Good faith in commercial agreements

The following Commercial practice note from LexisNexis examines the concept of good faith and the extent to which it is applied in commercial agreements.

It covers:

• Good faith in commercial agreements
• What does good faith mean?
• Implied duty
• Establishing an implied duty
• Breach of implied duty
• Express duty
• Agreements to negotiate in good faith
• Exercise of contractual discretion (‘Braganza duty’)
• Consumer contracts
• Position in other jurisdictions

This Practice Note considers good faith in commercial agreements. It examines the concept of good faith and the extent to which it is applied in commercial agreements either as an express term or an implied term. It also considers agreements to negotiate in good faith, the approach to the duty of good faith in other jurisdictions, the application of Braganza duties in commercial agreements, and provides some drafting considerations in respect of good faith provisions.

The traditional approach adopted by English courts has been to avoid implying a duty of good faith into commercial agreements and ‘if parties wish to impose a duty [of good faith] they must do so expressly’ (Mid Essex Hospital Services). However, it appears from the decisions in Yam Seng Pte Limited v International Trade Corporation and Bates v Post Office Ltd, that the courts may look to imply a duty of good faith in certain types of commercial relationships considered to be ‘relational contracts’. If parties wish to ensure that a duty of good faith is not implied into a contract that may be considered a relational contract, it is now recommended to expressly exclude such a term in the contract.

What does good faith mean?
The meaning of good faith has developed through case law and is heavily dependent on its context.

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