Saurabh Bhagotra examines the implied duty of good faith in contractual disputes in The Law Society Gazette

June 22 2020

This article was originally published in The Law Society Gazette and can be accessed here

Saurabh Bhagotra, Solicitor

Implied duty of good faith in contractual disputes

In early May, the UK Cabinet Office issued a non-statutory advice note: ‘Guidance on Responsible Contractual Behaviour in the performance and enforcement of contracts impacted by the Covid-19 emergency.’ The key summary outlined in the guidance is that parties to contracts should act responsibly and fairly, support the response to Covid-19 and protect jobs and the economy.

Against a challenging background, where every business and individual arguably have a moral duty to act responsibly and fairly with respect to others in the interests of public health and by extension, to the economy upon which we all depend, these objectives might appear to be perfectly reasonable.

In an appeal to altruism rather than by issuing a diktat, 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.’

But although the sentiment expressed may broadly echo the public mood, it is not as straightforward as that in legal terms. There are general principles in English law surrounding good faith to consider as well. Since the note is, in reality, a series of recommendations rather than statutory guidance, it is yet to be tested how the courts might apply the government’s message, as set out in the guidance, should there be a conflict between it and questions of good faith in a contractual dispute.

Recent events before the Covid-19 pandemic demonstrate that this is a continuously developing area of law: namely, the approach adopted by the English courts whether or not to imply a duty to act in good faith in contracts. One step in the law’s continuing evolution can be seen in the judgment of TAQA Bratani & Ors v RockRose [2020] EWHC 58 (Comm), which was handed down in January 2020.

This set an important precedent on the principles of contract interpretation and the much-disputed issue of whether and when an English court will imply the duty of good faith into commercial contracts. The TAQA dispute concerned the rights and obligations in joint operating agreements (JOAs) for five oil production blocks in the North Sea. Sitting in the Commercial Court, Judge Pelling QC held in favour of TAQA which, according to his judgment, had not acted in breach of any of the alleged implied terms. His judgment further found that the JOAs were sophisticated and complex contracts, drawn by skilled and specialist professionals, and where parties include a provision within their agreement which entitles one or more of them to terminate the agreement, that clause then takes effect in accordance with its terms.

Accordingly, an express term which gave TAQA, the non-operator, the right to remove the operator, RockRose pursuant to the JOAs, did not imply any duty on them to act in good faith when they exercised this right.

Although the judgment does not contradict what has been the general viewpoint of the English courts - to give the parties freedom of contract on whatever terms they agree and to put those terms in the contract - it does provide greater commercial certainty to all the parties concerned. In the judgment, HHJ Pelling QC accepted that ‘the circumstances in which such terms can be implied into commercial agreements is an incrementally developing area of the law’.

Since the UK Supreme Court judgment in Braganza -v- BP Shipping Limited [2015] UKSC 17, it has become increasingly common to allege breach of an implied duty of good faith in contractual disputes. In Braganza, the Supreme Court held, while applying the duty of good faith, that where a contract gives power to a party to make unilateral decisions which may affect the interest of both parties, the exercise of that discretion is limited by concepts of honesty, good faith, and genuineness, and cannot be arbitrary and irrational. In the present case, RockRose also argued that since the JOAs were ‘relational contracts’, the court should imply a duty of good faith into the contract. The ‘relational contracts’ could be defined as those contracts involving long term relationships to which the parties make a substantial commitment and may therefore require a high degree of co-operation based on mutual trust, confidence and loyalty. This may not be expressly stated in the contract, but are implicit in the parties conduct. However, in TAQA, the court decided that just because a contract could be defined as a ‘relational contract’, it would not automatically lead to the conclusion that the parties owe each other a good faith obligation. It would depend on the terms of the particular contract and “it is not a reflection of a special rule of interpretation” for relational contracts (Globe Motors v. TRW Lucas [2016] EWCA Civ 396).

Different jurisdictions can vary considerably in their approach to the issue. If the TAQA v RockRose contracts had been governed instead by the laws of a civil jurisdiction, for example France, Germany or certain US states, the court may have implied the duty of good faith or fair dealing into the contract. This would have restricted TAQA’s ‘unqualified or absolute right’ to discharge the operator, RockRose under the JOA remove RockRose as an operator. It therefore becomes obvious that the parties must carefully consider what terms should be expressly stated in their contract in order to avoid issues arising in the English courts which may imply a duty at a later date.

Accordingly, from the start of their commercial relationship, all parties to a contract should keep in mind the approach of English courts as to the duty of good faith - in particular when one of the parties is from a non-common law jurisdiction. Acting prudently, this would require the parties to seek advice from their legal advisers, and if the underlying contract is governed by English law, to mitigate the risk of getting involved in unnecessary litigation in exercise of its express rights under the terms of the contract. In UTB LLC v. Sheffield United Limited [2019] 2322 (Ch) Fancourt J stated that where a 'detailed, professionally-drawn contracts exist, it is more difficult to imply terms because there is a strong inference that the parties have given careful consideration to all the terms by which they agree to be bound…'. Moreover, it could be said that in order to maintain its position as the major jurisdiction for parties to resolve their commercial disputes, the English courts would be somewhat inclined to reconcile their position on the duty of good faith to other major civil law jurisdictions.

Specifically, due to the significant commercial disruption caused by the Covid-19 pandemic, the parties may be expected to consider the duty of good faith before making a unilateral decision which could affect the rights of other parties facing unforeseen and unprecedented economic difficulties.

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