Don’t sign your fate without good faith terms
It is well established that there is no general doctrine of good faith in English contract law. Given that the freedom of contract is a central unwavering principle in English contract law, the Courts will only make the rights and obligations under a commercial contract subject to implied duties of good faith in very limited circumstances.
The concept of good faith can still be relevant in the context of commercial contracts through an express duty and an implied duty. The resistance of the Courts to imply terms of good faith into contracts was highlighted recently in the Commercial Court decision in TAQA v RockRose  EWHC 58 (Comm) which this blog will consider in more detail.
Express duties and implied duties
Parties may agree an express duty to act in good faith, the Courts will then uphold this duty in practice and in accordance with the parties’ agreement. There is great flexibility in the language that can be used when drafting the duty of good faith into the contract. The meaning of the express duty of good faith will depend on the circumstances of each case and the commercial context. The obligations invoked by an express duty of good faith in a contract were summarised in CPC Group Ltd v Qatari Diar Real Estate Investment Company  EWHC 1535 (Ch), where is was held that parties subject to a requirement of good faith must:
“adhere to the spirit of the contract… to observe reasonable commercial standards of fair dealing, and to be faithful to the agreed common purpose, and to act consistently with the justified expectations of the parties.”
When it comes to implied duties of good faith, it is recognised that fair dealing and honesty in performance of a contract are broad basic principles that are often reflected in the Court’s analysis of contractual construction and implied terms. The Court’s powers when implying a duty of good faith are limited, however, as the Court should not undermine terms expressly agreed between the parties (MSC Mediterranean Shipping Company SA v Cottonex Anstalt  EWCA Civ 789). An implied duty based on good faith is only likely to arise where the contract would lack commercial or practical coherence without it (Monde Petroleum SA v Westernzagros Ltd  EWHC 1472 (Comm)).
Where commercial contracts are “relational contracts”, the Courts are more likely to imply duties of good faith (Bates & Ors v Post Office Ltd (No 3)  EWHC 606 (QB)). The reasoning behind this is outlined in Yam Seng v International Trade Corp  EHWC 111, where it was stated that “relational contracts” require a high degree of communication, co-operation and predictable performance, often on a long-term basis.
On a somewhat related point, commercial contracts often confer on a party the ability to exercise discretion, for example, in relation to the valuation of an asset, or to form an opinion on relevant facts. A potential conflict of interest arises where the contractual decision maker’s exercise of discretion affects it as well as other parties. In Braganza v BP Shipping Limited  UKSC 17 the Supreme Court found such a contractual discretion, where there is no clear language in the commercial contract to the contrary, to be subject to an implied duty and that the discretion should be exercised in good faith and not arbitrarily or in a capricious way. This duty is recognised as the “Braganza duty”. While Braganza was an employment law case, it is often applied to contracts between commercial parties.
TAQA v Rock Rose
The recent case of TAQA v RockRose concerned the claimants’ termination of the defendant’s appointment under Joint Operating Agreements relating to North Sea oil and gas infrastructure. Under the agreements, the claimants maintained that they were entitled to terminate the defendant’s appointment on notice, without having to justify or give reasons for their decision. However, the defendant argued the express provisions in the Joint Operating Agreements were impliedly qualified by obligations not to exercise their powers capriciously or arbitrarily, in accordance with the Braganza duty, and were subject to duties of good faith.
In response to the defendant’s argument that the termination provision was subject to the Braganza duty, the approach taken by the Commercial Court was straightforward and robust:
“the Braganza doctrine has no application to unqualified termination provisions within expertly drawn complex commercial agreements between sophisticated commercial parties such as those in this case.”
The Court distinguished between cases that require an assessment by a contractual party taking into account the interests of all of the parties, and cases where a party has an entitlement to exercise an express right stated in the contract. The Braganza duty should not apply in situations where a party has an entitlement to an express contractual right, therefore the Court rejected the use of the Braganza duty in this case as the claimants had an express contractual right to terminate the defendant’s appointment.
The defendant in TAQA v RockRose also maintained that the contract between the parties was a “relational contract” to benefit from the implied duty of good faith as set out in Yam Seng. The Court treated the Joint Operating Agreements “at least arguably” as “relational contracts”. However, on the facts of this case there was no implied duty of good faith.
The Commercial Court rejected this approach proposed by the defendant and the claimants were not required to justify or give reasons for their decision to resolve to terminate the defendant’s appointment, proving the Court’s hesitancy in implying terms of good faith in to express provisions of commercial contracts.
TAQA v RockRose demonstrates the Court’s reluctance to imply terms into contracts, especially complex agreements where the provisions are clear to the parties. Parties should take note of key clauses, such as notice provisions, and not rely on the Courts to infer a duty of good faith on the parties where they are not warranted. Furthermore, parties should consider the implications of express terms and whether they are in fact clear and unambiguous. While good faith will continue to have a place in English contract law, this cannot replace careful drafting of commercial contracts to ensure that the obligations of the respective parties are clear. The position remains that the Courts will not override any express contractual provisions with implied terms of good faith.