Commercial Contracts - What Does 'Good Faith' Actually Mean?
In the case of New Balance Athletics Inc v Liverpool Football Club, the High Court has clarified that 'good faith' goes beyond just acting honestly, but also not being faithful to the parties' bargain.
When Does 'Good Faith' Apply?
The notion of 'good faith' applies generally in certain types of relationship such as employer/employee, principal/agency and insurance. However, aside from that, there is no general principle of 'good faith' in English law commercial contracts.
In a line of cases since 2013, though, the English courts have introduced an implied duty of good faith in certain commercial contracts. These are in relational contracts, ie long-term ones that involve collaboration and trust and confidence to make the relationship work, such as distribution agreements. The good faith principle in those contracts mean that the parties will work with integrity and a spirit of co-operation.
A new case has now further clarified the meaning of good faith in the commercial context.
What Kicked Off the Case?
Liverpool Football Club agreed to give B, an American sportswear giant, rights to manufacture and sell replica shirts for a period of time. Liverpool was obliged to submit to B the terms of any third party offer for a new agreement, and B then had 30 days to tell Liverpool whether it would match the third party offer and enter into a new agreement.
After a third party had made an offer to Liverpool including to market the replica shirts through 6,000 stores worldwide, B offered to match it and market the replica shirts through 40,000 stores. Liverpool rejected B's offer, arguing that it had not been put forward in good faith on the basis that B could not distribute the products through the number of stores claimed. In Liverpool's view, B had therefore not actually been able to match what the third party could do. B claimed that it had matched the term, so brought legal proceedings against the football club.
Did Liverpool Walk Alone?
The referee in this case - the High Court - sided with Liverpool Football Club and dismissed B's claim. The Court said that the duty of good faith could be breached not only by dishonesty but also by conduct that was not faithful to the parties' bargain. When considering whether a party had not been faithful to the parties' bargain, the court will consider the nature of the bargain, the terms of the contract and the context in which the matter arises.
Comment
The duty of good faith is still a developing principle under English law, so any case that helps with interpreting the principle is useful. The Court here has shown that it goes beyond dishonesty.
In the case itself, the football club came up triumphant, and it will be hoping that its success in the court room will be translated into the pitch, as its march towards a first Premier League title seems unstoppable.
If you would like help with drafting, negotiating or advice on distribution agreements or other commercial contracts, please contact Paul Gershlick in our Commercial Law team on 01923 919 320, or complete the form below.