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The increasing importance of the obligation of good faith

Whilst other countries have embraced a legal obligation of good faith, English courts have been slow to embrace the concept.

English courts have historically favoured certainty over nebulous concepts and have not wanted to restrict any words in a contract by an over-arching obligation as uncertain as “good faith”.
However, gradually English courts have started to take account of contractual clauses which require the parties to “act in good faith” and a recent case from Canada (Bhasin v Hrynew 2014 SCC 71) has been referred to in a High Court case in this country.

What will a good faith clause do?

The High Court has condensed the obligation 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].”
There is also an obligation to disclose all material facts and there is an obligation to act rationally.

What won’t a good faith clause do?

It won’t require a party to act contrary to its commercial interests.

Does it matter if a party is required to act with “utmost” good faith?

No, the courts seem to have decided that “utmost” doesn’t add anything to the obligation.
It is likely that the clause will be included in more and more contracts in the future as it seeks to protect the parties in the event of a gap in contractual obligations covering some unforeseen circumstance.
For further information please contact Tom Warrender or Andrew Kerr.