GOOD FAITH OBLIGATIONS IN ‘RELATIONAL CONTRACTS’ GOVERNED BY ENGLISH LAW

One of the most important developments in English contract law in the last 10 years or so has been the increased willingness of English courts to imply a duty of good faith into certain commercial contracts.

Historically, there was no implied duty of good faith in commercial contracts governed by English law (subject to some notable exceptions, such as insurance contracts). This differed from the situation in many civil code countries, where there is an implied duty of good faith in most contracts.

However, in recent years a line of English cases has established that certain long-term contracts reliant on mutual cooperation (so-called ‘relational contracts’) will have good faith obligations implied into them in order to give effect to the parties’ intentions.

The relatively recent development of the law in this area means that there may be room for argument, dependent on the specific facts and wording of a contract, as to whether good faith obligations will be implied, and if so, what the effect of those obligations should be in practice.

This is important because it means that lawyers advising on English law contracts are finding it more difficult to advise with certainty as to the terms that can be implied into a contract and how the other terms of the contract would be construed by a court or tribunal. This is particularly problematic given that English law prides itself in providing relative certainty as to the meaning and enforceability of contractual terms.

Relational contracts

A key case in the development of the principle of relational contracts in English law was Yam Seng Pte v International Trade Corp (2013). In that case, which concerned a long-term distribution agreement, relational contracts were characterised as those requiring “a high degree of communication, cooperation and predictable performance based on mutual trust and confidence” and which “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”.

Oct-Dec 2024 issue

Reed Smith LLP