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Assessing The Application Of The Good Faith Obligation in Terms Of Certainty in Contract Law

  • Yazarın fotoğrafı: Cansu Güzel
    Cansu Güzel
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Güncelleme tarihi: 3 Şub

The absence of a definitive rule or uniform jurisprudence regarding the application of the good faith principle in English contract law undermines the principle of certainty, a fundamental tenet of English law. While various judicial decisions and academic discussions address the concept of good faith, this paper critically examines the statement made in Candey Ltd v Bosheh and the line of case law that led to it, analyzing the extent to which the inclusion of good faith principles in English contract law affects legal certainty.

 

The principle of good faith emerged as a cornerstone of contractual obligations following its incorporation into civil law systems through 19th-century codifications, particularly after World War II[1]. It is a mandatory principle in the legal systems of most European Union (EU) Member States and is expressly recognized in the Principles of European Contract Law and the UNIDROIT Principles on International Commercial Contracts. Although, as can be seen from the different jurisprudences about good faith in English courts, a general definition of the principle of good faith has not been established; it was defined good faith as "honesty" in its core meaning.[2] Unlike other common and civil law jurisdictions, Common Law which is not a system based on civil law does not recognize an obligation for a party to act in good faith in contract, negotiation and performance in order to avoid uncertainty and protect the freedom of the parties. In Walford v Miles[3], Lord Ackner underscored this resistance, stating that "good faith is inherently repugnant to the adversarial position of the parties when involved in negotiations". In support of this, it should be noted that, as stated by the Supreme Court in Times Travel (UK) Ltd v Pakistan International Airlines Corp[4], it was emphasised that there is no general principle of good faith in English law.


However, good faith has been just emphasised in a narrow area such as employment and insurance.[5] Thus, the principle of "good faith" has not been recognised by the English Courts as a general principle applicable to all commercial contracts. As observed by Bingham L.J., English law has traditionally preferred "piecemeal solutions" rather than an overarching principle of good faith [6]  However, recent judicial decisions suggest a growing emphasis on good faith obligations in specific contractual relationships. As an example of this, in the case of Petromec Inc v Petroleo Brasileiro SA Petrobras (2005)[7], the parties expressly incorporated a good faith clause into their contract, illustrating how contractual discretion may be limited by an explicit duty of good faith.

 

In this context, the case of Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd (t/a Medirest)[8], Cranston J held that the Trust's conduct breached the parties' contractual obligations to "co-operate with each other in good faith" under clause 3.5 and that the Trust had acted in an arbitrary, capricious or irrational manner in exercising its authority under clause 5.8. Furthermore, good faith as a general principle provides a behaviour-related framework for the application of existing legal doctrines.[9] In this context, in the case of MSC Mediterranean Shipping Company S.A. v Cottonex Anstalt (2016) [10], it was stated that the judiciary's increasing willingness to recognize good faith obligations in specific contractual contexts while still resisting a broad application of the doctrine.

 

After the judgement in the case of Yam Seng PTE Ltd v International Trade Corporation Limited [2013][11]case which is considered the striking and most important judgment in which the principle of good faith is applied in English law, a number of different approaches to implied terms of good faith have emerged. In that case, it has been decided that honesty, loyalty to the intentions of the parties and the principle of fairness and observance of common commercial standards will be considered as impied obligations of good faith in general and such obligations may be implied in relational agreements by Judge Sir George Andrew Midsomer Leggat.[12] In the Yam Seng case, the parties' duty of good faith was enumerated. However, in the subsequent case of Nehayan v Kent [2018][13], a term of good faith is implied on the basis that the contract is relational. In this case, the High Court held that a duty of good faith was implied in an oral joint venture agreement and that a breach of the implied duty of good faith existed in the case. As stated in the case of Nehayan v Kent, relational contracts necessarily involve trust and confidence between the parties and relational contracts require long-term co-operation between the parties. In the same context as this case,  in the case of Bates v Post Office Ltd [2019][14], Fraser J stated the characteristics required for relational contracts and decided that the obligation of good faith will be implied if it is determined that these contracts are formed. Furthermore, it was emphasised that in order for a relational contract to be formed, the parties must act with integrity, a significant degree of communication and cooperation and predictable performance is required, and it must be based on mutual trust and loyalty. On the contrary, in the case of UTB LLC v. Sheffield United Ltd[15], Judge Fancourt J held that it was sufficient to consider whether a reasonable reader would consider the obligation of good faith to be necessary for the operation of the contract and not to consider whether the contract was relational.

 

These cases are just some of the judgments on the implied acceptance of good faith. These judgments on the same matter undermine the principle of certainty, which is one of the fundamental concepts of English Law. Especially in the context of commercial law, transactions proceed in accordance with the rules laid down in case law. Thanks to legal certainty, the responsibilities of the parties and the outcomes of transactions are predictable. For this reason, commercial operations need to be aware that transactions will be interpreted by the courts in a reliable and consistent manner in parallel with previous case law. In this context, consistency has been highly emphasised by the English courts and a reasonable degree of predictability was tried to be ensured on the commercial community. From a contract law perspective, in Vauxhall Motors Ltd v Manchester Ship Canal Co Ltd [2019][16],Lord Briggs emphasised the importance of certainty and stated that "certainty is equally important in the law of commerce, and one of the reasons why English commercial law is chosen around the world by commercial counterparties to govern their contracts, even when neither they nor the subject matter have any connection with England". The same point was made in Lord Bingham's dissenting opinion in Golden Strait Corp v Nippon Yusen Kubishka Kaisha [2007][17] in which he stated that "the importance of certainty and predictability in commercial transactions has been a constant theme of English commercial law" and rejected the majority view on the grounds that it undermined the quality of certainty.

 

Lastly, in the case of Candey Ltd v Bosheh [2022][18], Coulson LJ attempted to provide some clarity to the previous complexity, with a critical look at the different approaches by courts in recent years. In this case, Candey, who represented Mr Bosheh under a conditional fee agreement ("CFA"), did not receive any fees as a result of the drop hands settlement between Sheikh M. and Mr Boshes. Candey then sued Mr Bosheh, claiming that his representation of Mr Bosheh was a relational contract imposing an implied duty of good faith on both parties. The judge applied the different approaches followed in the previous case law in sequence and reached a conclusion. The Court of Appeal dismissed Candey's appeal, emphasising that Candey had no real expectation that his assignment contained an implied duty of good faith and that it was odd, novel and startling to categorise his retainer as a relational contract.

 

Since there are many cases that may cause confusion on the issue of good faith, this essay is primarily based on the confusion caused by the application of the principle of good faith implicitly in the Candey Ltd v Bosheh case. However, as can be seen in general terms, the application of the principle of good faith, which is not based on any law, in English contract law undermines certainty and harms predictability.


Ultimately, the inclusion of an implied duty of good faith in English contract law—without a statutory foundation—risks undermining legal certainty. Given that commercial transactions rely heavily on predictability and consistency, courts should exercise caution in implying good faith obligations without explicit legislative or contractual endorsement. English contract law's commitment to certainty remains paramount, and any deviation from this principle must be approached with due consideration to its broader implications on commercial stability.

 

Bibliography

 

[1] Ateş, A. (2007)  “Sözleşme Özgürlü Bakımından Dürüstlük Kuralı”, TBB Dergisi, p. 77

[3] Walford And Others Appellants And Miles And Another Respondents [1992] 2 A.C. 128, at 138

[4] Pakistan International Airline Corporation v Times Travel (UK) Ltd [2021] UKSC 40

[9] Berger, K.P. and Arntz, T. (2016) “Good faith as a ‘general organising principle’ of the common law,” Arbitration International, 32(1), pp. 167–178. Available at: https://doi.org/10.1093/arbint/aiw001.

[11] Yam Seng Pte Ltd (a company registered in Singapore) v International Trade Corporation Ltd [2013] EWHC 111 (QB)

[12] Ashurst, A. (2017)  Leap of faith – the meaning of good faith in commercial contracts, Dispute Resolution Briefing, Page 2

[14] Bates and others v Post Office Ltd [2019] EWHC 606 (QB), at paragraph 711

[17] Golden Strait Corporation v Nippon Yusen Kubishika Kaisha [2007] UKHL 12


Cases

  • Street v Derbyshire Unemployed Workers' Centre [2004] 4 All ER 839, [2004] EWCA Civ 964 at 851

  • Walford And Others Appellants And Miles And Another Respondents [1992] 2 A.C. 128, at 138

  • Pakistan International Airline Corporation v Times Travel (UK) Ltd [2021] UKSC 40

  • Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] QB 433, at 439

  • Petromec Inc and others v Petroleo Brasileiro SA Petrobras and others [2005] EWCA Civ 891

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

  • Yam Seng Pte Ltd (a company registered in Singapore) v International Trade Corporation Ltd [2013] EWHC 111 (QB)

  • Nehayan v Kent [2018] EWHC 333 (Comm)

  • Bates and others v Post Office Ltd [2019] EWHC 606 (QB), at paragraph 711

  • UTB LLC v Sheffield United Ltd and others; Sheffield United Ltd v UTB LLC and others [2019] EWHC 2322 (Ch)

  • Vauxhall Motors Ltd (formerly General Motors UK Ltd) v Manchester Ship Canal Co Ltd [2019] UKSC 46

  • Golden Strait Corporation v Nippon Yusen Kubishika Kaisha [2007] UKHL 12

  • Candey Ltd v Bosheh and another [2022] EWCA Civ 1103

 

Journal

  • Ates, A. (2007)  “Sözleşme Özgürlü Bakımından Dürüstlük Kuralı”, TBB Dergisi

  • Hannant, J. (2015) “Good faith in English contract law, Commercial Newsletter.”

  • Berger, K.P. and Arntz, T. (2016) “Good faith as a ‘general organising principle’ of the common law,” Arbitration International, 32(1), pp. 167–178.

  • Ashurst, A. (2017)  Leap of faith – the meaning of good faith in commercial contracts, Dispute Resolution Briefing

 
 
 

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