Housebuilder Tip of the Month - Let’s act in good faith – actually, should we?

Published 25 October 2022

It is fair to say that the lack of a general doctrine of good faith in English contact law is well established – instead, parties to a contract are usually entitled to look out for their own best interest in any commercial relationship. However, it is becoming more common for good faith wording to be used in contracts and it is therefore important to carefully consider what this obligation may mean for the parties, in deciding whether or not it should form part of the drafting.

A duty of good faith has no universally accepted definition and therefore, precisely what it means will usually depend on the nature of the contract and the surrounding commercial context. What is also very interesting is that, unlike (by way of an example) the endeavours obligation, where there is a clear difference between ‘reasonable’ ‘all reasonable’ and ‘best’ endeavours levels, the courts do not seem to draw much, if any, distinction between the degrees of good faith. This means that, using words such as ‘utmost’ or ‘absolute’ is unlikely to affect the strength of the obligation in practice.

Another interesting aspect is that the precise drafting of the contract may have a crucial effect on whether the good faith obligation applies to a specific provision only (for example, exchange or disclosure of information) or whether it should govern the entire document. Therefore, careful consideration should be given to the intention behind the obligation.

When it comes to precisely what the parties need to do in order to be seen as acting in good faith towards the other, this will again depend on the nature of the contract and obligations within it. This is where the courts provide us with plenty of guidance. In the case of CPC Group v Qatari Diar Real Estate Investment, the court stated that acting in accordance with the duty of good faith was to: “adhere to the spirit of the contract, to observe reasonable commercial standards of fair dealing, to be faithful to the agreed common purpose, and to act consistently with the justified expectations of [the other party]”.

In other relatively recent cases, the obligation was also described as:

• acting honestly, fairly and openly;
• taking into account the other party’s interests;
• disclosing any material facts which may be of interest to the other party;
• not acting in a manner which may lull the other party into a false belief, including extracting information for false reasons;
• not knowingly providing false information upon which the other party is likely to rely; or
• not negotiating behind the other party’s back.

However, depending on the context of the contract and commercial relationship between the parties, a duty to act in good faith can take other meanings and introduce additional obligations.

To summarise, adding good faith wording may not achieve what you originally seek or expect. Although at first glance, it may appear like a great idea (as no one enters into a contract expecting the other party to act in bad faith), a good faith provision may introduce potentially unintended obligations on the parties (as illustrated by some of the examples above). Care should therefore be taken during negotiations so that, should this obligation feature in the drafting, the contract is clear on its scope. As an alternative to an express good faith obligation, and in order to introduce more certainty into the contract, the parties may instead choose to include an express list of specific provisions with which they need to comply.