Implied Good Faith – Lost at Sea Following Court of Appeal Shipping Case

Ashfords LLP has released a commentary on the implied obligations of good faith in the recent Court of Appeal decision in MSC v Cottonex Anstalt [2016] EWCA CIv 789 (Cottonex), which Ashfords said suggests that “the recent trend in favour of an implied obligation to act in good faith in English contract law is not good law”.

Ashfords had previously noted that “a duty of good faith has never been entirely at ease in English contract law. The preferred view of the Courts has traditionally been

that two (or more) commercial parties negotiate at arm’s length and are each capable of looking after their own interests”.

But Ashfords noted that there was an emerging trend for the Courts to recognise an implied duty of good faith, particularly in what have been referred to as “relational” contracts (such as franchise agreements, distribution agreements and joint venture agreements).

The leading case on good faith in relational contracts was heard by Mr Justice Leggatt – the same judge who first heard the Cottonex case, in which he commented on the “increasing recognition in the common law world of the need for good faith in contractual dealings”.

The Court of Appeal did not agree, stating that “the recognition of a general duty of good faith would be a significant step in the development of our law of contract with potentially far-reaching consequences … In my view the better course is for the law to develop along established lines rather than to encourage judges to look for what the judge in this case called some ‘general organising principle’ drawn from cases of disparate kinds”

The Court of Appeal preferred “piecemeal solutions in response to demonstrated problems of unfairness”.

The Court of Appeal’s main concern was that good faith “would be invoked as often to undermine as to support the terms in which the parties have reached agreement”.

In the Cottonex case the Court of Appeal referred to an earlier decision of the Court of Appeal which stated “that there is no general doctrine of “good faith” in English contract law”, although in the same judgment, referring to the relational contracts, it said that “although a duty of good faith is implied by law as an incident of certain categories of contract”.

Ashford’s noted that the Court of Appeal’s one-paragraph analysis of good faith was not determinative of the outcome of the appeal, meaning that the comments do not constitute a binding precedent on implied obligations of good faith. “However, the Court of Appeal, having gone out of its way to pass what can only be interpreted as a negative comment on implied good faith, provides a fairly certain barometer that it is unconvinced by implied good faith.”

Ashfords concluded that “the law on implied good faith is unsettled at best. It will remain unsettled until the Court of Appeal provide binding authority on the point. However Cottonex provides a good indication that the Court of Appeal is unlikely to echo the High Court’s alacrity for implying good faith.”