The duty of good faith and contracts impacted by COVID-19

The government released non-statutory guidance on the 7th of May 2020 applying to all active contractual arrangements materially impacted by COVID-19. The guidance sets out that parties should act responsibly and fairly and support the COVID-19 response to protect jobs and the economy.

The purpose of the guidance is to ensure contractual and economic activity can be preserved and ready to continue once COVID-19 is over and to ensure vital services and support continues to be provided through contracts and supply chains as part of the COVID-19 response.

Responsible and fair contractual behaviour is described in the guidance as being responsible and proportionate when responding to performance issues and enforcing contracts including cooperating and aiming to achieve just and equitable outcomes when dealing with any disputes.

Examples provided in the guidance of responsible and fair behaviour include:

• requesting and giving relief for impaired performance;
• requesting and allowing extensions of time;
• responding to/serving force majeure notices; and
• responding to requests for mediation or other alternative dispute resolution methods.

The guidance applies with immediate effect from the 7th of May 2020 and was reviewed on 30 June 2020 where the government decided the guidance would continue to apply until it is further amended or withdrawn.

The government provided further guidance on three specific issues, payments, extensions of time and the avoidance and resolution of disputes in their 30 June review. The guidance encourages parties to make prompt payments to maintain cash flow, to consider whether an extension of time for performance should be granted to preserve contracts and it encourages parties to resolve any emerging contractual issues through negotiation, an early neutral evaluation or mediation before formal disputes.

The guidance is non-statutory and does not override any legal rights or obligations that the parties may have under the terms of their contract. However, it does raise the question as to the extent to which English courts might take the guidance into account when considering contractual parties’ conduct and the approach they will take to express and implied obligations of good faith in contracts.

Good faith in English law

There is no general duty of good faith recognised by English law. However, recent case law shows an increasing willingness by courts to give effect to express contractual terms which require parties to act in good faith and in some cases to imply a duty into the contract to act in good faith.

Note – the Supreme Court indicated that it will not interfere with a detailed agreement negotiated by the parties (Marks & Spencer Plc v BNP Paribas Securities Services Trust Co (Jersey).

In the case of Yam Seng Pte Ltd v International Trade Corporation Ltd,  the court ruled that a requirement of good faith could be implied into the contract where it is consistent with the presumed intention of the parties. The contract, in this case, was a long-term distributorship agreement which required the parties to communicate effectively and cooperate with each other in its performance. The court classed this agreement as a “relational contract”. Examples are given by the court of “relational contracts” include joint venture agreements, franchise agreements and the type of long-term distributorship that was the subject of this dispute.

However, even where there is a “relational contract” the court will only imply a duty of good faith where it meets the usual requirements of implying terms into contracts under English law which is whether the term is so obvious that it goes without saying, or is necessary to give business efficacy to the contract.

This is a continuously developing area of law and the court has begun to narrow the interpretation in Yam Seng. For example, in the recent case of TAQA v RockRose [2020] the court decided that just because a contract could be defined as relational did not automatically lead to a conclusion that the parties would owe each other a duty of good faith, it would depend on the terms of that particular contract.

Furthermore, in cases where there is an express provision requiring good faith, the court has limited that provision to the purpose identified in the clause, rather than implying an overall duty of good faith to the contract.

Conclusion

Overall, the guidance appears to go further than the current duty of good faith in English law by encouraging a positive duty on parties to cooperate when responding to performance issues and enforcing the contract.  However, it is unlikely that the guidance will lead English courts to imply a duty of good faith where it would not have otherwise done so.

Furthermore, when taking the guidance into account, parties should ensure they are not giving up any rights which they may wish to rely on in the future.

For advice on how the guidance may affect your contract or questions about good faith more generally in contracts, please contact our Corporate and Commercial team.

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