter approach perhaps lends itself to greater certainty when compared to a more nebulous obligation of implied good faith. The Court of Appeal's main concern is that good faith "would be invoked as often to undermine as to support the terms in which the parties have reached agreement".
Interestingly, in order to support its criticism of implied obligations of good faith, in the Cottonex case the Court of Appeal refers to an earlier decision of the Court of Appeal which stated "that there is no general doctrine of "good faith" in English contract law" - however, that same earlier judgment (in the very same sentence) concludes by saying: "although a duty of good faith is implied by law as an incident of certain categories of contract" (referring to (amongst other things) the relational contracts mentioned above).
The Court of Appeal's brief, one paragraph analysis of good faith in this case was not determinative of the outcome of the appeal, meaning that the comments do not constitute a binding precedent on implied obligations of good faith. However, the Court of Appeal, having gone out of its way to pass what can only be interpreted as a negative comment on implied good faith, provides a fairly certain barometer that it is unconvinced by implied good faith. By stating that recognising implied good faith "would be" a significant step, the Court of Appeal is also in effect saying that it does not, as a matter of law, recognise the principle.
Nevertheless, until there is more certain (and binding) guidance from the Court of Appeal, it remains open for the parties to seek to rely on implied contractual obligations of good faith towards them in the limited circumstances where they may possibly be implied, such as the relational contracts identified by Mr Justice Leggatt.
The law on implied good faith is unsettled at best. It will remain unsettled until the Court of Appeal provide binding authority on the point. However Cottonex provides a good indication that the Court of Appeal is unlikely to echo the High Court's alacrity for implying good faith.
Whilst not fatal to implied good faith, following the Court of Appeal's decision in Cottonex we are now likely to see a more restrained approach from the lower courts. Therefore, if a party has expectations that its counterpart should act in good faith in its contractual dealings between them it should make it an express provision of the written contract that it will do so and, importantly, the contract should define what acting in good faith means; what the obligations are, and the circumstances in which good faith must be applied. Because it likely to be the most fertile ground for an appeal, this approach should be taken even (and perhaps especially) in those relational contracts where implied good faith has the best chance of survival as a principle.