What does it mean to agree to act “in good faith?”

The phrase “in good faith” is sometimes found in clauses of commercial contracts and can be easily glossed over as innocuous. However, there is no general doctrine of good faith in contracts under English Law and inserting these words can substantially change the footing one or both parties find themselves on, if a dispute arises.

Like all things with a long history, English contract law is brutal. The central tenet is that parties have freedom of contract and will act in their self-interest when agreeing terms. Bringing “good faith” into a contract suggests there is empathy to a counterparty’s position and a duty to act fairly and this does not sit well with the historical position. Furthermore, the concept of good faith is whimsical and circumstantial and therefore in contradiction with the requirement that contractual terms are certain. Except in special cases, good faith will only arise in a contract if the parties expressly agree it should.

Nonetheless, increasingly “good faith” is appearing in commercial contracts, either as an overriding duty or in specific circumstances; usually related to “known, unknowns” such as dealing with exogenous shocks (perhaps like the enormous energy price increases that businesses are currently trying to grapple with.)

So, what does “good faith” actually mean?

The Courts are unwilling to state that good faith has a scale. It is either required or it is not. Where a party is required to act in good faith, it goes hand-in-hand with an obligation to not act in bad faith. This is not as helpful as it first seems. Whilst it is easier to grasp what bad faith in a situation would look like, it still leaves a vast middle ground of actions which might be compliant with acting in good faith but might not, because the course of action does not have the necessary degree of co-operation or recognition of the other side’s position.

The caselaw is developing to help parties understand what their obligations are when acting in good faith, but it is circumstantial. Importantly, a requirement to act in good faith does not require a party to abandon its commercial imperative or to give up any rights it has acquired through robust negotiation. As such, a party’s duty to act in good faith does not provide a back-door remedy for the counterparty’s mistakes or poor negotiation skills. However, good faith does mean being open and honest, not circumventing an agreement and not withholding material facts.

Agreements to agree

“Agreements to agree,” often are predicated on a requirement to act in good faith during the negotiations. Again, the Courts have stopped short of interpreting the requirement to mean that agreement must be arrived at. It is still possible to act in good faith but not reach an agreement.

Implied Duty and rationality

When interpreting contracts the Courts are likely to consider concepts of fair dealing and honesty amongst contracting parties for example by not allowing a party to benefit from its own wrong-doing.

Additionally, the so-called “Braganza” duty requires parties to act rationally such as avoiding callous behaviour. A recent example brought this concept into consideration when the Court agreed that a franchisor had an obligation to consider the personal circumstances of a franchisee with a shielding family member, when the franchisee requested a suspension of their franchise agreement during the early parts of the Covid-19 pandemic.

The Courts have also created the concept of relational contracts. These are long-term contracts centred on a relationship of trust and collaboration. Relational contracts are likely to have an overriding duty of good faith in relation to their interpretation.

Finally, there is an implied duty of good faith, when dealing with consumers.