Duty of good faith implied in ‘relational' contract
BRISTOL GROUNDSCHOOL v INTELLIGENT DATA CAPTURE [2014]
The High Court ruled on a claim concerning a contractual relationship involving the supply and ongoing updating of online training materials under which one of the parties alleged there had been a breach of an implied duty of good faith.
An overriding duty of ‘good faith’ between contracting parties is a concept imposed by law in many continental European jurisdictions but not one which is generally implied under English law (at least not in those terms). However, the English Courts seem to be accepting the application of ‘good faith’ principles on a much more regular basis particularly in the context of so called ‘relational’ contracts..
Facts:
- Bristol Groundschool (B) provides specialist training to commercial pilots and Intelligent Data Capture (IDC) supplied online versions of training materials to B. B sued IDC for breach of contract and copyright infringement in relation to the artwork in the training materials it supplied.
- IDC counterclaimed that B had infringed its copyright by downloading IDC’s materials secretly and that this was a breach of an implied duty of good faith.
Decision:
- In relation to IDC’s counterclaim, the judge agreed that this was a ‘relational’ contract of the type referred to in Yam Seng v ITC [2013] in which a duty of good faith was implied. In that case, the Court commented that some commercial contracts involving a longer term relationship and ‘substantial commitment’ will require a higher degree of communication, cooperation and predictable performance based on mutual trust, which are implicit in the parties' understanding of what they would each give and receive, and are necessary to give so-called ‘business efficacy’ to the arrangements (ie because otherwise the arrangements would not make sense without them). Such ‘relational’ contracts might include joint venture agreements, franchise agreements and long-term distributorship agreements. Here, the contractual arrangement did involve elements of joint publishing and joint marketing of the training materials concerned even though this was primarily a customer/supplier relationship.
- The Court went on to explain that good faith extends beyond, but at the very least includes, the requirement of honesty. The relevant test is that of conduct that would be regarded as ‘commercially unacceptable’ by reasonable and honest people in the particular context involved.
- The judge found that a duty of good faith could be implied. The Court held that B’s conduct was ‘commercially unacceptable’ and therefore a breach of this implied duty. However, partly because of certain extenuating factors, the conduct was, somewhat surprisingly perhaps, not regarded as "[striking] at the heart of the trust which is vital to any long-term commercial relationship” and therefore did not amount to repudiatory breaches entitling IDC to terminate.
Points to note:
- The Court confirmed that in its view this was a form of ‘relational’ contract and implied a duty of good faith. One clear similarity between this and the Yam Seng case was that this was essentially a relationship between two key individuals, albeit trading through corporate vehicles.
- The exact circumstances in which a duty of good faith may be implied and the precise extent of that duty still appear to be uncertain. This is an issue which will undoubtedly continue to feature prominently in the law reports for some time. The judges appear uncertain as to exactly how far to go with this area of unfamiliar ‘new’ law.