Good faith

Essex County Council v UBB Waste (Essex) Ltd [2020] EWHC 1581 (TCC)

Facts

In 2012 Essex County Council (the “Authority”) entered into a twenty five year agreement with UBB Waste (Essex) Limited, the defendant (UBB) for the design, construction, financing, commissioning, operation and maintenance of a waste treatment plant. The Authority argued that UBB had failed to design and construct the facility so that it was capable of passing the ‘Acceptance Tests’ and that this, and its failure to attempt to do to so by the ‘Acceptance Longstop Date’, was an event of ‘Contractor Default’ which triggered rights of termination.

Relational contract

Both parties adopted the analysis of the characteristics of a relational contract by Fraser J in Bates v Post Office (No. 3) [2019] (read our 2019 summary), Pepperall J noting that “A term may be implied into a contract notwithstanding the existence of an entire agreement clause.” Factors which he considered pointed to this agreement being a relational contract included that:

• the parties “plainly intended that they should have a long-term relationship”;
• there was a need for “a close collaborative working relationship”;
• the parties intended that they should each have trust and confidence in the other;
• there was a requirement for “a high degree of communication and co-operation”; and
• significant investment and exclusivity were involved.

Good faith

Having concluded that “this 25-year PFI contract is a paradigm example of a relational contract in which the law implies a duty of good faith”, the judge considered the nature of the obligation. He expressed the view that it is an objective test - that the question is whether conduct that the aggrieved party claims is in breach of good faith would be regarded as ‘commercially unacceptable’ by reasonable and honest people. What will be required in any individual case will depend upon the contractual and factual context.

Termination

Ultimately the court’s recognition that good faith could be implied into the contract did not help UBB. Its allegations that the Authority had failed to act in good faith in its attempts to negotiate a solution and in its approach to termination were found to be without foundation.

UBB had not achieved service commencement by the Acceptance Longstop Date. The Authority was therefore entitled to terminate the contract for Contractor Default and was awarded significant damages.

There was some discussion about whether an implied term could mean that termination had to be exercised within a reasonable time. However, when applied to this particular contract and the facts, the argument was rejected. Indeed, the judgment confirms that there is no general principle that a right to terminate must be exercised within a reasonable time.

Comment

Businesses will be relieved to see the ability to exercise termination rights upheld although key was that, looking at the facts objectively, the Authority could not be said to have acted in a commercially unacceptable way.

It is also worth noting the judge’s observation that a simple entire agreement or sole remedy clause is unlikely to have the effect of expressly excluding an implied duty of good faith.

Taqa Bratani Ltd & Ors v Rockrose UKCS8 LLC [2020] EWHC 58 (Comm)

Facts

The claimant sought declarations that notices terminating the appointment of the defendant as an operator of oil and gas field blocks in the North Sea, under various joint operating agreements, were valid and took effect in accordance with their terms.

The defendant argued that the express termination provisions upon which the claimant relied were, impliedly, qualified by good faith obligations:

• that the claimant had to exercise its termination powers in the absence of “arbitrariness, capriciousness, perversity and irrationality” (Braganza duty); and/or
• the claimant’s termination right was subject to more general good faith obligations (of mutual trust, confidence and loyalty) because the contract was a relational contract.

Held

Braganza duty

The “Braganza” duty followed Braganza v BP Shipping Ltd [2015] UKSC 17. The duty can control a party’s right to exercise a contractual discretion. The defendant ran this argument because it questioned the claimant’s motivation in terminating the operator appointment.

The judge found the duty to be irrelevant given the claimant’s absolute right to terminate (not contractual discretion). The claimant had an express and absolute right to discharge the defendant on the minimum notice specified. There was no implied constraint on this right:

“…whilst I accept that the circumstances in which such terms can be implied into commercial agreements is an incrementally developing area of the law, I consider it clear that on the current state of the authorities, the Braganza doctrine has no application to unqualified termination provisions within expertly drawn complex commercial agreements between sophisticated commercial parties such as those in this case.”

He also went to say that even if his analysis was wrong and the duty did apply, he did not consider that the duty would have been breached when making the decision to terminate.

Relational contract

Accepting that the agreement could, at least arguably, be said to be “relational”, the judge commented that the resulting implied duty of good faith:

“does not lead to the conclusion that it is necessary to imply a good faith obligation into the exercise of the power on which the claimants rely” (i.e. the right to terminate the operator appointment).

Comment

As a general rule a contract which is likely to be relational and contain implied good faith obligations is, by its very nature, also likely to be a complex contract which was negotiated by sophisticated parties. The court is reluctant to interfere with the freedom to contract in these circumstances without good cause.

That said, it can be helpful to have evidence that decisions made were not in breach of the good faith argument being run (be it relational contract; Braganza duty; or breach of an express good faith obligation). For example, in 2019’s New Balance v The Liverpool Football Club and Athletic Grounds Ltd [2019] EWHC 2837 (Comm), the fact that New Balance had undertaken an internal due diligence exercise before making its renewal offer was particularly helpful to the company in proving that that it had made the offer in good faith (read our 2019 summary here).

Russell v Cartwright & Ors [2020] EWHC 41 (Ch)

Facts

This dispute concerned a joint venture vehicle in which each of the four parties was a director and owned 25% of the shares. Following a disagreement between the parties the claimant resigned, and afterwards he found out that the company had recently acquired a new project. The claimant argued that he had been wrongfully excluded and the three defendants’ actions in doing so were dishonest. In particular, that:

• there were implied duties because (a) the relationship between the parties was fiduciary in nature or (b) the joint venture agreement was a relational contract;
• there were express good faith obligations within the joint venture agreement.

Held

The relationship was not fiduciary in nature. It is exceptional for fiduciary duties to arise other than in certain settled categories of relationship. One settled category is partnership, but the parties were shareholders in a company. Referring to each other as ‘partners’ was simply business parlance.

Whilst there were certain limited express good faith obligations within the joint venture agreement, there was no general wider duty of good faith. It was neither obvious, nor essential, to the proper working of the contract, to imply some broader obligation of good faith. The existence of express good faith obligations was inconsistent with implying a more general good faith obligation.

Comment

It is interesting to note Falk J’s view that, rather than trying to identify first whether a contract is a "relational contract" (and so includes an obligation of good faith), the better starting point is the application of the conventional tests for the implication of contractual terms. That is, whether a reasonable reader would consider that an obligation of good faith was obviously meant, or the obligation was essential to the proper working of the contract since it would otherwise lack commercial or practical coherence (the business efficacy test). Both approaches are currently supported by case law.

Oliver Dean Morley t/a Morley Estates v The Royal Bank of Scotland plc [2020] EWHC Civ 88

Facts

The claimant, Mr Morley, argued that a loan agreement was a relational contract that brought with it a duty of good faith. RBS accepted that it owed a narrow duty in the same terms as set out in the case Property Alliance Group Ltd v Royal Bank of Scotland plc [2018], namely, that in calling for a revaluation of security, the bank could act in its own interests, but not so as to “vex [the customer] maliciously”.

Held

The loan facility was not a relational contract of any kind. The contractual discretions it contained were to be exercised by reference to Property Alliance Group and nothing wider. The decision to call in the loan was a right, not a discretion. Where discretionary decisions were taken by the bank, they were not taken to vex Mr Morley in any malicious way.