Implied Duty of Good Faith in Contractual Disputes

An advice note called ‘Guidance on Responsible Contractual Behaviour in the performance and enforcement of contracts impacted by Covid-19 emergency’ was issued by the UK Cabinet Office in May 2020. The summary is a non-statutory note setting out guidance for individuals and companies entering into contracts. The underlying message of the advice note is that all parties should act fairly and responsibly, aim to support the Covid-19 response and protect the economy, including jobs.

On the face of it, the objectives included in the advice note are reasonable given that individuals and companies have moral duties to act fairly in order to protect the economy, which has been severely impacted by the effects of Covid-19. The guidance states: “The Covid-19 emergency requires all of us to work together in the national interest to protect the health and safety of everyone in the United Kingdom, our vital public services including the NHS, jobs and our economy.”

As simplistic the objectives may seem, one must also consider the interplay of the principles surrounding the notion of ‘acting in good faith’ in the context of commercial contracts. On the basis that the guidance is not statutory, it is not yet known how the courts will apply the message should there be a conflict between the government’s intentions and acting in good faith in contractual disputes.

In respect of the duty to act in good faith in contractual disputes, parties may agree explicitly to act in good faith, or the courts might imply a general duty of good faith or use the concept of good faith to imply other fact-specific duties. This is a developing area of law and the court’s approach varies in whether it chooses to imply a duty to act in good faith in contracts.

The UK Supreme Court judgment in the case of Braganza v BP Shipping Limited [2015] UKSC 17 set out that if a contract permits a party to make unilateral decisions the exercise of those decisions are to be limited by the concepts of good faith, genuineness and honesty. It was stated that the decisions cannot be arbitrary. Since this case, it has become common practice for parties to contracts to allege breach of implied duties of good faith.

A recent case relating to this matter is that of TAQA Bratani & Ors v RockRose [2020] EWHC 58 (Comm). The dispute related to the rights and obligations in joint operating agreements (JOAs) for five oil production blocks in the North Sea. Judge Pelling QC found in favour of TAQA as the JOAs were deemed complex and sophisticated contracts. There was an express term which gave TAQA the right to remove the operator, RockRose, in accordance with the JOAs and this did not imply a duty on them to act in good faith. RockRose argued that the JOAs were ‘relational contracts’, meaning that they involved long term relationships in which mutual trust and loyalty were required and, as such, the court should imply a duty of good faith. The judge decided that despite the contracts being relational, the parties were not necessarily required to owe each other the obligation of good faith. This case has set a precedent in respect of contract interpretation and, in particular, how and when a court might imply the duty of good faith into contracts.

It is important that parties to contracts bear in mind the approach of judges in the English courts if one party is from a non-common law jurisdiction. Parties should seek independent legal advice to mitigate the risk of becoming involved in protracted and costly litigation. In light of Covid-19 and the Government’s advice, it would seem that parties might be expected to act in good faith more regularly in order to prevent further unnecessary economic issues. It will be interesting to read the judgments emerging from the courts in respect of this issue in due course.

If you would like to discuss anything relating to this article, please contact Gemma Dreyfuss at [email protected]