Acting in Good Faith

In many legal jurisdictions, parties to a contract are expected to act in good faith. The simplest explanation of the doctrine of good faith is that it requires parties to act honestly and not take advantage or make an issue of minor errors in performance as long as those errors don’t obstruct the object of the contract.

Does the doctrine of Good Faith apply in English law?

In short, no, there has never been a concept of good faith in English common law. Indeed, an attempt to bring it into English law was rejected by the House of Lords in the case of Arcos v Ronaasen [1933]. The case concerned an English company that had bought a shipment of wooden staves from a Scandinavian company. The order had specified that the staves should be of a specific length. When the staves arrived, they were of different lengths but all within a few inches of the required length. Both parties accepted that, although the staves were not exactly the right size, they could still be used for the purpose for which they were bought. Nonetheless, the English company rejected the staves. The Scandinavian company then issued proceedings to recover payment.

The Scandinavian company argued that, although not all the staves were exactly the right size, they were still fit for purpose, so the doctrine of good faith should be applied and the English company should be compelled to accept the staves. The House of Lords unanimously rejected that argument and ruled decisively that there was no concept of good faith in English law.

Has anything changed since the 1930s?

While generally it remains that there is no overarching duty of good faith, courts have with increasing frequency decided to imply good faith into specific contracts to achieve the object of justice. Therefore, a company now refusing to act in good faith might now expect to be given short shrift by the courts.

However, there are limits to this as the courts are still reluctant to recognise a fully-fledged doctrine of good faith. A good example of this is the relatively recent High Court case of Myers and another v Kestrel and others [2015], where the court considered whether a duty of good faith was implied into a loan note. The court decided that was did not, and decided that no duty of good faith should be implied where the discretion was whether or not to exercise a contractual right. Should the parties have intended good faith to apply to this element of the contract, then they should have expressly drafted this into the contract.

Are you involved in a dispute over a commercial contract? If so the experienced Commercial Dispute Resolution team at Levi Solicitors can help you. Call today on 0113 244 9931.

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