Duty to act with ‘honesty and integrity’ implied (and other good faith cases)
D&G CARS v ESSEX POLICE AUTHORITY [2015]
An overriding duty of ‘good faith’ 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). There have been a number of decisions in 2015 where the Courts were asked to decide whether a general duty of good faith should be implied into a contract. The Courts have also been asked to consider the impact of various express contractual provisions along similar lines. Here, the Court confirmed that a general duty to act with ‘honesty and integrity’ should be implied but other cases which we have also reviewed have resulted in a different outcome: Portsmouth City Council v Ensign Highways, Myers v Kestrel and Greenclose v National Westminster Bank.
Facts:
- D&G Cars (D&G) was a vehicle recovery business and had an agreement with the Essex Police Authority (EPA) to dispose of vehicles on its behalf. The recovered vehicles were to be dealt with as set out in the contract – for example, certain vehicles were to be crushed to ensure that no parts of the vehicle could be re-used in other vehicles.
- D&G did not carry out the EPA’s instruction to crush one vehicle, but instead changed its identity so that it could use it for its own purposes. The EPA ended the agreement and excluded D&G from the tendering process for further contracts for vehicle recovery on the basis that D&G had breached:
- an express condition which required D&G to follow the EPA’s instructions and to not take possession of vehicles which it had disposed of; and
- an implied condition that both parties would conduct themselves acting in good faith or with honesty and integrity in meeting their contractual duties.
Decision:
- Express condition
- The Court decided that the EPA was entitled to act as it did and terminate the agreement for breach of the express provision.
- Implied condition
- The Court also found that there had been a clear breach of an implied term to act with integrity, although given the facts, it was not satisfied that D&G had been dishonest.
- Although both parties had accepted that there was an implied term to act with honesty and integrity, the Court set out the legal basis for the implication of that term, referring to the case of Yam Seng v ITC [2013].
- The Court then looked at the particular features of the vehicle disposal contract which would warrant the inclusion of such an implied term:
- the agreement resulted in the parties having a contractual relationship for a relatively long period;
- the substance of the contract involved dealing with the recovered property of the public acting on behalf of a law enforcement agency;
- the recovered property might have to be returned to the public; and
- some of the recovered vehicles would form part of the evidence for criminal investigations and potential prosecutions.
- The judge said that all of these features made it clear that there was an implied term that the parties would act with honesty and integrity in operating the contract and he commented that it was a 'relational' contract “par excellence”.
PORTSMOUTH CITY COUNCIL v ENSIGN HIGHWAYS [2015]
Here, the Court ruled that there had been no breach of an express duty of good faith because according to its wording, it was limited in scope. So far as an implied term was concerned, the Court formulated the implied obligation in a much more traditional way, at least for English law.
Facts:
- Portsmouth City Council (P) and Ensign Highways (E) entered into a long-term contract relating to E’s maintenance and operation of highways. There was a complicated service points regime relating to E’s performance of the services and a provision requiring the parties to, “deal fairly, in good faith and in mutual co-operation with one another” in relation to P’s statutory obligation to try to obtain best value.
- Due to various government cuts in funding, P was worried the contract would become unaffordable and did not want to pay the compensation that would be payable if it ended the agreement without a reason. It therefore embarked on a strategy of issuing large amounts of service points to E, such as awarding the maximum amount of service points for every default irrespective of the severity, to try to put E in a position such that it was persuaded to renegotiate the contract terms.
- Consequently a dispute arose over how, and the extent to which, P was awarding service points and whether it was under an obligation to act in good faith in relation to this aspect of the contract, either due to the express duty to deal in good faith or as a result of an implied obligation to do so.
Decision:
- Express obligation - Looking at the express duty in the best value clause, the Court said there was nothing in the language of the provision itself nor in any other part of the agreement that indicated, either expressly or by implication, that the duty of good faith in relation to best value was to apply more widely. Various other clauses contained a specific and narrow obligation of good faith which suggested that the parties had thought about the situations in which such a duty was necessary and had provided for these in the contract accordingly. Hence, there was no general duty under the agreement to act in good faith by virtue of the express provision.
- Implied term - In considering whether a general duty of good faith should be implied, the Court stated that the award of service points involved an implied term, “to act honestly, on proper grounds and not in a manner that was arbitrary, irrational or capricious”. P should not have applied the same points regardless of how serious the breach was, particularly as there was a reference to a ‘maximum’ number of points for each default, which suggested that discretion should have been exercised depending on the gravity of the breach in each case. P was therefore in breach of this implied term.
MYERS v KESTREL [2015]
This was another example of where a claim that a duty of good faith should be implied was unsuccessfulFacts:
As part of the sale of Myers’ business, Kestrel (K) issued various loan notes to Myers (M). K then amended one of the loan notes which M said would effectively make the loan note worthless. M argued that K should be under an implied duty to exercise the right to modify the loan note in good faith.
Decision:
- The Court refused to imply such a term saying that the Court was being asked to conclude that the parties had omitted to insert an important term but there was no justification for this as the overall loan documentation was extensive and detailed.
- Referring to the decision in Attorney General v Belize Telecom (PC) [2009], the judge said the Courts have no power to introduce terms to make a contract it is asked to interpret fairer or more reasonable. The most usual inference, if the agreement does not expressly provide for what is to happen when some event occurs, is that nothing is to happen and that where the event causes loss, the loss lies where it falls.
GREENCLOSE v NATIONAL WESTMINSTER BANK [2014]
- An argument that a duty of good faith should be implied also failed in this case. The Court reiterated the position that, “there is no general doctrine of good faith in English contract law and such a term is unlikely to arise by way of necessary implication in a contract between two sophisticated commercial parties negotiating at arms’ length”.
- The Court went on to say that the decision inYam Seng v ITC [2013] was not to be regarded as laying down any general principle applicable to all commercial contracts but the implication of an obligation of good faith is heavily dependent on the situation. Hence, in some circumstances where a party is given a discretion to exercise a contractual right, the Court will more readily imply an obligation that the discretion should not be used in bad faith or in an arbitrary or capricious manner, but the context is key.
Points to note:
Although the outcome of the above cases was not always consistent, a number of recurring points do emerge:
- It is clear that the Courts will uphold express contractual obligations to exercise good faith but generally they will not apply them more widely than actually provided for in the express contractual provision in question.
- The Courts may imply a general duty of good faith in certain so-called ‘relational’ contracts which require a high degree of co-operation based on mutual trust and confidence, but this is heavily dependent on the context of the contract in question and particularly, the identity and sophistication of the contracting parties. It would seem that this is very much the exception rather than the rule.
- The Courts will not normally imply such a term if it would contradict an express term of the contract.
- Where a party has discretion involving an assessment or a choice as to a range of options in which both parties’ interests are relevant, then there is an implied term that that discretion should not be exercised arbitrarily, capriciously or in an irrational manner. However, the exercise of absolute contractual rights is unlikely to be subject to such an implied term.
- If contracting parties wish there to be a duty to act in good faith, it is best to include a clear provision in the agreement itself, setting out the exact scope of what such an obligation is intended to entail. Opinion seems divided as to whether it is sensible to include express and generally applicable ‘good faith’ obligations. Some consider it encapsulates the spirit of ‘partnership’ that they want to engender with their contracting partners whilst others believe it introduces an altogether unsatisfactory degree of uncertainty into contracting relationships which makes it very difficult to enforce agreements as written.