What Is the Implied Duty of Good Faith in Contracts?

The implied duty of good faith is a developing concept in English contract law that requires parties to act honestly, fairly, and in some cases cooperatively when performing contractual obligations. Unlike some jurisdictions where good faith is a general principle applied to most contracts, English law does not recognise a universal duty of good faith. Instead, it may be implied in specific circumstances, particularly in relational or long-term commercial contracts.

This concept is increasingly important in business disputes, especially in joint ventures, franchise agreements, and complex supply arrangements where ongoing cooperation is expected.

Meaning of Good Faith in Contract Law

Good faith generally refers to conduct that is:

• Honest and not deceptive
• Based on fair dealing
• Consistent with the agreed purpose of the contract
• Not intended to undermine the other party's contractual rights

In English law, good faith is not a single, uniform doctrine. It is developed through case law and depends heavily on the context of the contract.

Is There a General Duty of Good Faith?

English courts have repeatedly confirmed that there is no overarching duty of good faith in all contracts. However, the courts have also recognised that such a duty may arise in specific situations.

The leading approach is that:

• Good faith is not automatically implied
• It may be implied based on the nature of the contract
• The intention of the parties and the contract context are key

This position was reinforced in cases such as Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd, which emphasised fairness in contractual dealings, particularly where onerous terms are involved.

When Can an Implied Duty of Good Faith Arise?

Courts may imply a duty of good faith in certain categories of contract, particularly where ongoing cooperation is required.

1. Relational contracts

Relational contracts are long-term agreements involving trust and cooperation. Examples include:

• Joint ventures
• Franchise agreements
• Long-term supply contracts
• Distribution agreements

In such contracts, courts may imply a duty of good faith as a matter of necessity to give business efficacy to the agreement.

The leading modern authority is Bates v Post Office Ltd, where the court recognised that relational contracts may carry an implied duty of good faith due to their nature.

2. Contracts requiring mutual cooperation

Where performance depends on ongoing collaboration, courts may imply obligations of:

• Honesty
• Transparency
• Reasonable cooperation

This ensures the contract can function effectively.

3. Contracts with discretionary powers

Where one party has discretion under a contract (e.g., pricing, approval, or termination decisions), courts may imply limits requiring:

• Rational exercise of discretion
• No arbitrary or capricious decision-making
• Honesty in decision-making

Content of the Implied Duty of Good Faith

Where recognised, the implied duty of good faith may include obligations such as:

• Acting honestly in contractual dealings
• Not deliberately undermining the contract
• Avoiding deceptive conduct
• Cooperating where necessary for performance
• Exercising contractual discretion reasonably

However, the scope varies depending on the contract. Courts are careful not to impose vague or overly broad obligations.

Limits of the Duty of Good Faith

The implied duty of good faith has clear limitations:

1. It cannot contradict express terms

If a contract expressly allows certain conduct, good faith cannot override it.

2. It does not impose fiduciary obligations

Good faith does not require one party to prioritise the interests of the other.

3. It is context-specific

It depends entirely on the nature of the contract and the relationship between the parties.

4. It does not guarantee fairness of outcome

Courts focus on conduct, not whether the outcome is commercially fair.

Good Faith vs Express Contract Terms

Where contracts are carefully drafted, express terms take priority. Courts are reluctant to imply good faith where:

• The contract is detailed and comprehensive
• The parties are sophisticated commercial entities
• The allocation of risk is clearly set out

However, where terms are open-ended or discretionary, the duty may be more readily implied.

Good Faith in Commercial Disputes

The implied duty of good faith is often argued in disputes involving:

1. Termination of contracts

Claims that termination was exercised dishonestly or in bad faith.

2. Pricing disputes

Allegations that pricing discretion was used unfairly.

3. Franchise and distribution agreements

Claims that one party undermined the commercial relationship.

4. Joint ventures

Disputes involving trust, cooperation, and shared objectives.

Remedies for Breach of Implied Good Faith

If a court finds that a duty of good faith has been breached, remedies may include:

• Damages for financial loss
• Contract termination (if breach is sufficiently serious)
• Declaratory judgments
• Injunctions in appropriate cases

The remedy depends on the nature of the breach and the loss suffered.

Time Limits for Claims

Claims relating to breach of contract, including implied duties, are generally subject to:

• 6 years under the Limitation Act 1980 for standard contracts
• 12 years for deeds

Time runs from the date of breach, not discovery in most cases.

Practical Assessment in Disputes

When considering whether an implied duty of good faith applies, courts and parties typically assess:

• The nature of the contractual relationship
• Whether the contract is long-term or collaborative
• Whether discretion is granted to one party
• The presence of express terms addressing conduct
• The behaviour of the parties during performance

These factors determine whether good faith is implied and whether it has been breached.

Common Misunderstandings

1. Good faith means fairness in outcome

Incorrect. It focuses on behaviour, not commercial fairness.

2. Every contract includes good faith

Incorrect. It is only implied in specific circumstances.

3. Good faith prevents termination

Incorrect. A party may still terminate if contract terms allow it.

Final Thoughts

The implied duty of good faith in English contract law is a context-dependent principle that may arise in relational or cooperative commercial contracts. It requires honesty, fair dealing, and proper exercise of contractual discretion, but it does not override express contractual terms or impose broad obligations of fairness. Its application depends heavily on the nature of the contract and the intentions of the parties. In commercial disputes, it is often a key argument in assessing whether contractual behaviour was lawful and consistent with agreed obligations.