Good faith – codified under Dutch law as “reasonableness and fairness” (redelijkheid en billijkheid) – has become an integral part of Dutch commercial transactions and agreements. It applies as a general overriding principle to all types of legal relationships. Consequently, under Dutch law good faith governs how a contract is formed (negotiations), interpreted and performed. The principle is based on an obligation to act reasonably towards the other party to the transaction. As the parties must act in good faith there is less need to cover all possible situations in the terms of an agreement. A Dutch contracting party, however, when entering into an agreement under English law, should be aware that English law does not accept good faith as an overall principle and that the current position is not clear. It risks, therefore, relying on a principle, which may turn out to be unenforceable. On their part, English parties should realise, when contracting under Dutch law, that their legal relationship may consist of more than what they agreed in contract.
There are only a few and specific good faith statutory provisions in England and Wales, for example in relation to consumer rights as a result of EU law. English courts, however, provide solutions under the common law on a case by case basis, where a contract otherwise would not make commercial sense or be unfair. In practice the courts limit the use of good faith to fiduciary relationships (e.g. agency, employment, insurance and partnership contracts) and where the parties contractually agreed to impose such a duty. There have been some developments, whereby the English courts have introduced good faith into other types of contracts. Some of the keywords in judicial decisions are: honesty, integrity and fair dealing, but these terms are open for interpretation and circumstantial.
In 2016 the Court of Appeal reiterated that there is no general organising principle of good faith under English law. English courts should provide “piecemeal solutions” on a case by case basis by using means of traditional contractual interpretation and implication of terms into agreements (these methods will be explained another time). This makes it difficult to predict the outcome and whether earlier case law developed by lower courts is in compliance and sustainable, for example in relation to long-term contracts (e.g. distribution and joint venture agreements).
The English law position is best explained by some of the principles of the common law and its distinctive approach to contracts: case law as the principal source of law, freedom of contract (including the right to pursue self-interests), avoidance of uncertainty and vague terms, and literal interpretation (as opposed to the civil and EU law codification, regulatory and purposive approach). This is why English parties are usually opposed to any or non-specific reference to good faith in (pre) contractual arrangements. In this respect, the United Kingdom has not ratified and English parties usually try to exclude the United Nations Convention on Contracts for the International Sale of Goods in cross border agreements. The treaty introduces good faith as a means of interpretation of its provisions.
When contracting under English law a contracting party should not assume good faith and always check whether it is backed in the particular circumstances by specific English statutory or hard case law. Currently, the best way seems to expressly agree and define good faith in clear written terms and when it applies. This requires advice and concise drafting from an English law perspective.
Please also see Terms in English contracts explained: Time is of the essence.