The duty of contracting parties to act in good faith has been adopted as an overriding principle in several legal systems.
Despite the general nod to commonality between national legal systems and, in particular, common law systems such as Canada and Australia, English courts have consistently refused to commit to this somewhat vague and subjective concept.
However, the recent judgment of Mr Justice Dove in D&G Cars Ltd v Essex Police Authority  EWHC 226 (QB) refocuses the discussion by implying a duty to act with honesty and integrity in what he termed a ‘“relational” contract par excellence’. This new development towards accepting good faith as an implied term in commercial contracts compels contracting parties, and their lawyers, to ask: in what commercial contracts is such a duty implied? And, importantly, what behaviour would trigger a breach?
The evolving view
The traditional view of English courts being against implying the duty of good faith when negotiating or performing contracts was succinctly pronounced by Lord Justice Bingham in his judgment in Interfoto Picture Library Ltd v Stiletto Visual Programmes  QB 433, stating that English law has ‘committed itself to no such overriding principle’.
Of course, there are instances where special duties are required in contractual relationships, such as consumer contracts or in fiduciary, agency or employment relationships (special duty contracts). In such contracts the requirement to act in a certain way is at the very root of the contractual relationship and pays consideration to the balance of power between the parties.
Extending this general duty of good faith as an overriding principle in other types of contract would seem to overlook the risk of making the terms of a commercial contract uncertain. Indeed, the subjective nature of the good faith principle may put parties in a position where they find it difficult to determine how they must act: whether they are entitled to pursue tenaciously their commercial goals within the limits of the express terms of a contract, or if they are now bound by the implied duty of good faith to focus on the communal objectives of all parties in addition to what is required by the express terms of the contract.
Support for an express term to bind the parties to good faith was given by the Court of Appeal in Compass Group UK and Ireland Ltd (t/a Medirest) v Mid Essex Hospital Service NHS Trust  EWCA Civ 200, where it was held that in English contract law there is no ‘general doctrine of good faith… if the parties wish to impose such a duty they must do so expressly’. However, the Court of Appeal did consider Yam Seng Pte Ltd v International Trade Corp Ltd  EWHC 111 (QB) and noted that ‘a duty of good faith is implied by law as an incident of certain categories of contract’.
In Yam Seng, Mr Justice Leggatt had asserted that where the parties to a contract have a long-term relationship – such as a joint venture or franchise agreement – good faith, co-operation and loyalty are required and therefore more likely to be implied as a term of what he defines as a ‘relational contract’. The relational contract is a step beyond the special duty contract, which threw open a debate about what could be considered a relational contract.
D&G Cars – opening the floodgates?
In D&G Cars, Dove J determined that the parties were party to a relational contract and, as such, there was an implied term to act with integrity and honesty when performing the terms of the contract between D&G Cars Ltd, a vehicle recovery service, and Essex Police Authority.
It is interesting to note that his focus on integrity and honesty seems to narrow or replace the traditional concept of good faith.
Dove J clarified the criteria on which he had decided that the contract was a ‘“relational” contract par excellence’, and which triggered this implied term. As part of his deliberation, he took into consideration the length of the contractual relationship, the number of transactions between the parties and the substance of the contract, which included dealing with the public’s property and evidence for criminal investigations. In considering what would be a breach of this implied term, he decided that acts which would ‘compromise the mutual trust and confidence’ between the parties were central to his decision-making process.
There are clear difficulties when it comes to defining relational contracts. Wide varieties of commercial contracts are long-term and include a number of transactions between the parties. Can they all now be subject to the implied and overriding duty to act with honesty and integrity, a quasi duty of good faith?
Even if it is possible to say with certainty that an agreement is a relational contract, the problems do not end there. How will the parties know the limits of the extra duties imposed on them? What behaviour will amount to a breach? The guidance provided by both Leggatt J and Dove J will give parties cause for concern. To what extent parties must act with integrity, loyalty and co-operation with other parties must depend on the context of the contractual arrangement.
It seems that we have arrived at the very uncertainty that had been shunned by the courts when considering whether there was an overriding principle of good faith in English contract law.
It is likely that the court will consider it necessary to provide further guidance on what category of contract is a relational contract and whether the subjective concepts of integrity, loyalty and co-operation can be pinned down so that parties can be clear when they are in breach of an implied term. It may be that the English courts will have to look to the decisions by the Canadian and Australian courts for assistance in their consideration.
It is often said that commercial parties in international transactions choose English law because it promotes certainty, but introducing implied terms of honesty and integrity will do little to reinforce this reputation.
Alexandra Whiston-Dew is a solicitor at Mishcon de Reya