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Court rules there will be an implied duty of good faith for “relational contracts”

In civil law systems such as in France the law implies a duty of good faith to contracts and this is contained within the civil code. This means a contract in a civil law system cannot be formed unless there is good faith.

However, the English legal system does not imply such a duty and the English Courts are seemingly reluctant to imply a duty of good faith to contractual relationships. There are exceptions to this, for example in insurance contracts and employment contracts.

In a recent case the High Court has ruled that there will be an implied duty of good faith in contracts which amount to “relational contracts”.

The Court explained that a relational contract is a contract where there is a long term relationship, substantial commitments, a high degree of communication, cooperation and predictable performance based on mutual trust and confidence between the parties. The Court also gave some examples including franchise and joint ventures agreements.

Furthermore, there must be no conflicting express term in the contract which would prevent a duty of good faith being an implied term.

The High Court also gave some useful guidance on the meaning of good faith. They said it went beyond a duty to act honestly and also included a duty to refrain from conduct which in the relevant context would be regarded as commercially unacceptable by reasonable and honest people.

Top Tip: An implied term must not contradict an express term in a contract, so if in doubt include an express contract term.

For advice on Commercial Law matters, please contact David Anderson, Head of Company Commercial.