Skip to main content
Insight

Is a duty of good faith becoming harder to establish?

Summary In the recent case of Myers v Kestrel Acquisitions, the High Court refused to imply a duty of good faith into a loan instrument, finding that there was no justification for doing so because Summary

 

In the recent case of Myers v Kestrel Acquisitions, the High Court refused to imply a duty of good faith into a loan instrument, finding that there was no justification for doing so because the relevant documentation was, on the whole, extensive and detailed.  This case reiterates that, whilst it is well established that there is no general duty of good faith in commercial contracts, the Court will be more willing to imply a duty of good faith where a contracting party is given a discretion which involves a choice from a range of options.  The High Court found, in this case, that such duty did not apply where there was no contractual discretion to be exercised, but rather a "binary" choice of whether or not to exercise a contractual right.  (Myers v Kestrel Acquisitions [2015] EWHC 916 (Ch))

 

Facts

As part of the consideration for the sale of the claimant’s sub-prime lending business, the first defendant (Kestrel) issued vendor loan notes to the claimants. These were documented in the Vendor Loan Note Instrument in the contract.

The Vendor Loan Note Instrument provided that:

“[Kestrel] could make any modifications to this instrument… if the modification is consistent in all material respects with any modification being made to the Discounted Loan Note Instrument”.

In reliance on this provision, Kestrel amended the Vendor Note Instrument. The claimants objected, stating that the effect of the amendments would make the vendor loan notes worthless.  They asked the court to imply a term that in exercising its power to modify the Vendor Loan Note Instrument, Kestrel had to act in good faith.

The High Court refused to imply such a term into the Vendor Loan Instrument on the basis that the overall documentation was extensive and detailed and that the claimants were, effectively, asking the Court to "conclude that the parties omitted to insert an important term".

 

The Court held that, whilst the provision granted Kestrel the "power" to modify the Vendor Loan Instrument, such discretion did not involve a range of options - it was rather a "binary choice".  The High Court found that the fact that a party had a contractual choice did not justify it being subject to an obligation to act in good faith.

 

Commentary

 

This case reiterates that, unless it relates to the exercise of a contractual discretion, the Courts will generally be reluctant to imply a duty of good faith into a contract.

 

It should be noted, however, that the Courts have implied a duty of good faith or upheld an express obligation to act in good faith in a number of recent cases, including:

 

  • Yam Seng Pte Limited v International Trade Corporation Limited, where the High Court combined the concept of good faith with the established methodology for implying contractual terms (i.e. taking into account the intention of the parties) to establish a core duty of honesty; and a duty relating to the price of products which was specific to the facts of this case;


 

  • Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Trading Ltd, where the Court of Appeal held that a contractual provision in which the parties agreed to  “co-operate with each other in good faith" did apply to the specific objectives stated in the relevant provision (relating to transmission of information), but did not apply to the contract as a whole.


 

Myers v Kestrel Acquisitions, in the context of other recent cases relating to good faith obligations, confirms that if parties to a contract intend to rely on a duty of good faith, this should be expressly provided for in the contract.  This is especially true given that English common law does not recognise any general duty to act in good faith when forming or performing contracts (Walford v Miles [1992] 2 ac 128 HL) and, as a result, "has developed piecemeal solutions in response to demonstrated problems of unfairness" (Interfoto Picture Library Ltd. v Stiletto Visual Programmes Ltd., [1989] QB 433).  As such, in the absence of any express and clearly scoped obligation in the contract to act in good faith, the Court will need to look to the facts to determine whether or not to imply or uphold any such duty of good faith.

 

When expressly stating in a contract that a duty to act in good faith applies, the following details should also be included:

 

  • the scope of the duty;


 

  • whether the duty of good faith goes beyond just acting honestly and with integrity - for example, whether it includes a duty to consult, cooperate, or to disclose information;


 

  • the extent to which such duty of good faith restricts any specific acts by a party or acting to the detriment of another party;


 

  • whether it requires a party to put the other party's commercial interest before its own.


 

 

Sign up to our email digest

Click to subscribe or manage your email preferences.

SUBSCRIBE