FAQ on good faith clauses in commercial contracts

What is the duty of good faith?

In commercial contracts, it can be generally taken to mean honest, fair, and trustworthy dealings between parties. It requires both parties to cooperate and avoid actively working against each other’s ability to fulfil or profit from the contract. Essentially, it aims to ensure that neither party undermines the other’s right to receive the benefits of the agreement.

Is it an English contract law concept?

Unlike many civil law systems (e.g. on the continent), English law does not impose a universal obligation to act in good faith, this is partly because English law places great weight on contractual certainty.

Can it affect an English contract?

Yes. The concept of good faith can affect a contract in three ways:

• Express Duty of Good Faith: Parties can negotiate and include an express duty of good faith in their contract. An express duty of good faith takes its meaning from the context in which it is used. The scope of this duty should be clearly defined to avoid uncertainty. It may apply only to specific areas of the contract where the express term is included.
• Contractual Discretion and Rationality: This is known in legalese as the ‘Braganza’ duty after a leading case. Effectively, where contractual discretion exists, unless there is express wording providing otherwise, that discretion should be exercised honestly, rationally and for the purpose for which it was transferred. This is to prevent one party, acting as decision-maker, from abusing its decision-making powers where the contracting parties would have a conflict of interest e.g. one party unilaterally setting or varying the charges or interest rate in a contract.
• Implied Duty of Good Faith: Courts may imply a duty of good faith in specific circumstances or use the concept of good faith to imply other fact-specific duties.

Should we include one in a commercial contract?

We would recommend incorporating this obligation to address contractual gaps and promote fair and honest behaviour between the parties.

Comment

Good faith obligations in a commercial contract can help foster trust, transparency, and cooperation between parties when negotiating terms, performing duties, or resolving disputes, contributing to successful business relationships. However, the contract’s wording and context will be considered when assessing good faith obligations, so any good faith obligations need to be drafted carefully and in detail. Drafted well, good faith provisions should help ensure fairness and integrity throughout the contractual relationship.

Contact our Corporate & Commercial team if you would like help with good faith clauses in commercial contracts.