Last edited 13 Feb 2014

Good faith – good grief

In the second instalment of our new legal digest by construction lawyer Najma Dunnett, good faith rears its head again, and appears to behave like buses with three cases hot on the heels of each other: Mid Essex NHS Trust v Compass Group UK & Ireland Ltd, Yam Seng v International Trade Corporation and the case discussed here - TSG Building Services Plc v South Anglia Housing Limited.

The basic question in this case: whether an express duty of good faith applied to a termination at will clause? The answer: no.

The judge decided that reasonableness did not apply to termination in this case as either party could terminate for any or no reason, such is the nature of these type of clauses. The clause provided an “unconditional and unqualified right” meaning that termination under the contract was properly effected by South Anglia with no compensation payable to TSG. Clause 1.1 of the contract, relating to good faith, was narrowly interpreted to apply only to matters within the context of that clause so that good faith did not extend to the whole contract.

No implied duty of good faith was found here and recent good faith cases emphasise there is no general implied duty of good faith in English contract law, unlike for example the USA, Canada or Australia.

The moral of the story is that if parties wish certain provisions to be governed by a duty of good faith or reasonableness then this must be expressly stated in their contract. Recent cases demonstrate that good faith provisions will be restrictively construed and not generally applied to bail out parties from unpalatable contract provisions. Termination at will/for convenience clauses do exactly what they say on the tin and do not sit kindly with partnering term agreements when the parties seemingly content partnering arrangement can be abruptly terminated. This is why it is vital to carefully check and consider all provisions of a contract and not take for granted boilerplate termination clauses. This was a harsh wake up call for TSG, leaving them out of pocket when faced with sudden termination mid-way through a 4 year contract.

Click here to read the detailed analysis of this case.

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