GOOD FAITH AND RATIONALITY – BECOMING A TREND?
As we look to emerge from the coronavirus (COVID-19) pandemic and deal with the resultant economic environment, parties’ behaviour vis-à-vis their counterparties is going to come under sharper focus. This will particularly be the case where there are provisions which give parties contractual discretion. In addition, an issue that is likely to gain traction is whether a party is required to act in good faith and if so, the scope of that obligation.
In this article we look at the recent decisions and growing judicial views on the obligation of good faith and the duty of rationality when exercising contractual discretion.
Is there a general obligation of good faith?
Express provision. A contract governing the relationship between the parties can include an express provision of good faith. In those situations, what the obligation means will depend on the circumstances and wording of that contract. For example, the good faith obligation may be limited to price negotiations or extend to the overall relationship between parties. As such, reviewing the wording and context of the provision will be important, in particular where a contract includes an express obligation of good faith this is likely to be given some weight and meaning by the English court. It can no longer be ignored as a meaningless provision.
The test of good faith is, however, likely to be objective. It is not a question of whether one party perceives the other’s conduct to be improper but whether honest and reasonable people consider it to be so.
Oct-Dec 2020 issue
CMS Cameron McKenna Nabarro Olswang LLP