Express duty of good faith does not extend to termination
TSG v SOUTH ANGLIA [2013]
The Court was asked whether a contractual right of termination for convenience had to be exercised in good faith and whether there was an implied term to this effect. The answer to both of these was ‘no’, which seems to support the opinion that the Courts are likely to interpret express contractual obligations of good faith narrowly, will hesitate before implying such obligations and will certainly not imply them where they would seem to override expressly agreed contractual provisions.
Facts:
- T contracted to provide a gas servicing programme to the housing stock of S for four years. Clause 1.1 provided that the parties “shall work together and individually in the spirit of trust, fairness and mutual co-operation … within the scope of their agreed roles, expertise and responsibilities … and in all matters governed by the Contract they shall act reasonably and without delay”.
- Clause 13.3 gave S the right to terminate the contract for convenience or at will at any time.
- After about a year, S served a termination notice on T under clause 13.3, without giving any explanation as to why it wished to terminate. T commenced an adjudication claiming compensation for the early termination and was awarded a substantial sum.
- S applied to the Court for a declaration that its termination had been in good faith and hence no compensation was due. T argued that such a duty arose on the correct interpretation of clause 1.1 (the question was how far did the duty to act reasonably extend?) and also by virtue of an implied obligation of good faith.
Decision:
- The Court held in favour of S and found that the adjudicator was wrong to award compensation. The right of termination for convenience on notice was an ‘unqualified and unconditional right’ and the Court founds as follows:
- No requirement to act reasonably
It was held that the requirement in clause 1.1 which stated that the parties were to “work together … in the spirit of trust, fairness and mutual co-operation” related to the provision of gas-related works only. This was also the case with respect to the requirement that they “act reasonably” in relation to “all matters governed by the Contract”. The parties had expressly limited the scope of these obligations to their “roles, expertise and responsibilities” - termination at will was not a ‘responsibility’, it did not give rise to a ‘role’ nor was it dependent upon any ‘expertise’. Consequently this limitation did not affect the right to terminate for convenience and accordingly, clause 1.1 did not require S to act reasonably in exercising this right.
- No implied duty of good faith
The Court also rejected T’s argument that it should imply a term of good faith into the contract. The parties had already expressed in clause 1.1 the way in which they were to work together. There was therefore no room for the Court to imply a duty of good faith. Even if there was such an implied term, it could not circumscribe what the parties had expressly agreed in clause 13.3 - there was no requirement to act reasonably or in good faith in exercising the right of termination. Termination for convenience without any reason was therefore a risk both parties had agreed to when entering into the agreement.
- No requirement to act reasonably
Points to Note:
- This is the latest in a series of cases in which the English Courts have considered the extent to which contracting parties must act in good faith. The judge considered the ruling in the Yam Seng case that we reported on in May, and concluded that although this was potentially of general application to all commercial contracts, in this case there was no suggestion of any dishonesty in S’s decision to terminate and fidelity was largely already covered by clause 1.1. The Yam Seng decision seemed to go against the grain of previous and traditional English case law that there is no broad implied duty of good faith, which this case also appears to support.
- In line with the Court of Appeal's judgment in the Compass decision, which we also reported on in May, this case confirms the ruling that while discretions involving an assessment or a choice as to a range of options in which both parties’ interests are relevant may be subject to an implied term of good faith, those involving the exercise of absolute contractual rights are unlikely to be.
- Where a contract contains an express right of termination for convenience, any conditions that must be met before the right can be exercised will usually be set out: if there is to be a requirement of good faith or the right may not be exercised unreasonably, then the parties would normally say so expressly. In the absence of any such provision here, the Court was not willing to imply one. In addition, if compensation for early termination is expected, then care must be taken to ensure the wording reflects the parties’ intentions. T did not agree with S to include a provision for an early termination payment in the contract and so it was presented with what on its face purported to be a four year agreement that was terminated early without cause or compensation. In fact, the four year agreement was nothing of the sort.