Implied and express obligations of good faith in contracts

As my colleague Josh McFadzen wrote recently in OGV Energy magazine (page 50), caution must be exercised when importing common law concepts into upstream oilfield services contracts where the governing law is that of a civil law legal system in the Middle East.

"Where market participants conducting petroleum operations in the Middle East are importing common law concepts into upstream oilfield services contracts, and where the governing law chosen by the parties is a civil law legal system, there remains a residual risk that a tribunal or court may adjudicate outcomes which are different to the common intention of the parties on the basis of the disparity between legal principles."

However, in certain jurisdictions, the English common law is relevant to commercial relationships and to disputes arising from them. In the Abu Dhabi Global Market financial free zone, the English common law is directly applicable by virtue of the Application of English Law Regulations of 2015. Here, common law concepts such as good faith will be taken into account by the courts in determining commercial disputes. It is therefore still useful for parties in the region to examine the way the English courts have refined and, to an extent, expanded the scope of the obligation of good faith on a contracting party in recent jurisprudence.

Implied obligations of good faith

The starting point is that there is no general doctrine of good faith in English law. Parties are generally free to pursue their own self-interest, and the law will not set aside a contract just because one side has made a bad bargain. Another reason why the courts have refrained from imposing a general implied obligation of good faith is that one of the overarching goals of a contract is to give the parties to it certainty as to what their respective rights and duties are, and concepts like good faith can bring in an element of subjectivity that can make it harder to achieve that goal of certainty.

In certain types of contract, however, the English courts have held that an obligation of good faith may, in some circumstances, fall to be implied. Those include:

Relational contracts (as described in the case of Yam Seng Pte Ltd v International Trade Corp Ltd [2013] EWHC 111 (QB), and considered again more recently in the case of Bates v Post Office Ltd (No 3) [2019] EWHC 606 (QB)) – contracts involving "a high degree of communication, co-operation and predictable performance based on mutual trust and confidence, and expectations of loyalty".
Contracts where a party is under the "Braganza duty" (as described in the case of Braganza v BP Shipping Ltd [2015] UKSC 17) – contracts conferring an express or implied discretion on a party.

What does acting in good faith require?

Contracts may also, of course, include express provisions requiring parties to act in good faith. What a particular express or implied obligation of good faith actually means will depend on the wording of the clause (if express) and the context in which it exists, but the courts have given guidance as to what a requirement to act in good faith might oblige a party to do, or refrain from doing. These examples are fact and contract-specific and so will not apply to all good faith obligations, but can give an indication as to the kind of conduct that is either required or prohibited.

In Berkeley Community Villages Ltd v Pullen [2007] EWHC 1330 (Ch), a clause requiring a party to act in "utmost good faith" was held to breached by actions which frustrated the purpose of the agreement. This accords with the High Court's later characterisation of an obligation of utmost good faith, in the case of CPC Group Ltd v Qatari Diar Real Estate Investment Company [2010] EWHC 1535 (Ch), as requiring parties "to adhere to the spirit of the contract…and to observe reasonable commercial standards of fair dealing, and to be faithful to the agreed common purpose, and to act consistently with the justified expectations of the parties."
A duty of good faith does not, however, require a party to put the other's interests before its own. A party will not be obliged to give up a financial advantage that has been freely negotiated and agreed upon in a contract if, for example, there is a fall in the market (Gold Group Properties Ltd v BDW Trading Ltd [2010] EWHC 1632 (TCC)).
Save for in very unusual circumstances (see the Bates v Post Office case, arising out of the Horizon scandal, and where there was an obvious imbalance of power between the Post Office and the subpostmasters), a duty of good faith, whether express, implied or arising from a Braganza duty, will not cut across hard contractual rights, such as termination rights. It was argued in TAQA Bratani Ltd v RockRose UKCS8 LLC [2020] EWHC 58 that a termination provision allowing the removal of an operator with notice conferred a discretion on the voting parties, and therefore they were under a Braganza duty to exercise their discretion to terminate in good faith, and not arbitrarily or capriciously. The court held that, in this particular contract, the termination provision was simply an unqualified right and not a discretion per se, so a Braganza duty did not arise. This reasoning was followed and applied in the case of Cathay Pacific Airways Ltd v Lufthansa Technik AG [2020] EWHC 1789 (Ch) where again the court held that "[a] power to terminate or withdraw an object from a contract of service is by definition a power inserted for the benefit of the terminator / withdrawing party and at least where it is clearly drafted (as it the Option in this case is), it ought usually take effect in accordance with its express terms".

Good faith cannot, therefore, be ignored, even where there is no express provision in the contract. The courts of the Abu Dhabi Global Market financial free zone will consider this jurisprudence in relevant cases.