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A new era for "good faith" in English contract law – the next instalment?

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Kate Davies McGill

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London

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30 September 2014

In Bristol Groundschool Ltd v Intelligent Data Capture Ltd & ors [2014] EWHC 2145 (Ch), 2 July 2014, Richard Spearman QC (sitting as Deputy Judge of the Chancery Division) implied a general duty of good faith into what the High Court termed a "relational contract". To the best of the authors' knowledge, it is the first time a judge has openly endorsed the analysis of Leggatt J in Yam Seng Pte Ltd v ITC Ltd [2013] EWHC 111 as regards the existence of a general duty of good faith in commercial contracts.

Background

Between 1999 and 2009, the claimant (BGS) and one of the defendants (IDC) had an ongoing business relationship producing and selling training manuals for use by various civil aviation agencies. During this time, they signed two contracts (the 1999 Agreement and 2001 Agreement) pursuant to which IDC supplied static artwork for the manuals which BGS then produced and sold. BGS paid for and owned the copyright in the static artwork.

By 2009, the relationship between BGS and IDC had soured. BGS commenced proceedings against IDC claiming breach of the 2001 Agreement and infringement of copyright. IDC counterclaimed on similar grounds. One of the issues before the High Court was whether BGS was in repudiatory breach of an implied, general duty of good faith for accessing and downloading materials from IDC's computer system in 2009, without consent and in order to develop its own software system for IDC's static artwork (in purported anticipation of a breach of contract by IDC).

Was there an implied duty of good faith (and if so, why)?

Richard Spearman QC concluded that there was a general duty of good faith implied into the parties' agreements because:

  1. the 2001 Agreement was a "relational contract" of the type described by Leggatt J in Yam Seng. Although this is not stated in the judgment, Spearman QC appears to have accepted IDC's contention that the 2001 Agreement was a hybrid between a joint venture and product distribution agreement (two of the "long-term" contracts that Leggatt J had identified as "relational" in Yam Seng);

  2. in the judge's view, the Court of Appeal in Mid Essex Hospital Services NHS Trust Compass Group [2013] EWCA Civ 200 (Litigation Review, April 2013) did not disapprove of Yam Seng and, moreover, "did not focus on the implication of the duty of good faith in contracts outside the categories mentioned by Leggatt J at [131]"; and

  3. the principal witness for the claimant apparently recognised the duty of good faith because he accepted in evidence that "[t]here was an element of trust" in the parties' relationship, when referring to how BGS would have reacted had IDC accessed BGS's computer system and downloaded confidential commercial documents.

Has the duty of good faith been breached (and what is the test)?

Spearman QC again concurred with Leggatt J, stating that "good faith extends beyond, but at the very least includes, the requirement of honesty". He concluded that the "relevant test" is whether the conduct complained of "would be regarded as "commercially unacceptable" by reasonable and honest people in the particular context involved".

Spearman QC relied for this conclusion on the objective test set out by Leggatt J in Yam Seng (referred to by Beatson LJ in Mid Essex) and the test for dishonesty in Royal Brunei Airlines v Tan [1995] 2 AC 378 which both make clear that what is "commercially unacceptable" is context specific. In this regard, Lord Nicholls said in Royal Brunei that "[t]he individual is expected to attain the standard which would be observed by an honest person placed in those circumstances. It is impossible to be more specific". However, Lord Nicholls did highlight the following potential signs of dishonesty or "commercially unacceptable" behaviour:

  • "acting in reckless disregard of others' rights or possible rights";

  • a lack of regard to all of the circumstances known to the party in question, "including the nature and importance of the proposed transaction, the nature and importance of his role, the ordinary course of business, the degree of doubt, the practicability of … proceeding otherwise and the seriousness of the adverse consequences to [the rights or interests of others]"; and

  • The court will "also have regard to personal attributes of the third party, such as his experience and intelligence, and the reason why he acted as he did".

In downloading information from IDC's computers, BGS had knowingly disregarded IDC's rights and breached the obligation of good faith. However, there were a number of extenuating circumstances including that the actions taken were precautionary, they had limited purpose and they did not cause any significant financial damage. For these reasons, Spearman QC concluded that BGS's breach did not "strike at the heart of the trust which is vital to any long-term commercial agreement" (citing Yam Seng) and was therefore not repudiatory.

Comment: The decision in Bristol Groundschool is significant for at least three reasons.

First, the case contains useful guidance as to the approach a court might take in determining whether particular conduct has breached an obligation of good faith (express or implied). At the very least, good faith requires conduct that is honest.

Second and to the best of the author's knowledge, it is the first time that an English court has relied on the judgment of Leggatt J to imply a general duty of good faith into a so-called "relational contract".3 As discussed below, the decision appears to run counter to the majority of the case law in this regard.

Third, the decision in Bristol Groundschool represents a novel interpretation of the Court of Appeal's decision in Mid Essex on the question of whether a general duty of good faith may be implied into a commercial contract (as opposed to the categories of contract into which such a duty is implied by law).

As noted above, one of the bases on which Spearman QC felt able to imply a general duty of good faith into the 2001 Agreement was his view that the Court of Appeal in Mid Essex did not focus on the implication of a duty of good faith into other contracts where such a duty is not implied by law. In Mid Essex, Jackson LJ concurred with Leggatt J that there is no general doctrine of good faith in English law. As an exception to this, Jackson LJ recognised (again by reference to Yam Seng) that "a duty of good faith is implied by law as an incident of certain categories of contract". However, he then went on to say in the very next sentence and arguably by reference to any other category of contract that "[i]f the parties wish to impose such a duty they must do so expressly".

It is of course a matter for subsequent case law to determine Jackson LJ's meaning in this regard. On its face, however, his view is reasonably clear – except where a duty of good faith is implied by law as incidental to the relationship in question (eg employment), a good faith obligation will only apply where it is expressed in the parties' agreement. This could mean it must appear in terms (and Mid Essex was a case involving an express duty of good faith). Or it could mean that the duty will only arise where it expresses what the reasonable man would have understood the parties to have meant (ie following the usual rules for the implication of terms in A-G of Belize). The majority of cases since Yam Seng that have dealt with the question of whether such a duty should be implied provide some guidance as to the meaning intended, by either (a) confirming that it does not lay down any general principle applicable to all commercial contracts, in particular those negotiated at arm's length (eg Greenclose Ltd v Nat West Bank plc [2014] EWHC 1156 at [150]), or (b) simply rejecting it (eg Morris J in Hamsard 3147 Limited v Boots [2013] EWHC 3251; Henderson J in Carewatch Care Services Ltd v Focus Caring Services Ltd [2014] EWHC 2313; and Akenhead J in TSG Building Services PLC v South Anglia Housing Limited). At the very least, these cases illustrate that the circumstances in which a duty of good faith may be implied into a commercial contract will be very narrow indeed. They also illustrate, at least for now, that Bristol Groundschool (and Yam Seng) are swimming against the tide as regards the existence of any general duty of good faith in commercial contracts.