AN INTRODUCTION TO

GOOD FAITH

A paper presented to the Society of

Construction Law at a meeting
in Reading on 7th March 2012

Sarah Williams

June 2012

176

www.scl.org.uk
 AN INTRODUCTION TO
GOOD FAITH

Sarah Williams

A definition of good faith

Does an obligation to act in good faith require behaviour that is considered
merely co-operative or does it require positive acts for the benefit of other
parties, possibly even against a party’s own self interests?

A final definition may not be possible; in part because of the various contexts
in which the phrase has been used. However, a useful working definition is
provided in the judgment of Lord Justice Bingham in Interfoto Picture Library
v Stilletto Visual Programmes, where he said:
‘In many civil law systems, and perhaps in most legal systems outside
the common law world, the law of obligations recognises and enforces
an overriding principle that in making and carrying out contracts parties
should act in good faith. This does not simply mean that they should not
deceive each other, a principle which any legal system must recognise;
its effect is perhaps most aptly conveyed by such metaphorical
colloquialisms as “playing fair”, “coming clean” or “putting one’s cards
face upwards on the table”. It is in essence a principle of fair and open
dealing.’1

The judgment suggests that a general obligation of good faith represents a

further and overriding obligation on any party entering into a contract. In
abbreviated form, it amounts to playing fair. The close relationship between
good faith and fairness is continued in Regulation 5 of The Unfair Terms in
Consumer Contracts Regulations 1999 (‘the 1999 Regulations’).2

In Director General of Fair Trading v First National Bank, Lord Bingham

described the requirement of good faith in relation to the predecessor of the
1999 Regulations as follows:
‘The requirement of good faith in this context is one of fair and open
dealing. Openness requires that the terms should be expressed fully,
clearly and legibly, containing no concealed pitfalls or traps.
Appropriate prominence should be given to terms which might operate

1 Interfoto Picture Library Ltd v Stilletto Visual Programmes Ltd [1989] 1 QB 433 (CA)
page 439; also [1988] 2 WLR 615, [1988] 1 All ER 348.
2 Unfair Terms in Consumer Contracts Regulations 1999, SI 1999/2083 passed in order to
give effect to Council Directive 93/13/EEC. See also EC Directive on Commercial
Agency as provided for by Commercial Agents (Council Directive) Regulations 1993, SI
1993/3053 and the EC Directive on Distance Contracts as provided for by the Consumer
Protection (Distance Selling) Regulations 2000, SI 2000/2334.

1
 disadvantageously to the customer. Fair dealing requires that a supplier
should not, whether deliberately or unconsciously, take advantage of the
consumer’s necessity, indigence, lack of experience, unfamiliarity with
the subject matter of the contract, weak bargaining position or any other
factor listed in or analogous to those listed in Schedule 2 of the
Regulations. Good faith in this context is not an artificial or technical
concept; nor, since Lord Mansfield was its champion, is it a concept
wholly unfamiliar to British lawyers. It looks to good standards of
commercial morality and practice.’3

However, the judgment in Interfoto Picture Library acknowledged that the

obligation to act in good faith is not a concept of general applicability in
contract law in England and Wales.4 Even if there is no general principle of
good faith in the jurisdiction, it cannot be ignored altogether because good
faith appears commonly in statute and in the express terms agreed by parties.
These are considered below.

Good faith in statutory provisions: the 1999 Regulations

Good faith is a concept that is widely recognised in civil law systems. It is
perhaps not surprising that statutory provisions in England and Wales that
include the requirement to act in good faith often derive from Europe.5
Possibly the most far reaching, in English contract law at least, are the 1999
Regulations.

Regulation 5 makes provision for unfair terms, of which sub-section (1) states:
‘A contractual term which has not been individually negotiated shall be
regarded as unfair if, contrary to the requirement of good faith, it causes
a significant imbalance in the parties’ rights and obligations arising
under the contract, to the detriment of the consumer.’

Consequences of an unfair term are dealt with by Regulation 8(1):

‘An unfair term in a contract concluded with a consumer by a seller or
supplier shall not be binding on the consumer.’

The effect is significant: if the term is considered unfair, in that it causes a

significant imbalance between the parties, it does not bind the parties to the
contract. The 1999 Regulations further provide that the contract only
continues to bind the parties where it is capable of continuing without the
unfair term.

3 Director General of Fair Trading v First National Bank plc [2001] UKHL 52, para [17];
also [2002] 1 AC 481, [2001] 3 WLR 1297, [2002] 1 All ER 97, [2001] 2 All ER
(Comm) 1000, [2002] 1 Lloyd’s Rep 489.
4 See Interfoto Picture Library, note 1, page 439, where Lord Justice Bingham said,
‘English law has, characteristically, committed itself to no such overriding principle but
has developed piecemeal solutions in response to demonstrated problems of unfairness.’
See also Walford v Miles [1992] 2 AC 128, page 139; also [1992] 2 WLR 174, [1992] 1
All ER 453, (1992) 64 P & CR 166.
5 Often, but not always. See for example the Bills of Exchange Act 1882, s90.

2
The 1999 Regulations clearly apply to contracts between a consumer6 and a
supplier or seller.7 In the construction context, the 1999 Regulations will
probably only have limited application in, for example, contracts made
between a homeowner and his or her builder.

It is further not clear on the face of it whether the 1999 Regulations are to be
limited to specific types of consumer contracts. Although the 1999
Regulations do not go on to define the types of consumer contract to which the
provisions apply,8 the provisions appear to apply to all consumer contracts
including construction contracts, and not just those for, for example, the sale
of goods. Certainly the Technology and Construction Court (TCC) has
contemplated challenges to terms in construction contracts pursuant to the
1999 Regulations, culminating in a decision which went to the Court of
Appeal: Bryen & Langley v Boston.9

Bryen & Langley was an appeal from an application for summary judgment to
enforce an adjudicator’s decision. The respondent, Mr Boston, submitted that
the provisions of the relevant JCT building contract10 relating to adjudication
and to withholding notices were unfair within the meaning of the 1999
Regulations and therefore should not bind him. In order to achieve this result it
is implicit that Mr Boston had to show that the JCT terms brought about an
imbalance between the parties contrary to the principle of good faith. The
Court of Appeal disagreed that the JCT terms did so. Mr Justice Rimer
(sitting in that court) said:
‘... in assessing whether a term that has not been individually negotiated
is “unfair” for the purposes of Regulation 5(1) it is necessary to consider
not merely the commercial effects of the term on the relative rights of
the parties but, in particular, whether the term has been imposed on the
consumer in circumstances which justify a conclusion that the supplier
has fallen short of the requirements of fair dealing.’11

Unfairness was considered by reference to the balance of rights as a result of

the contract and also the circumstances attending the conclusion of the
contract. The decision went against Mr Boston principally on the ground that
the terms had been introduced by Mr Boston’s own quantity surveyor in the

6 Defined in Regulation 3(1) as ‘any natural person who, in contracts covered by these
Regulations, is acting for purposes which are outside his trade, business or profession’.
7 The term ‘seller or supplier’ means ‘any natural or legal person who, in contracts
covered by these Regulations, is acting for purposes relating to his trade, business or
profession, whether publicly owned or privately owned’ (Regulation 3(1).
8 For a discussion on this point see Chitty on Contracts (30th edition, Sweet & Maxwell,
London 2008), para 15 – 018.
9 Bryen & Langley Ltd v Boston [2005] EWCA Civ 973, [2005] BLR 508. See also
Picardi v Cuniberti [2002] EWHC 2923 (TCC), [2003] BLR 487, 94 Con LR 81, (2003)
19 Const LJ 350; Lovell Projects Ltd v Legg and Carver [2003] BLR 452 (TCC); and
Westminster Building Company Ltd v Beckingham [2004] EWHC 138 (TCC), [2004]
BLR 265, [2004] TCLR 8, 94 Con LR 107.
10 Standard Form of Building Contract, 1998 edition, Private with Quantities (Joint
Contracts Tribunal Ltd).
11 Bryen & Langley, note 9, para 45.

3
invitation to tender documents.12 On that basis, Mr Justice Rimer stated that
either the terms did not fall within the 1999 Regulations at all or, at least, Mr
Boston had opportunity to influence those terms, saying:
‘It was not for [the appellant contractor] to take the matter up with [Mr
Boston] and ensure that he knew what he was doing: they knew that he
had the benefit of the services of a professional ... to advise him of the
effects of the terms on which he was inviting tenders. In my judgment,
there was no lack of openness, fair dealing or good faith in the manner in
which the June 2001 contract came to be made ...’13

More recently, the TCC has considered the subject in Domsalla v Dyason.14
In that case, the contractor, Domsalla, applied for summary judgment to
enforce an adjudicator’s decision in his favour. Although the building contract
between the parties was not subject to the adjudication provisions of the
Housing Grants, Construction and Regeneration Act 1996 (the Construction
Act 1996) the respondent, Dyason, had signed a JCT adjudication agreement
providing for contractual adjudication. However he contended that those
provisions were unenforceable by virtue of the 1999 Regulations.

The judge held that the adjudication provisions in themselves were not unfair
within the meaning of the 1999 Regulations. Adjudication provisions do not
create a significant imbalance between the parties, it was held, because inter
alia adjudication had minimum standards of fairness and impartiality, the
adjudicator was trained to apply principles of fairness and the adjudication
decision was only temporarily binding.15

In Domsalla, HH Judge Thornton QC held that the provisions applying the

requirement for withholding notices were unfair and, pursuant to the 1999
Regulations, did not bind Mr Dyason. That was because, on the unusual facts
in that case, Mr Dyason was required by his insurers to act as the employer to
the construction contract with Domsalla. He was not involved in the payment
process under that contract and was not entitled to issue withholding notices.
In effect, it was held that imposing the terms against Mr Dyason provided a
significant imbalance between the parties contrary to the 1999 Regulations
because it prevented him from raising potential cross-claims for defects or
delay in circumstances where he could be personally liable for payment
certificates. Although based on unique facts, the decision demonstrates the
possible ramifications (and utility) of good faith for consumers and suppliers
in contractual adjudication.

12 It may be noted though that the benefit of professional advice does not, in itself, mean
that a term is fair and binding on a consumer: see for example Harrison v Shepherd
Homes Ltd [2011] EWHC 1811 (TCC), (2011) 27 Const LJ 709, paras 113-5.
13 Bryen & Langley, note 9, para 46.
14 Domsalla v Dyason [2007] EWHC 1174 (TCC), [2007] BLR 348, [2007] TCLR 5, 112
Con LR 95.
15 Domsalla v Dyason: note 14. However the judge also stated that: ‘The effect of these
decisions is that the adjudication provisions, even if proffered by the contractor in
circumstances which would make it procedurally unfair for the contractor to rely on them
vis-à-vis a consumer, do not cause a significant imbalance in the parties’ rights and
obligations’. Whether the procedural unfairness could still give rise to a successful
challenge under the 1999 Regulations is unclear.

4
Arbitration clauses have also sometimes fallen foul of the 1999 Regulations.
In Mylcrist Builders v Buck the applicant builders applied to enforce an
arbitrator’s award against the employer, Mrs Buck.16 Amongst other matters,
Mrs Buck submitted that the arbitrator’s award could not be enforced because
it was contrary to the provisions of the 1999 Regulations. Mr Justice Ramsay
agreed, holding that the clause had provided a significant imbalance of power
between the parties (contrary to the requirements of good faith) because it
excluded or hindered Mrs Buck’s right to take legal action. This is in spite of
arbitration sharing the hallmarks of fairness and impartiality that justified the
decision in Domsalla. The contrasting results in Domsalla and in Mylcrist
appear therefore to be due, at least in part, to the temporary nature of an
adjudication decision when compared to an arbitration award.

Section 91 of the Arbitration Act 1996 provides that arbitration awards of less
than £5,000 are unfair for the purposes of the 1999 Regulations.17 The amount
of the arbitration award in dispute in Mylcrist was greater than £5,000 and so
was not automatically deemed unfair by the statute. However, the judge
considered that the arbitration clause was a factor which fell within the
Regulations, Schedule 2, paragraph 1, which gives an indicative and non-
exhaustive list of the terms which may be unfair. Specifically of interest was
sub-paragraph 1(q) which includes terms:
‘... excluding or hindering a consumer’s right to take legal action or
exercise any other legal remedy particularly by requiring the consumer
to take disputes exclusively to arbitration not covered by legal
provisions …’18

Although the arbitration clause itself was not automatically unfair by virtue of
the Arbitration Act 1996 section 91, when considered together with the still
relatively small sums in dispute and the relative significance of the arbitrator’s
fee, the judge held that there was a significant imbalance between the parties
contrary to the 1999 Regulations. However, perhaps of most significance was
the requirement for notice of the arbitration clause:
‘The requirement of fair and open dealing means that for consumer
transactions the arbitration clause and its effect need to be more fully,
clearly and prominently set out than it was in this case.’19

So, even though the signature box drew Mrs Buck’s attention to the existence
of terms, the arbitration clause falling within paragraph 1(q) of the Schedule
should have been identified by Mylcrist and its effect explained. Further:
‘... whilst there is no suggestion that the Claimant deliberately took
advantage of Mrs Buck’s necessity, indigence, lack of experience,
unfamiliarity with the subject matter of the contract or weak bargaining

16 Mylcrist Builders Ltd v Buck [2008] EWHC 2172 (TCC), [2008] BLR 611, [2009] 2 All
ER (Comm) 259.
17 The amount is set from time to time by statutory instrument, currently the Unfair
Arbitration Agreements (Specified Amount) Order 1999, SI 1999/2167, Regulation 3.
18 The 1999 Regulations, Schedule 2, paragraph 1q, quoted in Mylcrist v Buck, note 16,
para 54.
19 Mylcrist, note 16, para 56.

5
 position, I consider that the Claimant by including arbitration in the
Claimant’s standard terms did take such disadvantage, albeit
unconsciously. ... the fact that the particular works were being carried
out to Mrs Buck’s order does not, in my judgment, affect the assessment
of good faith in this case in relation to the term.’20

The judgment suggests that, at least when contracting with consumers on

standard terms, there is a higher obligation on contractors and construction
professionals to point out, and potentially even to explain, the significance of
such terms in order to discharge their statutory obligation to act fairly and in
good faith. In line with the decision in Bryen & Langley this may particularly
be the case when the seller or supplier knows that the consumer has no other
professional advising him or her about the effect of such terms. Although it
has not been used extensively, the statutory obligation appears to provide a
useful means to avoid arbitration awards made against the consumer.

Good faith as a contract term

Good faith often appears in the duties and obligations of parties to a contract.
The obligation is sometimes made by reference to a particular aspect of the
contract, or in other circumstances it constitutes an overarching principle. It is
less clear what these duties mean for the party concerned. This section
considers the courts’ approach to good faith in the context of, first, an
obligation to negotiate in good faith and, second, the requirement to act in
good faith found in some standard form construction contracts.

In Walford v Miles, the House of Lords considered the effect of an agreement

that allegedly required the parties to negotiate in good faith in the anticipation
of entering into a contract for the sale of a photographic processing business.
The implied term was pleaded as follows:
‘It was a term of the said collateral agreement necessarily to be implied
to give business efficacy thereto that, so long as they continued to desire
to sell the said property and shares, the first defendant on behalf of
himself and the second defendant would continue to negotiate in good
faith with the plaintiff.’21

It was held that the good faith term was void for uncertainty, not only on the
basis that an agreement to negotiate was as unenforceable as an agreement to
agree, but also because the requirement to act in good faith was at odds with
the act of negotiation. The latter point was dealt with in this way:
‘... the concept of a duty to carry on negotiations in good faith is
inherently repugnant to the adversarial position of the parties when
involved in negotiations. Each party to the negotiations is entitled to
pursue his (or her) own interest, so long as he avoids making
misrepresentations. To advance that interest he must be entitled, if he
thinks it appropriate, to threaten to withdraw from further negotiations or
to withdraw in fact, in the hope that the opposite party may seek to

20 Mylcrist, note 16, para 56.

21 Walford v Miles, note 4, page 135.

6
 reopen the negotiations by offering him improved terms ... A duty to
negotiate in good faith is as unworkable in practice as it is inherently
inconsistent with the position of a negotiating party. It is here that the
uncertainty lies.’22

It might also be suggested that the inherent inconsistency identified in Walford

v Miles between the general duty of good faith and pre-contract negotiations
also extends post-agreement. Any requirement under a general duty of good
faith to act in a way that is contrary to self-interest beyond the agreed terms of
the contract could be regarded as equally repugnant to the adversarial (or, at
least, independent) position of the contracting parties.

In Cable & Wireless v IBM the court had to consider whether an express
agreement to negotiate any disputes in good faith, and then to use ADR in
good faith to resolve any disputes, was sufficiently certain. Mr Justice
Colman held that the clause was sufficiently certain because it detailed the
steps the parties had to take in order to comply, including by reference to a
well-known dispute resolution centre. In that regard, the court could
determine with sufficient certainty whether the parties were in breach. Obiter
the judge stated:
‘... if in the present case the words of clause 41.2 had simply provided
that the parties should “attempt in good faith to resolve the dispute or
claim”, that would not have been enforceable.’23

Without more, the duty of good faith would not provide enough guidance to be
enforceable. It might therefore be concluded that the requirement to act in
good faith in this case was not adding any more to the other express terms of
the contract.

The Court of Appeal then considered good faith obligations in the case of
Petromec v Petroleo Brasileiro SA Petrobras.24 Obiter it was stated that the
agreement to negotiate in good faith in that case could have been enforced
because the court would have been able to ascertain the likely result of a
failure to conclude the negotiations, namely the reasonable cost of various
works upgrades. Although determining when the negotiations had ended in
bad faith was considered ‘somewhat elusive’, Lord Justice Longmore held that
the difficulty of that problem should not be an excuse for the court to declare a
blanket unenforceability on the obligation. The judge appeared to be
persuaded to this view by the fact that the parties had deliberately and
expressly entered into an enforceable agreement, of which the obligation to
negotiate for a further part of the works was an express obligation (in contrast
with Walford v Miles in which the implied obligation was subject to contract)

22 Walford v Miles, note 4, page 138.

23 Cable & Wireless Plc v IBM United Kingdom Ltd [2002] EWHC 2059, [2002] 2 All ER
(Comm) 1041, [2003] BLR 89, [2002] CLC 131. The decision was followed in the TCC
by Holloway v Chancery Mead Ltd [2007] EWHC 2495 (TCC), [2008] 1 All ER
(Comm) 653, 117 Con LR 30.
24 Petromec Inc v Petroleo Brasileiro SA Petrobras (No 3) [2005] EWCA Civ 891, [2006]
1 Lloyd’s LR 121.

7
and that the scope of that further agreement was relatively narrow.25 The
judge went so far as to say that to hold that the clause had ‘no legal content’
‘would be for the law deliberately to defeat the reasonable expectations of
honest men ...’.26

The enforceable nature of express duties of good faith, in contrast to a general

doctrine of good faith, is considered in Lord Steyn’s paper, Contract Law:
Fulfilling the Reasonable Expectations of Honest Men, from which the phrase
used by the judge in Petromec appears to be borrowed. He says:
‘But I have no heroic suggestion for the introduction of a general duty of
good faith in our contract law. It is not necessary. As long as our courts
always respect the reasonable expectations of parties our contract law
can satisfactorily be left to develop in accordance with its own pragmatic
traditions. And where in specific contexts duties of good faith are
imposed on parties our legal system can readily accommodate such a
well-tried notion. After all, there is not a world of difference between
the objective requirement of good faith and the reasonable expectations
of the parties.’27

It may not be easy for the party under the good faith obligation to know when
it is or is not in breach. Unfortunately, it appears to be a matter of fact and
degree and (according to Petromec) may depend on such issues as:
o whether there is an enforceable contract of which the obligation to
negotiate in good faith forms an express part;
o whether the parties were in receipt of legal advice when forming
that contract;
o the scope of the proposed agreement that is contemplated by the
obligation to negotiate in good faith;
o whether the courts would be able to determine if the negotiations
had ended in ‘bad faith’;
o whether the courts are able to ascertain the loss associated with a
failure to conclude such negotiations.

It is then useful to consider the TCC case of Birse Construction v St David.28

The case concerned the concept of mutual trust and co-operation, that may be
considered related to obligations of good faith. The issue for the court to
decide was whether the parties had entered into a construction contract and
had therefore agreed to arbitrate disputes. During the disputed period, the
parties had signed a partnership charter. The aim of the charter was ‘To
produce an exceptional quality development within the agreed time frame, at
least cost, enhancing our reputations through mutual co-operation and trust’.
Although not legally binding, the judge held that the charter would provide

25 Petromec, note 24, para 115 onwards.

26 Petromec, note 24, para 121.
27 Lord Steyn’s paper, Contract Law: Fulfilling the Reasonable Expectations of Honest
Men, 113 LQ Review 1997, page 439.
28 Birse Construction Ltd v St David Ltd [1999] BLR 194 (TCC).

8
standards by which the conduct and attitude of the parties were to be
measured. Specifically, it was held:
‘Even though the terms of the Charter would not alter or affect the terms
of the contract (where they are not incorporated or referred to in the
contract or are not binding in law in their own right) an arbitrator (or
court) would undoubtedly take such adherence to the Charter into
account in exercising the wide discretion to open up, review and revise,
etc which is given under the JCT Conditions.’29

The judge did not regard the provisions requiring mutual trust and co-
operation to be express terms, nor did he find that the charter’s provisions
modified those terms to provide the standard by which the parties’ conduct
would be measured (which appears to stop short of the approach taken in, for
example the USA or Australia – considered below). The judgment might also
be regarded as consistent with the customary approach in the jurisdiction that
there is no general duty of good faith. Perhaps oddly, the charter was held to
influence the arbitrator’s (or court’s) approach to interpreting the subsequent
contract, notwithstanding that the good faith provisions were something less
than contractually binding. It is not clear from the judgment how it was
envisaged that an arbitrator or the court would account for the charter and it
may be that the case will be distinguished on its facts. However, does it
perhaps hint at an increased scope to argue for implied obligations of good
faith or mutual co-operation beyond the express terms of the contract?

In Berkeley Community Villages v Pullen Mr Justice Morgan had to decide

whether a sale of land to a third party, which would deprive the claimant of the
opportunity to earn fees, would breach an express term of the agreement that:
‘In all matters relating to this Agreement the parties will act with the utmost
good faith towards one another and will act reasonably and prudently at all
times’.30
The judge construed this obligation as:
‘... imposing on the Defendants a contractual obligation to observe
reasonable commercial standards of fair dealing in accordance with their
actions which related to the Agreement and also requiring faithfulness to
the agreed common purpose and consistency with the justified
expectations of the First Claimant.’31

It was held, however, that the defendant was not in breach.

An express requirement to act in good faith was considered in the case of Gold
Group Properties v BDW Trading. The parties had agreed a contract for the
development of properties to be built by BDW and sold to Gold on long leases
so that both parties could share in revenue generated by subsequent sales. The
contract required that: ‘all transactions entered into between the parties shall

29 Birse Construction, note 28, page 203.

30 Berkeley Community Villages Ltd v Pullen [2007] EWHC 1330 (Ch), [2007]
3 EGLR 101, para 33 (item 36).
31 Berkeley Community Villages, note 30, para 97.

9
be conducted in good faith’ and that ‘neither will seek to increase its profit or
reduce its loss at the expense of the other’.32
In the proceedings, BDW alleged that Gold was in breach of contract and the
requirement to act in good faith, by failing to contemplate any change to the
revenue sharing provisions in the contract and in indicating that it was not
obliged to agree an adjustment to the minimum prices set out in the contract.
This was particularly the case because of the difficulties incurred by BDW by
the fall in the property market in 2008. Did the obligation to act in good faith
mean that Gold was obliged to revise the revenue sharing provisions agreed in
the contract?

The judge considered that the requirement for good faith did not require the
parties to give up a ‘freely negotiated financial advantage’ in the contract. To
act in good faith required the parties to act in a way that allowed them both to
enjoy the anticipated benefits of the contract. In that instance, Gold was not in
breach of contract.

However obiter it was considered that Gold may have been in breach of
contract had it failed to negotiate or agree a replacement schedule of minimum
prices even though the express term did not require it to do so. This is because
negotiating in that way would not have affected Gold’s profit in the
development but may have affected the performance of the contract as
envisaged. In that sense, good faith does not modify the contractual terms
where they confer a freely negotiated advantage but, subject to that, it may
modify a party’s behaviour ancillary to the performance of the contract.
Questions may be raised over what the anticipated benefit of the contract is
and whether, by its conduct, a party has prevented fulfilment of the anticipated
benefit in pursuit of its own interests. The case does however confirm the
courts’ increasing willingness to give legal content to good faith obligations,
per Petromec.

In summary, it might be said with some confidence that courts in England and
Wales remain reluctant to imply a general duty of good faith into contracts.
However, where there is an express duty of good faith, the courts appear to
favour its application and enforcement to the extent that the obligation has
sufficient certainty.

Both Petromec and Cable & Wireless confirm that certainty in good faith
obligations may derive from the remainder of the express terms in the contract
or alternatively by reference to standards of reasonableness. Cable & Wireless
leaves open the possibility that, without more, a requirement to act in good
faith in isolation may still not be sufficiently defined to permit enforcement –
it becomes the stuff of aspirations.

As to the type of behaviour required when under an obligation to act in good

faith, Gold Group Properties clarifies that it does not require a party to give
up a freely negotiated contractual advantage (unless, perhaps, there is
provision for this). The other express terms of the contract would therefore

32 Gold Group Properties Ltd v BDW Trading Ltd [2010] EWHC 1632 (TCC), para 27.

10
appear to trump the requirement of good faith. Subject to that, it is clear that a
party that acts to prevent the anticipated benefits of a contract, even if it is
acting within the other express terms of the contract or honestly, could well be
in breach of the good faith obligation.

Good faith as an express term: standard form construction

contracts
Notwithstanding the above, the universal appeal of good faith to parties, at
least in sentiment, means that it has appeared in a number of the standard form
construction contracts. The JCT Constructing Excellence Contract Project
Team Agreement 2011 states:
‘The Parties confirm ... their intention to work together with each other
and with all other Project Participants in a co-operative and collaborative
manner in good faith and in the spirit of trust and respect.’33

The considerations applicable to good faith type obligations are likely to

extend to other similar forms of obligation, including those to act in a spirit of
mutual trust and cooperation. Possibly the most familiar standard form with
this type of obligation is the NEC3 contract which states:
‘The Employer, the Contractor, the Project Manager and the Supervisor
shall act as stated in this contract and in a spirit of mutual trust and co-
operation.’34

In what circumstances will these clauses become something more than mere
aspiration? For example, would it be a breach of good faith for the contractor
under such an obligation to suspend all but the most lucrative part of the
contract following a minor delay in payment of only a trivial part of an interim
payment? Gold Group Properties might suggest that it would be, given that it
does not appear to be compromising a freely negotiated advantage for the
contractor – he still gets paid for the lucrative part of the contract – yet
suspension no doubt compromises the anticipated benefits of the contract for
the employer. However, section 112 of the Construction Act 199635 provides
the right to suspend any or all of the works and it is unlikely that an express
requirement to act in good faith would modify the statutory right.

The body of case law considering these sorts of clauses is relatively limited,
even for standard form contracts.36 Might this suggest a tendency for parties
to rely on traditional, hard-edged obligations – such as payment notices and
termination clauses – rather than the perhaps more nebulous (though
potentially potent) good faith-type obligations? Possibly, but the recent
willingness for courts to give legal content to these clauses may encourage
parties to run arguments founded on breach of good faith obligations.

33 JCT Constructing Excellence Contract Project Team Agreement 2011 (Joint Contracts
Tribunal Ltd), clause 2.1.
34 NEC 3 Engineering and Construction Contract 2005 (Thomas Telford Ltd).
35 As amended by section 145(2) of the Local Democracy, Economic Development and
Construction Act 2009.
36 An isolated example is Costain Ltd v Bechtel Ltd [2005] EWHC 1018 (TCC),
[2005] TCLR 6.

11
Good faith: a comparison with two other jurisdictions
Australia
Like England and Wales, Australia has a common law system and provides a
useful point of comparison on the development in approach to good faith.

In the early 1990s, Australia appeared to embrace the concept of good faith, as
shown in judgments such as Renard Constructions v Minister for Public
Works. In that case it was stated by Priestley JA that:
‘... people generally, including judges and other lawyers, from all strands
of the community, have grown used to the courts applying standards of
fairness to contract[s] which are wholly consistent with the existence in
all contracts of a duty upon the parties of good faith and fair dealing in
its performance. In my view this is in these days the expected standard,
and anything less is contrary to prevailing community expectations.’37

In Burger King Corporation v Hungry Jack’s the New South Wales Court of
Appeal considered whether it could imply a requirement to act in good faith
into the commercial contract between the parties. The contract was a
development agreement for a franchise of the appellant’s products in
Australia. It appears that the court was persuaded to do so because, inter alia:
‘There is such an extraordinary range of detailed considerations,
particularly in relation to whether operational requirements have been
satisfied, contained within clause 4.1(a), that unless there was an implied
requirement of reasonableness and good faith, BKC could, for the
slightest of breaches, bring to an end the very valuable rights which
HJPL had under the Development Agreement. Further, contrary to
BKC’s submissions, cl 4 does not contain only objective criteria against
which the discretion is to be exercised.’ 38

Accordingly, the sheer imbalance in power, even to the extent that rights could
be removed without significant justification, seems to have supported a re-
distribution of power by the court through implied duties of good faith. This
surely goes beyond the English position set out in Gold Group Properties.
The power distribution freely negotiated by the parties was amended by
reference to good faith principles.

The court in Burger King also observed that:

‘... obligations of good faith and reasonableness will be more readily
implied in standard form contracts, particularly if such contracts contain
a general power of termination.’39

Although not expanded upon, this comment may stem from the same base as
the good faith obligations in the 1999 Regulations, that is to restore balance

37 Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234
(Supreme Court of New South Wales), page 268E.
38 Burger King Corporation v Hungry Jack’s Pty Ltd [2001] NSWCA 187, para 183.
39 Burger King, note 38, para 163.

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between the parties where terms were not individually negotiated. However,
if the comment also covers the standards by which a party has to perform its
obligations, it is perhaps unclear why standard forms would receive this
particular comment.

The Australian position was developed in the federal judgment of Finkelstein J

in Pacific Brands Sport & Leisure v Underworks. The judge considered
whether there was an autonomous concept of good faith in Australian law and,
although obiter, concluded that:
‘... the duty of good faith is an incident (not an ad hoc implied term) of
every commercial contract, unless the duty is either excluded expressly
or by necessary implication. The duty cannot override any express or
unambiguous term which is to a different effect. Further, I presently
incline to the view (but not with complete conviction) that the duty is not
an independent term of the contract the breach of which would give rise
to a remedy, but that it operates as a fetter upon the exercise of the
discretions and powers created by the contract, including the power of
termination.’ 40

As to the obligation imposed by good faith, the judge said:

‘... the standard of conduct imposed by a covenant of good faith is
incapable of precise definition. That does not produce an unworkable
obligation ... Be that as it may, a good starting point in any particular
enquiry is to see whether the impugned conduct (in this case a
termination) was motivated by bad faith, or was for an ulterior motive
or, if it be any different, whether the defendant acted arbitrarily or
capriciously. It may also be proper to investigate whether the impugned
act was oppressive or unfair in its result. If any of these things can be
established then, in all probability, the obligation will be breached and
the resultant act (or omission) of no effect.’41

Ultimately, the judge decided that, had the defendant in the action been in
breach of contract, it was not open to the claimant to terminate for that breach
because the claimant itself had been willing to ‘make life as difficult as
possible’ for the defendant in an endeavour to lead it into a breach.

Good faith here appears not as a term sounding in damages if breached but as
a modifier (or a ‘fetter’) of other express obligations. It may therefore lower
the bar by which a breach could be established of such express obligations,
although, as usual, what would suffice for these good faith standards would be
a question to be determined on the particular facts.

40 Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd [2005] FCA 288 (Federal
Court of Australia), para 64; see para 60 onwards. Interestingly, it was the judge’s view
in that case that good faith did not form part of English law because ‘according to
English principles of contract law the legal outcome of a case is more important than
justice’ (para 61). An alternative interpretation might be that English law seeks to
enforce express or implied terms that are sufficiently certain and, where it is considered
that that has resulted in, for example, unfairness or an impartial result, the courts have
preferred specific though piecemeal remedies.
41 Pacific Brands, note 40, para 65.

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The concept of good faith, at least in aspiration, is perhaps difficult to argue
against. However, its presence as an ‘incident’ to every contract, as in Pacific
Brands, still raises questions as to the conduct required of each party. For
example, what, if any, must the contracting party have done in order for its
behaviour to amount to bad faith? Does state of mind matter at all?42 What
level of causative potency must that behaviour have had on, for example, the
contractual breach alleged against another party? And what, if any, further
protection does good faith provide over and above the terms commonly
implied into construction contracts in England and Wales, such as those of co-
operation and non-prevention?43

Finally, or at least in the Australian jurisdiction, if ‘good faith’ can be

overridden by an express term (as in Pacific Brands), would the duty to act in
good faith be averted in its entirety simply by inserting the relevant clause into
the contract? If that is correct, it might simply result in another standard term
in every contract to exclude the duty, similar to the response in England to the
Contracts (Rights of Third Parties) Act 1999.

In summary, Australia appeared to have embraced the concept of good faith to

a greater extent than in England and Wales, such that it is ‘incident’ to every
commercial contract. It may not necessarily be a term capable of breach, but
perhaps acts to modify the requirements as to the parties’ conduct. However,
it is far from clear whether this approach provides satisfactory answers to the
questions of, for example, contractual certainty and necessity.

USA
Good faith is a concept that is well recognised in the USA. In Market Street
Associates v Dale Fre, Posner CJ said:
‘The contractual duty of good faith is thus not some newfangled bit of
welfare-state paternalism or ... the sediment of an altruistic strain in
contract law, and we are therefore not surprised to find the essentials of
the modern doctrine well established in nineteenth-century cases ...’ 44

Additionally, the provisions of the Uniform Commercial Code (UCC), which

aims to simplify, clarify, and modernise the law governing commercial
transactions in the USA, include codified good faith duties: ‘Every contract or
duty within this Act imposes an obligation of good faith for its performance or
enforcement’.45

42 In Horn v Commercial Acceptances Ltd [2011] EWHC 1757 (Ch) it was confirmed that
dishonesty is not required in order for a good faith duty to be breached. See also Bryen
& Langley, note 9.
43 For which see, for example, Hon Sir Vivian Ramsey and Stephen Furst QC, Keating on
Construction Contracts (9th edition, Sweet & Maxwell, London 2012) paragraphs 3-046
to 3-048.
44 Market Street Associates Limited Partnership v Dale Frey 941 F 2d 588 (7th Cir, 1991),
page 595.
45 The Uniform Commercial Code, www.law.cornell.edu/ucc, §1-304. Good faith is
defined (§1-201) as ‘... honesty in fact and the observance of reasonable commercial
standards of fair dealing’. However individual States have given their own interpretation

14
Further:
‘The obligations of good faith, diligence, reasonableness, and care
prescribed by [the Uniform Commercial Code] may not be disclaimed
by agreement. The parties, by agreement, may determine the standards
by which the performance of those obligations is to be measured if those
standards are not manifestly unreasonable.’46

It can be seen that this goes further than the statutory implied terms in England
and Wales. The prohibition on the exclusion of good faith also contrasts with
the obiter position taken in Australia in Pacific Brands where the parties could
avoid such good faith obligations by express terms. This raises the question:
what happens in the USA in the event that a party acts in compliance with the
express terms excluding good faith but, potentially at least, acts in breach of
overriding duties of good faith? Is there perhaps a suggestion from the case
law that, ultimately, the judge may find favour with the letter of the contract?

In Kham & Nate’s Shoes v First Bank of Whiting, the court said:
‘Firms that have negotiated contracts are entitled to enforce them to the
letter, even to the great discomfort of their trading partners, without
being mulcted for lack of ‘good faith’. Although courts often refer to
the obligation of good faith that exists in every contractual relation ...
this is not an invitation to the court to decide whether one party ought to
have exercised privileges expressly reserved in the document. When the
contract is silent, principles of good faith ... fill the gap. They do not
block use of terms that actually appear in the contract.’47

The decision in Kham & Nate’s Shoes was followed in the more recent case of
Mid-America Real Estate v Iowa Realty where it was stated that:
‘... the covenant does not “give rise to new substantive terms that do not
otherwise exist in the contract” ... Our research reveals that “[i]t is
universally recognized [that] the scope of conduct prohibited by the
covenant of good faith is circumscribed by the purposes and express
terms of the contract ... There is a good reason for this consensus:
Allowing the covenant to create new substantive obligations would harm
the “institution of contract, with all the advantages private negotiations
and agreement brings” because it would permit courts to turn agreed-to
contracts into wholly new ones which were never consented to. Instead
of creating new substantive obligations, the covenant prevents one party
from using technical compliance with a contract as a shield from liability
when that party is acting for a purpose contrary to that for which the
contract was made.’48

(eg in Alaska, it is defined as ‘honesty in fact in the conduct or transaction concerned’

but without the requirement of commercial standards of fair dealing. A consistent
definition of good faith appears to be a problem in many jurisdictions. See also Berkeley
Community Villages (note 30) for a similar construction. The code is not in itself law,
but is a proposal for state law which may or may not be enacted by the various states.
46 The Uniform Commercial Code, note 46, §1-302.
47 Kham & Nate’s Shoes No 2 Inc v First Bank of Whiting [1990] USCA7 907.
48 Mid-America Real Estate Co v Iowa Realty Co Inc [2005] USCA8 267.

15
In that case it was held that the party seeking to rely on an implied covenant of
good faith would fail because the text of the contract would not support its
assertions.

Although these cases do not necessarily grapple with the question of exclusion
of a duty of good faith, they do appear to show a preference by the court for
reliance on the express terms of the contract. Accordingly, although different
in outcome, some similarities may be found between the USA and England
and Wales. For example, both place value on the express terms of the contract
in that they provide a greater degree of certainty about the intentions of the
parties. Further, and perhaps more importantly, similarity might be found in
the potential ability for the express terms to trump the concept of good faith.

Why then do England and Wales and the USA appear to take different
positions on good faith in, for example, the imposition of a general doctrine?
It may be a historical artefact that, as part of the legal lexicon, good faith is
more familiar in the USA and there is perhaps more confidence in measuring
conduct against it. An analogy may be drawn with evaluations of the concept
of ‘reasonableness’, which are regularly carried out in England and Wales.
Might we see litigants relying on good faith obligations more frequently as the
English courts become more familiar in measuring conduct by this meter?
Quite possibly.

Postscript from England: the Compass case

In Compass Group UK v Mid Essex Hospital Services NHS Trust, the High
Court was asked to consider the duty between the parties to ‘co-operate with
each other in good faith and [to] take all reasonable action as is necessary for
the efficient transmission of information and instructions and to enable the
Trust or, as the case may be, any Beneficiary to derive the full benefit of the
contract’.49 The contract was for the provision of services, including catering
services, at NHS hospitals run by the defendant. Service failure points were
scored against the claimant, together with deductions from fees payable, in the
event of service failure. A number of service failure points were made and the
Trust terminated the contract. The claimant accepted that the number of
service failure points did permit a termination but argued that they had been
given by the Trust contrary to the duty to act in good faith, which amounted to
a repudiatory breach by the Trust.

The judge held that the Trust acted in a manner calculated, at least objectively,
to impose the largest possible service failure points irrespective of the lack of
justification. These included deductions of £84,540 for a one day old
chocolate mousse, which was immediately removed, and £96,060 for some
three day old bagels that were also removed. Although it was held that there
had not been a repudiatory breach by virtue of these payment deductions, the
arbitrary way in which the Trust had operated the contract was contrary to the
duty to act in good faith; it was akin to a sword of Damocles being suspended

49 Compass Group UK and Ireland Ltd (t/a Medirest) v Mid Essex Hospital Services NHS
Trust [2012] EWHC 781 (QB).

16
over the claimant and the behaviour amounted to a repudiatory breach of the
duty to act in good faith.

Although the facts of the case are relatively extreme, in that the judge was
highly critical of the Trust’s behaviour, which he described as ‘poisoning’ the
relationship between the parties, the judgment does provide scope for parties
to rely on a breach of the duty to operate in good faith, in isolation. It shows
that such general good faith clauses (commonly found in standard form
construction contracts) can act to modify the obligations and standards of
behaviour of the parties with significant outcomes, even in the absence of
fundamental breaches. However, the standard of behaviour that these good
faith clauses require in each individual case remains ambiguous.

Good faith: a summary

In legal terms, good faith is regarded as a nebulous concept – definitions vary
but repeatedly speak of ‘playing fair’ and ‘having one’s cards face up on the
table’. The inherent ambiguity is perhaps the principal complaint against its
enforcement.

It is relatively clear that there is no general doctrine of good faith in the law of
England and Wales and assertions to that end will be unlikely to find favour.
Unjust results are instead softened by ‘piecemeal’ remedies, such as
misrepresentation or waiver.

The approach taken towards express terms of good faith is less clear. Where
the concept is supported by the other terms of the contract, it provides the
certainty required for enforcement. In the absence of other contractual indicia,
even express obligations of good faith may run the risk of becoming void for
uncertainty. Clearly then, for the party entering into the contract, throwing in
a term of good faith may be valueless without sufficient contractual machinery
and, it might therefore be surmised, be good as an aspiration only.

On the other hand, express terms contravening principles of good faith and
fairness in consumer contracts run the risk of being void, by virtue of the 1999
Regulations. It is therefore arguably incumbent on those contracting with
consumers to point out, and possibly even to explain, the significance of such
potentially unfair terms in order to mitigate this risk to the supplier.

Comparing England to Australia and the USA, both foreign jurisdictions have
embraced the concept of good faith to varying degrees. Whilst both appear to
acknowledge the inherent ambiguity of the concept, both have apparently been
more willing to apply a general principle of good faith in all commercial
contracts. This does not appear as a term to be breached, but rather as a
standard to be obtained. In Australia, it appears that it is at least permissible to
contract out of such good faith obligations, but in the American code, such
provisions are a mandatory feature.

However, notwithstanding the differing approaches, have any of the

jurisdictions resolved the inherent difficulties in defining good faith, satisfying
its requirements by the parties’ conduct and in knowing with any amount of

17
certainty when such good faith obligations have been breached? To what
extent does a party have to abandon or depart from activities in its own best
interests in order to comply? Finally, if resort is continually made to the letter
of the contract either to support the concept of good faith or even to override
it, what if any additional protection does the obligation to act in good faith
give to the parties to a contract?

It might be said with some confidence that none of the considered approaches
in England, Australia or the USA answers these questions comprehensively.
However, perhaps the unfailing popularity of good faith (and its related
obligations) as an express contractual term reflects a demand for legal force to
be given to these sorts of obligations. Good faith appears then to have at least
one area of certainty: its place in future contract law.

Sarah Williams is a barrister practising from Keating Chambers in

London.

© Sarah Williams and Society of Construction Law 2012

The views expressed by the author in this paper are hers alone, and do not
necessarily represent the views of the Society of Construction Law or the editors.
Neither the author, the Society, nor the editors can accept any liability in respect of
any use to which this paper or any information or views expressed in it may be put,
whether arising through negligence or otherwise.

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