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Good faith in commercial contracts: another development?

  • United Kingdom
  • Commercial agreements
  • Licensing
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14-08-2019

Introduction

In April we reported on a High Court case that implied a duty of good faith into a commercial contract, with the result that a party may be potentially restricted in the way it acts in exercising its rights. That case was Alan Bates and Others v Post Office Limited where the judge decided that there is an established category of contracts in English law called “relational” contracts where there is implied an obligation of good faith, not implied as an individual term necessary to make sense of the arrangement but as incidental to the nature of the contract. We now have another High Court case looking at the argument of whether an obligation to act in good faith should be implied, that of SDI Retail Services Limited v The Rangers Football Club Limited.

Background

This later case arose from a widely publicised dispute between Rangers football club and Sports Direct and a retail and distribution agreement which allowed Rangers the freedom to do deals with third parties if it gave the Sports Direct entity it contracted with (SDI) a right to match third party offers.

From the point of view of Rangers, if SDI was able to exercise its matching rights repeatedly, this gave SDI far greater power over Rangers’ supply chain than, Rangers said, was intended. One of their arguments against SDI being able to exercise its matching rights on more than one occasion was that the arrangement was a relational contract and therefore SDI was subject to an implied term to act in good faith. If this was correct, Rangers argued that SDI would be restricted in how it exercised its matching rights so it could not use them in a way that would give it control over all of Rangers’ supply chain and thereby prevent the sale by others of replica kit.

Significance

Although this later case is clear in its conclusions and rejection of Rangers’ arguments, neither the judgment nor those arguments refer to the earlier Post Office case. Nor does this later judgment go into any detail to refute Rangers’ argument that the SDI contract was relational. Instead, it focusses on the correct test for implying terms into a contract and then applies that test to Rangers’ proposed implied term. This test was set out in the 2016 Supreme Court decision of Marks & Spencer plc v BNP Paribas Securities Services as including the following restrictions:

• it must be necessary to give business efficacy to the contract (so that no term will be implied if the contract is effective without it)

• it must be so obvious it goes without saying

• it must not contradict any express term of the contract.

The SDI case does contain some discussion of previous cases on relational contracts without rejecting the concept of this separate category of contract. Rather, the judge decided that there is no Court of Appeal authority to support Rangers' arguement that a duty of good faith may be more readily implied into relational contracts.

Instead, his approach was to treat the matter simply as one of contract construction: “an implication of a duty of good faith will only be possible where the language of the contract, viewed against its context, permits it. It is thus not a reflection of a special rule of interpretation for this category of contract”. On this basis, the judge rejected any basis for implying a term of good faith into the SDI arrangement: the implied term Rangers suggested was not obvious, it was not necessary to give business efficacy to the agreement and it cut across express terms. Or, to put it another way, if the agreed commercial terms gave SDI control over part or all of Rangers’ supply chain, then those were the terms that had been agreed and were nothing to do with any exercise of bad faith on the part of SDI.

Conclusion

We now appear to have two approaches from first instance cases as to whether a duty of good faith will be implied: one that approaches the issue with an emphasis on the Supreme Court approved restrictive test for implying terms and the other using an approach that first categorises a contract as “relational” and, having adopted that category, implies a standard of behaviour into that contract without looking at the test of business efficacy.

We are left with a potentially confusing position: if you have a long term collaborative contract that could be categorised as “relational”, do you approach it on the basis that an obligation to act in good faith will apply to your actions or do you assume that the restrictive test on implied terms will apply and ask yourself the question, does the contract work without the term?

One solution may be to expressly exclude any obligation to act in good faith either absolutely or excluded on the basis that the contract contains its own express terms on how parties should act in particular circumstances. One further word of warning: including an express term to act in good faith is not necessarily going to add much clarity as to the extent of behaviour required to comply with that term,

 

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