Is there room for ‘good faith’ in English contract law?

Year Published: 2014

In the recent case of Bristol Groundschool Ltd (BGS) v Intelligent Data Capture Ltd (IDC) & ors [2014], Judge Richard Spearman QC implied a general duty of good faith into what the High Court termed ‘relational contracts’.

The first time this approach was endorsed, within the case of Yam Seng Pte Ltd v ITC Ltd [2013], ‘relational contracts’ were described as those which are often long term and may require substantial commitment. This includes a high degree of communication, cooperation and predictable performance based on mutual trust and confidence.

Facts behind the case

Between 1999 and 2009 the claimant (BGS) and the defendant (IDC) had an on going business relationship producing manuals for civil aviation agencies. During this time the parties signed two contracts, one in 1999 and another in 2001, under which IDC were to provide artwork for the manuals and BGS were then to produce and sell them. BGS also bought and owned the copyright of the artwork produced by IDC.

By 2009 the relationship had broken down and BGS brought a claim against IDC on the grounds of a breach of copyright. IDC then counterclaimed on similar grounds.

One of the key issues for the court to decide was whether there had been a repudiatory breach of an implied, general duty of good faith by BGS when they accessed and downloaded materials from IDC’s computer system without prior consent. This would have been in order to develop their own software system in anticipation of a breach by IDC and a breakdown of the relationship.

Judge’s decision

Judge Spearman stated that there was an implied duty of good faith within the signed contracts for the following reasons:

  • The 2001 contract was a ‘relational contract’ as defined within the similar case of Yam Seng;
  • The court of appeal had not disapproved of the ‘Yam Seng’ approach within similar recent cases;
  • One of the key witnesses for BGS recognised that a duty of good faith existed and in his evidence stated that there was an ‘element of trust’ in the parties’ relationship, when the case made reference to how BGS would have reacted had the situation been reversed.

How do you prove a breach of the duty of good faith?

Spearman stated that the test to prove a breach of good faith should be: whether the conduct in question would have been regarded as ‘commercially unacceptable’ by reasonable and honest people in the particular context involved.

In this decision reference was made to the case of Royal Brunei Airlines v Tan [1995] which defined ‘commercially unacceptable’ as:

  • Acting in reckless disregard for other peoples’ rights or possible rights;
  • A lack of regard to all the circumstances known to the party in question, including the nature and importance of the proposed transaction, the nature and importance of his role, the ordinary course of business, the degree of doubt, the practicability of proceeding otherwise and the seriousness of the consequences to the other party’s rights;
  • The court will also have regard to the personal attributes of the third party, such as intelligence, experience and the reason he acted as he did.

Therefore in accessing and downloading information from IDC’s computer system, BGS had knowingly disregarded IDC’s rights and breached the duty of good faith.

However, Spearman came to the decision that the breach was not a repudiatory breach as the conduct did not strike at the heart of the trust.

How does this relate to your business?

The case contains useful guidance on the approach the court may take when determining whether particular conduct has breached an obligation of good faith. In its simplest form, ‘good faith’ requires conduct that is honest in the opinion of a reasonable and honest person in the same circumstances. The decision often appears to run against the majority of English case law which relates to the existence and/or breach of a duty of good faith in the context of contract law.

For more details on English contract law or any other corporate issues, please contact Ben Davies on 0161 475 1216.

 

 

 

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