The Good, the Bad, and the Uncertain: the Status of Good Faith in English Law

The concept of good faith is, historically, anathema to the English law of contract. Although English law has no general principle or doctrine of good faith, good (and by extension, bad) faith has nevertheless become an increasingly visible feature of the English law of contract as the law has developed over the last few decades. This piecemeal development has had the benefit of respecting the certainty of freedom of contract, while still allowing room for the law to develop flexibly. Recent developments, including observations of senior judges, suggests a continuing trend towards good faith playing an increasingly visible role in English law contracts in the future.

In England, the emergence of good faith obligations has primarily manifested itself via the express terms of the contract (i.e., where parties have expressly negotiated good faith requirements), and by implication or operation of law. In the latter category, three distinct yet related lines of authority have developed; namely: (1) good faith requirements in certain categories of contracts by implication or operation of law; (2) implication of a term requiring unilateral exercise of contractual powers to be exercised honestly, rationally, and in good faith, and (3) implication of good faith obligations into a commercial contract generally.

This article will briefly consider express terms as to good faith as well as the first and third types of implied term, but will focus primarily on recent developments in the law associated with qualifications on the exercise of contractual powers by reference to good faith.

Express Obligations of Good Faith

These days, it is not uncommon in contracts governed by English law to find an express obligation requiring the parties to act in good faith. The content of such an obligation has been the subject of varied judicial consideration. Most recently, the Court of Appeal has observed that, firstly, an obligation of good faith has at its ‘core’ an obligation of honesty, such that dishonesty will always be a breach of good faith. Secondly, to be in breach of a good faith obligation it is necessary to have acted in ‘bad faith’ (“[u]nless [the defendant] has acted in bad faith he cannot be in breach of a duty of good faith”) – Re Compound Photonics Group Ltd [2022] EWCA Civ 1371.

The question what amounts to bad faith remains context-sensitive. It was described in Re Photonics Group Ltd as being able to include conduct that “would be regarded as commercially unacceptable to reasonable and honest people albeit that they would not necessarily regard it as dishonest,” but that will not necessarily be so in every case. In summary, the Court of Appeal held that “apart from the ‘core’ duty of honesty and (depending the context) a duty not to engage in conduct that could be characterized as bad faith, any further requirements of an express duty of good faith must be capable of being derived as a matter of interpretation or implication from the other terms of the contract in issue in the particular case.” In so concluding, the Court of Appeal specifically rejected the first instance decision which had attempted to identify certain ‘minimum standards’ that would exist in any good faith obligation. The Court of Appeal thereby rejected objective minimum standards in favor of a more traditional approach of contract construction. In other words, the content of an express good faith obligation will therefore largely still depend upon a case-specific construction of the relevant good faith clause.

Implication of Good Faith Concepts

Despite the absence of a general doctrine of good faith, there are certain specific contractual contexts in which good faith will be imported into contracts by operation of law, or by implication of law. Although similar in practice, there is a difference insofar that breach of an obligation of good faith arising by operation of law will not sound in damages, whereas breach of a term implied by law may do so. Examples of contracts in which good faith obligations exist by operation of law include contracts of insurance (where there is a continuing duty of utmost good faith, albeit that many of the requirements in insurance contracts are now dictated by legislation), and partnerships (where partners owe an obligation of good faith to each other). By contrast, the most well-observed example of a term implied by law is in contracts of employment, where a term will be implied creating a general duty of good faith and loyalty by both employer and employee.

Putting specific categories of contract to one side, most interesting are the circumstances in which the Court will imply good faith restrictions into commercial contracts more generally. The first of these concerns what has become known as the Braganza principle in relation to discretionary contractual powers, derived from the Supreme Court case of Braganza v. BP Shipping Ltd [2015] UKSC 17, which in turn approved the approach of the Court of Appeal in Socimer International Bank ltd v. Standard Bank London Ltd [2008] EWCA Civ 116. In Socimer, the Court of Appeal had held that, in the context of the exercise of a contractual power, “a decision-maker’s discretion will be limited, as a matter of necessary implication, by concepts of honesty, good faith, and genuineness, and the need for the absence of arbitrariness, capriciousness, perversity and irrationality. The concern is that the discretion should not be abused.” In Braganza the Supreme Court affirmed the decision of Socimer, including the parallel drawn with the public law review standard of Wednesbury unreasonableness. The Supreme Court thereby held that a contractual discretion was subject to an implied term that “the decision-making process be lawful and rational in the public law sense, that the decision is made rationally (as well as in good faith) and consistently with its contractual purpose.”

In Mid Essex Hospital Services NHS Trust v. Compass Group UK and Ireland Ltd. [2013] EWCA Civ 200, decided after Socimer but before Braganza, the Court of Appeal accepted the conclusions of Socimer but drew a distinction between cases such as Socimer where it “does not involve a simple decision whether or not to exercise an absolute contractual right. The discretion [(in the sense of a true ‘discretion’)] involved making an assessment or choosing from a range of options, taking into account the interests of both parties” and the facts of the case before it where the clause in question was treated as an absolute contractual right. Thus, the distinction arises between a contractual discretion (to which a Braganza restriction applies) and an absolute contractual right (on which there is no such restriction – per Mid Essex Hospital Services). The question of into which category a clause in any given contract falls, is a prior question that must be resolved in each case as a matter of construction of the contract.

Making such a distinction is not always a straightforward matter, and various elements may influence the conclusion of whether the contractual power ought to be qualified, and if so, to what degree. Foremost of these is a proper construction of the contractual power itself, which may (in the usual way) go beyond the mere words used. A contractual power being described as “at a party’s discretion” may therefore be a persuasive factor in concluding there is discretion, but equally it is possible for a clause to posit discretion when in truth there is none, if there is only a binary choice to be made. In such cases, no Braganza duty would be implied.

In addition, if the contractual power is qualified within the terms of the contract itself, for example in requiring facts to be proven to the “reasonable satisfaction” of the other party, then it has been held that there is no need and therefore no room for an additional implied restriction such as that of a Braganza nature. Moreover, in relation to contractual termination provisions (perhaps the most common example of a contractual power seen in commercial contracts), it has been said that these amount to an example of absolute rights to which a Braganza qualification would not be applied. In one High Court decision, such termination rights were described as “an everyday feature of the contracts that govern commercial relationships and extending Braganza to such provisions would be an unwarranted interference in the freedom of parties to contract on the terms they choose.” (Taqa Bratani Ltd v. Rockrose UKCS8 LLC [2020] EWHC 58 (Comm)).

The nature of the decision-making power to be exercised may also influence the conclusion. In Braganza itself, the employer was required to make a contractual assessment of facts to determine whether death-in-service payments were payable, and the Supreme Court required that power to be exercised in a way that was lawful, rational, in good faith, and consistently with its contractual purpose. In Braganza, the Supreme Court also recognized that an “imbalance of power between the contracting parties” (as is often the case in an employment context) is a further influencing factor.

Overall, therefore, Braganza-style good faith restrictions can qualify contractual powers that contain an element of general discretion, with qualification more likely where there is an imbalance of power or an assessment of facts that affects the rights of the parties. By contrast, exercise of a power that permits a binary choice to exercise or not exercise an option is unlikely to be so qualified. It follows that it will be difficult to say with certainty in any given case whether Braganza-style qualification will be imported by the Court, although it appears that the greater the array of options available or degree of assessment required by the discretion-holding party, the more likely it is that such a qualification will be found.

When a Braganza qualification is implied into a contract, it will be done on the same basis as with any other implied term of the contract. This was seen clearly in the recent case of Macdonald Hotels v. Bank of Scotland [2025] EWHC 32 (Comm), concerning the implication of a Braganza qualification to a contractual power contained into a banking contract. It was first found that a Braganza-style qualification could, in theory, be imported to qualify a bank’s right to refuse to release security for the purposes of a sale (albeit not in relation to rights arising merely out of their position as a mortgagee) – in that case, because a reasonable person with the background knowledge of the parties would not have “concluded from the language used by the parties that it had been intended that [the bank] would be entitled to refuse its consent when no reasonable person in its position could have refused or for a purpose unrelated to [the bank’s] legitimate commercial interests.” The Court then went on to consider “whether the implication of such a term is necessary,” having earlier set out the principles in relation to implication of terms into contracts generally, which reiterated the criterion of “necessity.” This case highlights well the nature of the balance being struck; on the one hand, between avoiding permitting capricious or commercially unjustifiable exercise of a contractual power (e.g., to refuse, upon request, the right to realize certain security held pursuant to a loan), and, on the other hand, recognition that the bank was entitled to act in its own interests and not balance its interests against those of the secured debtor. On the facts of the case, it was found that the bank had not breached the Braganza duty.

The above represents a summary of the law as it presently stands, although there is yet further potential for uncertainty. It has already been noted that the challenge in the first instance is to construe the contractual power in question to ascertain if it is a true discretion (potentially subject to Braganza qualification) or whether it is in the nature of an absolute contractual right (and unqualified). Despite this, in the recent case of Tesco Stores Ltd v. Union of Shop, Distributive and Allied Workers [2024] UKSC 28, Lord Leggatt JSC observed (on an obiter basis) that he considered the distinction between contractual discretions and absolute contractual rights to be “unsound,” and instead was of the view that “a contractual power, even though expressed in unqualified terms, is in general circumscribed by an implied qualification that the power must be exercised in good faith and not arbitrarily, capriciously or irrationally or for an improper purpose.” His view was that “[t]here is no conceptual reason why the exercise of such a power should be unconstrained.” Lord Reed JSC did not agree with this approach, and refused to endorse it, noting that it went further than the previous caselaw had decided.

Lord Leggatt’s views were expressed only on an obiter basis, but it is a clear signal as to the direction in which (at least from his perspective) the law might develop in the coming years, if and when the issue returns to the Supreme Court for judicial consideration at the highest level.

Implication of Good Faith Requirements More Generally

Interestingly, the broader but still burgeoning concept of implication of good faith into commercial contracts more generally has significant roots in a first instance decision and obiter observations of Lord Leggatt. In Yam Seng Pte Ltd v. International Trade Corp Ltd [2013] EWHC 111 (QB) Leggatt J. (as he then was) was of the view that there was “no difficulty, following the established methodology of English law for the implication of terms in fact, in implying such a duty [of good faith] in any ordinary commercial contract based on the presumed intention of the parties.” However, he also went further in referring to the concept of “relational contracts” which “may require a high degree of communication, cooperation and predictable performance based on mutual trust and confidence and involve expectations of loyalty which are not legislated for in the express terms of the contract but are implicit in the parties’ understanding and necessary to give business efficacy to the arrangements.” The treatment of “relational contracts” as a concept that attracts implied obligations of good faith has not been entirely consistent in ensuing caselaw.

In the more recent Court of Appeal decision in Candey Ltd v. Bosheh [2022] EWCA Civ 1103, Coulson L.J. made a distinction between the “usual test for implied terms” (to mean terms implied in fact) and a “relational contract”, to mean implication as a matter of law, although some previous cases had treated the indicia of a relational contract as being grounds for implication in fact. Nine (non-exhaustive) indicia of a relational contract had been set out in Bates v. Post Office [2019] EWHC 606 (QB) by Fraser J., and in which case a relational contract was found on the basis of those nine indicia being satisfied (and pursuant to which there was implication of an obligation of good faith). By contrast, in Candey Ltd v. Bosheh none of the nine indicia were found to be present, and no such obligation was implied by law as a result (nor as a matter of fact). In UTB LLC v. Sheffield United Ltd [2019] EWHC 2322 (Ch) at [202], Fancourt J. warned against “relational contract” being used as a broader concept (as opposed to specific contracts being identified as such with the assistance of the Bates characteristics). The Judge there noted that “not all long-term contracts that involve an enduring but undefined, cooperative relationship between the parties” will demand implication of an obligation of good faith, even if in general terms they could be described as relational in the sense of involving a long-term relationship.

Coulson L.J. observed in Candey v. Bosheh that “the elusive concept of good faith should not be used to avoid orthodox and clear principles of English contract law,” although it remains to be seen how the law concerning relational contracts will develop, particularly given that, first, the Bates v. Post Office indicia were non-exhaustive, and secondly, it is unclear how such contracts should be assessed when some but not all of the indicia are present. Given the less stringent requirements for implication of terms in law compared to those implied in fact (the latter requiring “necessity”), there is a risk that good faith obligations may increasingly be allowed in by the back door via the still ill-defined concept of relational contracts. Greater certainty would be promoted by confining implication of good faith obligations into contracts more generally to implication in fact, which would also heed the warning of Fancourt J. against “relational contracts” becoming broad concept liable to mislead rather than a conclusion to be reached after a proper assessment of a contract and its terms. That would root good faith obligations in the presumed intentions of the parties, which is more consistent with the traditional English law approach to contract law focused on freedom of contract and giving effect to the intentions of the parties.