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Good Faith in Commercial Contracts

History and Developments

You might be surprised to hear that English law has not historically implied an obligation on the parties to a contract to act in good faith. However, there have been and still are exceptions including contracts of employment, insurance etc. Furthermore, good faith obligations are becoming more readily implied into contracts through decisions of the courts. Parties involved in long term ‘relational contracts’ such as joint ventures, franchise agreements and long term distribution agreements, for instance, should be aware of a shift towards the European application of good faith. Such contracts are ones where the relationship between the parties is key to their success and it is these types that such a term is most likely to be implied.

Good faith may also be implied where a contractual right involves the exercise of discretion. Unless there is clear language to the contrary, that discretion must be exercised in good faith for the purpose for which it was conferred and not arbitrarily, capriciously or unreasonably.

D&G Cars v Essex Police Authority (2015)

In this case, the claimant had a contract with the defendant police force to dispose of their vehicles. The defendant terminated the contract and excluded the claimant from the tendering process. The claimant alleged bad faith on the part of the defendant. The High Court dismissed the claim on the basis that there was evidence to show that a reasonable person in the defendant’s position, and in possession of the facts which the defendant had, would have done precisely what the defendant had and would have treated that which had been discovered (dealing with a vehicle without the defendant’s consent) as a repudiatory breach and also grave misconduct so as to lead to the termination of the contract and the removal of the claimant from the tender process.

The law surrounding the issue of ‘good faith’ is grey and it is not the case that an obligation to act in such a way will be implied into all commercial contracts. As is often the case with contractual matters, the circumstances of the transaction must be examined carefully and the legal requirements must be met.

Drafters and negotiators of contracts may want to consider whether to expressly address the issue of ‘good faith’.

This should not be relied upon for legal advice. If you would like any further information or advice please email

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