In the first of a series of short articles examining common contractual terms, the effect of which is often misunderstood or underestimated, Elaine McGrath examines the concept of ‘good faith’.

How often have you agreed to act in good faith in relation to an element of a contract such a negotiation of a price review or resolution of disagreements or indeed in respect of the implementation of a contract generally? However have you considered what this means in practice?

Express Duty of Good Faith

There are no restrictions on parties including express obligations of good faith in a contract.

The Judge in the case of CPC Group Limited –v- Qatari Diar Real Estate Investment Company EWCH 1535 (Ch) summarised the obligations imposed by such a duty as the requirement 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 justified expectations of ”

While most people would expect their counterpart to act fairly and honestly in their dealings, it is not always clear how far such obligation goes. There has been a many cases in the UK on the subject but most are decided on their facts or the specific interpretation of the good faith clause; e.g. is the duty expressed to apply generally or specifically in relation to particular provisions and in the context what is appropriate? Case law has determined that behaviour such as the giving of false information knowing it will be relied upon or failure to disclose material facts for example may fall foul of the duty. However, a general duty of good faith will not be construed so as to hinder the commercial interests of either party or dilute express provisions of a contract such as an express entitlement to terminate in a contract.

Therefore to asses the extent of the duty imposed by the inclusion of an express duty to act in good faith the context of the agreement and its subject matter will need to be considered to ascertain what objectively are the intentions of the parties in this regard.

Implied Duty of Good Faith

In general law does not impose a general principle of good faith. There are a number of reasons for this; contracts require certainty but the concept of good faith is nebulous and subjective and therefore prone to uncertainty. Furthermore the parties to a contract should be free to negotiating commercial terms and it is not the place of the court to imply a duty between two commercial parties negotiating at arms length.

However, in a departure from this position a recent Irish High Court case, John Flynn and Benray Limited v Breccia and Michael Mcateer², the court did imply a duty of good faith and fair dealing in relation to the terms of a shareholders agreement.

The parties were shareholders in Blackrock Hospital Limited the company that owns Blackrock Hospital. The plaintiff took a loan from Anglo to purchase its shares in the hospital. The Defendant acquired this loan from NAMA and sought to enforce it and appoint a receiver.

The plaintiff challenged the enforcement of the loan on the basis of a breach of an implied duty of good faith in the shareholders agreement. The judge held in favour of the plaintiff. In doing so looked at the relationship created by the shareholders agreement requiring the parties to communicate effectively and cooperate. In addition he looked at the ongoing relationship created by the shareholders agreement and the fact that the relationship and the nature of the arrangements were not merely commercial. Accordingly, it was held that the implied term meant that the Defendant was not entitled to demand or recover monies other than in accordance with the Shareholders Agreement and therefore the implied term of the shareholders agreement trumped the contractual rights under the loan documents.

The courts had previously been reluctant to imply obligations of good faith and while this case was very much determined on its facts, the court has determined that it may be appropriate to do so in certain circumstances particularly where the contract in question is a relational contract where there is a long term relationship between the parties and/or where the relationship is not purely business.