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Last edited 03 Oct 2022

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Najma Dunnett Other Consultant

TSG v South Anglia

Good faith has reared its head again in 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 described below, TSG Building Services Plc v South Anglia Housing Limited [2013] EWHC 1151 (TCC).

The basic question in TSG v South Anglia was whether an express duty of good faith applied to a termination at will clause. The answer was no.

TSG was appointed by South Anglia to undertake gas servicing and maintenance works to South Anglia’s properties for a term of 4 years under an ACA standard form contract for term partnering (TPC 2005). The two key clauses in the contract were 1.1 (good faith) and 13.3 (termination at will):

Clause 1.1 provided for the parties to work together in “the spirit of trust, fairness and co-operation....within the scope of their agreed roles, expertise and responsibilities....and in all matters governed by the Contract they shall act reasonably.....”.
Clause 13.3 provided for termination at will (or for convenience) by either party on three months’ notice.

A dispute arose regarding payment whereupon South Anglia terminated the contract pursuant to clause 13.3. TSG subsequently referred the dispute to adjudication claiming compensation for early termination. South Anglia contested the adjudicator’s jurisdiction and claimed the contract did not provide for compensation on termination but the adjudicator nevertheless awarded TSG approximately £384,000 for early termination. TSG proceeded to enforce the adjudicator’s award but South Anglia sought a CPR (Civil Procedure Rules) Part 8 declaration that the adjudicator lacked jurisdiction as more than one dispute was referred to him and whether in construing the contract, termination had to be effected in good faith or reasonably. The judge, Mr Justice Akenhead, found that although the adjudicator had jurisdiction to decide the dispute he reached the wrong conclusion and clause 13.3 was not subject to a duty of good faith.

Whilst the Construction Act and the Scheme provide for only one dispute at a time to be referred to adjudication, the court took a broad approach to the definition of dispute finding that although one dispute was referred to adjudication it comprised three issues.

The judge decided that reasonableness did not apply to termination under clause 13.3 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 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 such boilerplate termination clauses. This was a harsh wake up call for TSG resulting in unintended consequences being left out of pocket when faced with sudden termination mid-way through a 4 year contract.