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The implied term of good faith in English contract law: a view from North of the border

by Prof Laura Macgregor, Chair of Scots Law, Edinburgh Law School*

At the time of writing, the Scottish courts have not yet had the opportunity fully to consider the English implied term of contractual good faith (in Unicorn Tower Ltd v HSBC Bank plc [2018] CSOH 30 [72], Lady Wolffe held that there was no need to adjudicate on the parties’ submissions on this question). This is not surprising: the flow of Scottish reported cases is relatively small, and (Unicorn aside) no case has been reported in which a Scottish court has been asked to apply the relevant English precedents.

Whether a Scottish court would be obliged to apply those English precedents in the context of a suitable case is a difficult question. The law of implied terms in English and Scots contract law is similar, and English precedents are routinely cited and applied in the Scottish courts. That is not the case, however, with contractual good faith. Scots law contains a native, albeit nascent and under-developed, idea of contractual good faith. In a House of Lords case from 2004 Lord Hope stated: “Good faith in Scottish contract law […] is generally an underlying principle of an explanatory and legitimating rather than an active or creative nature” (R v Immigration Officer at Prague Airport, ex parte European Roma Rights Centre [2004] UKHL 55, [2005] 2 AC 1, [60]). More recently, the Inner House of the Court of Session reasserted the existence of good faith without expanding on its source or nature (Van Oord UK Ltd v Dragados UK Ltd [2021] CSIH 50).

Should a relevant case arise in Scotland, different possible courses of action are open to the Scottish courts. Clearly, the English precedents, having their source in Yam Seng Pte v International Trade Corp ([2013] EWHC 111 (QB), [2013] 1 All ER (Comm) 132) could be applied. Another possible course of action would be for the Scottish court to seek to achieve the same end as the English precedents but through a different route. This is, in effect, what happened in the House of Lords case Smith v Bank of Scotland (1997 SC (HL) 111). The English ‘inspiration’ was Barclays Bank v O’Brien [1994] 1 AC 180. Faced with a Scottish appeal on similar facts, Lord Clyde drew on a broad principle of good faith in Scots contract law in order to fashion a solution. Unfortunately, that case has been limited as a precedent largely to its own facts, namely cautionary obligations (guarantees) where the cautioner (guarantor) and the borrower have a close relationship. Yet another possibility would be for the Scottish courts to apply the existing Scottish idea of good faith, in effect, independently of the existing English precedents.

The aim of this blog is not to discuss the current concept of Scottish contractual good faith. The ground has already been expertly covered (see Hector MacQueen and Shannon O’Byrne, ‘The Principle of Good Faith in Contractual Performance: A Scottish-Canadian Comparison’ (2019) 23 EdinLR 301 and Jonathan Ainslie, ‘Good Faith and Relational Contracts: A Scots-Roman Perspective’ (2022) 26 EdinLR 29). The aim is instead to cast a cold eye on the recent English developments in order to assess whether those precedents should be applied in Scots law. Do they provide a workable idea of contractual good faith which would benefit Scots law? Are they clear and easily applicable?

This is no easy task. The number of English cases is indeed dizzying. Certain thoughts are grouped below under two headings. It is worth observing at the outset that in most of the English cases the claimant has been unsuccessful in its attempts to persuade the court to imply a term. Successful cases are very thin on the ground (a point well-made by my colleague, Lorna Richardson in her excellent book chapter, ‘Good faith and the duty to co-operate in long-term contracts’ in Andrew Hutchison and Franziska Myburgh (eds), Research Handbook on International Commercial Contracts (2020) 35). This should perhaps raise our suspicions on the effectiveness of the English idea.

1. Scope

The observations made under this heading are ones which apply to terms implied in fact generally – they are not specific to the implied term of good faith. We know that implied terms must not conflict with express terms. This means that the implied term of good faith can only occupy a territory which exists in the interstices between express terms. In a contract drafted with the benefit of expert legal advice (which would include most commercial contracts) that space is likely to be very small. The natural habitat of the implied term is therefore not wide.

Perhaps the more significant point to be made, however, is that it will be difficult to ‘jam’ an expansive idea like good faith into a small compartment. As a broad idea, it ought to function perhaps to ‘build out’ terms which have not been articulated fully or well, or to provide the contracting parties with a guide to their behaviour in performing contractual obligations. The route taken by the English courts, via implication in fact, seems to be one which is unsuitable for a broad general idea like good faith.

Further potential problems can be illustrated with reference to an English case decided in 2020. This is Russell v Cartwright and ors (2020] EWHC 41 (Ch). In the contract at issue, as is commonly the case in commercial contracts, individual references to good faith were scattered through the clauses of the contract. The claimant nevertheless wished to argue that the contract contained a broader idea of good faith. Rejecting the implication of a wider, more general, idea, Falk J explained (at [89]):

“The existence of express good faith obligations indicates that when the parties intended to impose an obligation of good faith they did so, strongly suggesting that implying a more general good faith obligation would be inconsistent with the express terms”.

This is not at all surprising and represents the simple application of orthodox contract law, namely that implied terms cannot conflict with express terms. Nevertheless, if any single reference to good faith in one clause rules out the application of a broader idea of good faith, that significantly limits the power of the English implied term. Given the frequency with which individual references to good faith are made in contractual clauses, is the implied term likely to be of any use at all? Looking on the bright side, this situation will certainly encourage contract drafters to understand the repercussions where they choose to refer to good faith within a contractual clause.

2. Term implied in fact or term implied in law?

We can deduce from the body of decided English cases that, where a contract falls into the class of a ‘relational’ one, potentially, a term imposing duties of good faith can be implied in fact. We have also been provided with a definition of ‘relational contracts’. They:

“[…] may require a high degree of communication, cooperation and predictable performance based on mutual trust and confidence and involve expectations of loyalty which are not legislated for in the express terms of the contract but are implicit in the parties’ understanding and necessary to give business efficacy to the arrangements”  (Yam Seng Pte v International Trade Corp [2013] EWHC 111 (QB), [2013] 1 All ER (Comm) 132, [143]).

Even in this case which gave birth to the idea, Leggatt J (as he then was) raised the possibility that the term could, in fact, be a term implied in law rather than a term implied in fact. He expressed his doubt that “English law has reached the stage  […] where it is ready to recognise a requirement of good faith as a duty implied by law, even as a default rule, into all commercial contracts” (at [131]). Thus, the English concept rests on a term implied in fact, but it was hinted that it might develop into a term implied in law in future. One can see why the term implied in law is attractive as a solution. It requires an identifiable type (which, here, would be the relational contract). The term would then be implied as a matter of law into all contracts of that type. An existing weakness, however, lies in uncertainty in the meaning of ‘relational contract’. As successive English cases have been decided, more and more contracts have been rejected as members of that type (see, e.g. Bank of Scotland v Hoskins [2021] EWHC 3038 (Ch) and Candey Ltd v Bosheh and Salfiti [2022] EWCA Civ 1103). Nevertheless, the parameters of the ‘relational contract’ are not becoming any clearer (the law on this point has “not yet reached a stage of settled clarity”, John Kimbell KC, Cathay Pacific Airways Ltd v Lufthansa Technik Ag [2020] EWHC 1789 (Ch), [189]).

Many years after first hinting that the term implied in law provides the best route to good faith, Leggatt J returned to that possibility. This took place in Sheikh Tahnoon Bin Saeed Bin Shakhboot Al Neyahan v Ioannis Kent [2018] EWHC 333 where he suggested (at [147]) that the term before the court passed the test for implication in law “on the basis that the nature of the contract as a relational contract implicitly requires (in the absence of a contrary indication) treating it as involving an obligation of good faith” (at [147]). In conclusion, from this author’s perspective, there currently seems to be a lack of clarity on the type of implication taking place.

It is important for us to know whether it is a term implied in law or a term implied in fact. Terms implied in fact have been treated as being rooted in the parties’ presumed intentions. Where a term is implied in law, i.e. implied into every contract of a specific type, the link with the actual parties’ intentions must be much weaker, as Ewan McKendrick has observed (Chitty on Contracts, Vol 1, [14-005]). At the very least, we should be sure about the legal basis when we imply a term of good faith. Is good faith something which the individual parties have agreed (or can be assumed to have agreed), or is it something else, perhaps the application of external societal norms about business behaviour?

Added to these problems is the fact that enthusiasm for the category of relational contracts seems to be on the wane. Certain English judges have recently ‘played down’ the importance of the relational contract as a category. They seem to suggest that there is nothing different about the implied term of good faith and that it can be implied into contracts like any other term. In other words, identification of the type as a relational contract seems to be disappearing from the step-by-step approach of implying good faith. This phenomenon can be seen in cases such as UTB LLC v Sheffield United [2019] EWHC 2322 (Ch), Russell v Cartwright and ors [2020] EWHC 41 (Ch), and Cathay Pacific Airways Ltd v Lufthansa Technik Ag [2020] EWHC 1789 (Ch). If we are losing our enthusiasm for the category of the relational contract, then the route which relies on a term implied in law may be closed to us.

Much more could be said. This author would suggest that the English concept has a sufficient number of teething problems to place the Scots lawyer on the alert. The danger is that we import the concept into Scots law leaving ourselves with the problems set out above to be resolved. We clearly have, as MacQueen and O’Byrne have explained, a number of individual manifestations of an underlying Scottish idea of good faith. Rather than applying the English precedents, it would make sense to recognise those manifestations, and unite them under the banner of the broad Scottish idea. The recent recognition by the Inner House of a concept of good faith (Van Oord UK Ltd v Dragados UK Ltd [2021] CSIH 50) may be a signpost on the way to that ultimate goal.

* With thanks to Lorna Richardson for helpful comments.

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