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Good Faith Clauses in Supply Chain Contracts

on Wednesday, 28 October 2015.

The aerospace and defence sector often has complex and interdependent contractual structures. An increasing issue in such contracts is good faith clauses.

What is a 'good faith' clause?

A duty of good faith will normally require a party to adhere to the overall spirit of a contract, to observe reasonable commercial standards of fair dealing and to be faithful to the agreed common purposes.

There is no automatic duty of good faith in English law. Generally, a specific clause in a contract is needed.

The English Courts have been reluctant to 'read into' a contract a general duty of good faith. It is thought that to do so would create uncertainty, by implying obligations which are subjective.

However, the Courts have recognised that by their very nature, there are a limited number of specific relationships which require such a duty. This includes consumer, agency, insurance and employment contracts.

Say What You Mean in the Contract

Express good faith clauses may be agreed between the parties. Their construction and interpretation must be clear in order to impose the intended result.

It is important the contract is well written. Express clauses have been the origin of much litigation.

Examples of Why it Can be Important

In some cases, there can be disagreements about whether a duty of good faith should be implied into a contract. The Courts apply an objective test if they decide to imply terms into a contract, so as to reflect the parties' perceived intentions. The Courts have implied a duty of good faith:

  • When one party had accessed the other's computer systems to download information. In Bristol Groundschool Ltd v Intelligent Data Capture Ltd and others (2014), the development of aviation training material (the contract here being a 'relational contract') implied a duty of good faith. The party concerned had acted in a commercially unacceptable manner.
  • About one party not knowingly providing incorrect information. In Yam Seng Pte Ltd v International Trade Corporation Ltd (2013), a party entered a distribution agreement on the incorrect basis that a party already had a licence.

However, the Courts have not implied a good faith obligation to prevent a party exercising a freely negotiated contractual right to terminate a contract. This was shown in the case of TSG Building Services Plc v South Anglia Housing Ltd (2013).

Organisations have spent considerable time, effort and money litigating good faith clauses. It is cost-effective to spend time drafting detailed provisions at the outset of a contract. We can help with such drafting.

Should you have any queries regarding good faith clauses in supply chain contracts, please contact Ben Holt in our Aerospace and Defence Team on 0117 314 5478.

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