Contracting ‘good faith’ in COVID-19

Businesses have had to rely on ‘good faith’ during COVID-19, but what does ‘good faith’ mean, when does it apply and has COVID-19 affected this duty?

What is ‘good faith’?

There is no one definition of what ‘good faith’ means, and it has been interpreted differently by courts depending on the context of the particular case. Generally, it can be understood as adhering to the spirit of the contract, observing reasonable commercial standards of fair dealing, being faithful to the agreed common purpose and acting consistently with the justified expectations of the other party. If a contract contains an express obligation to act in ‘good faith’, courts will construe this strictly in accordance with drafting. For instance, a duty to act in ‘good faith’ must clearly identify which provisions it will apply to. 

An express duty of ‘good faith’ has been found by the courts to:
1.    prevent action that frustrates the purpose of the agreement
2.    require the disclosure of material facts to the other party
3.    prohibit knowingly providing false information on which the other party will rely
4.    prohibit negotiating behind the other party’s back
5.    prohibit improperly accessing the other party’s computer systems
6.    to observe moral and ethical standards of behaviour
7.    require parties not to break off negotiations without reasonable cause.

However, a duty to act in ‘good faith’ does not require either party to give up their commercial interest nor will not cut across hard contractual rights. For example, a party exercising its express right to terminate a contract will not be in breach of a general duty to act in ‘good faith’.

When must parties act in ‘good faith’?

Unlike in many civil law jurisdictions, there is no general principle of ‘good faith’ which regulates the behaviour of parties to a contract under the laws of England and Wales. Instead, parties may be under an obligation to act in ‘good faith’ where a contract includes an express obligation or in certain limited circumstances an implied obligation in ‘relational contracts’. 

‘Relational contracts’ are typically long-term agreements requiring a high degree of cooperation and collaboration between the parties. However, case law has established that this duty will be implied only in very limited circumstances. For example in the recent case of TAQA Bratani & Ors v RockRose [2020] EWHC 58 (Comm), the court found that although the parties may have had a “relational contract” they would not imply a duty of ‘good faith’ into it. In deciding this, the court took into account that they were expertly drawn, complex commercial agreements between sophisticated parties. 

COVID-19

The UK Cabinet Office has issued “Guidance on responsible contractual behaviour in the performance and enforcement of contracts impacted by the COVID-19 emergency” (Guidance). The Guidance strongly encourages “responsible and fair behaviour in contractual arrangements” where parties are “materially impacted by COVID-19”. These principles seem to be similar to a duty to act in ‘good faith’. 

Yet while similar, the Guidance appears to go further than a duty of ‘good faith’ as “responsible and fair behaviour” as it includes “being reasonable and proportionate in responding to performance issues and enforcing contracts (including dealing with any disputes), acting in a spirit of cooperation and aiming to achieve practical, just and equitable contractual outcomes having regard to the impact on the other party (or parties), the availability of financial resources, the protection of public health and the national interest”. 

Crucially, the Guidance is not binding. It does not override parties’ contractual rights and obligations under the general law, nor as set out in their contract and it is not statutory guidance. However, the Guidance might influence the development of the doctrine of ‘good faith’ in the future: potentially making ‘good faith’ more onerous or expanding the scope of an implied duty. Indeed, the Guidance states that “further measures may be taken in respect of the guidance… including legislation.”