What does good faith mean in business? And is it recognised by English law?

Kirsty Davey, Partner and Head of Corporate and Commercial at Coodes Solicitors, explains the meaning of good faith in business and whether it has any status in English law.

Updated January 2020

‘Good faith’ is an expression that is often bandied around when discussing corporate deals. The phrase is also sometimes used in business contracts. It is generally intended to express a sense of fair play and reasonable behaviour between two parties, perhaps a client and supplier or between the former and new owner of a business.

While people often talk about the concept of good faith, and sometimes ask for it to be referenced in business contracts, it is not in fact a legally-recognised term in this country. I often have to explain to my clients that the phrase does not have an agreed meaning in English law. This is particularly the case with companies that operate internationally. In Australia, for example, good faith has a specific legal meaning and is widely used.

Good faith is sometimes considered by UK courts

Despite not being formally accepted in English law, the use of the phrase good faith has sometimes been recognised by the courts. For example, in 2018 the High Court held that a business breached an express obligation of good faith by setting up a rival company, which benefited from information that had previously been provided by the other party. Mid-Essex Hospital Services NHS Trust took Compass Group UK & Ireland Ltd to court, claiming they had breached a contract that stated the Compass Group would act in good faith at all times. The outcome went in Mid-Essex Hospital Services NHS Trust’s favour after the court held the Compass Group had acted against reasonable commercial standards of fair dealing.

Should a business reference good faith in a contract?

Given that the courts sometimes recognise good faith but it is not formally recognised in English law, is there any value in referencing it in business contracts? While the phrase has often been recognised in the courts, it is open to interpretation. Having a more specific explanation of what both parties agree to – and what they will not accept – is therefore more likely to be useful in future.

Every deal is different, so it is vital that every business contract is bespoke. A key part of the process is for both parties to sit down and have an open discussion about what they consider good faith and how they would expect each other to act. I use this to determine exactly what good faith means in that individual situation before translating it into a contract. While I may use the words ‘good faith’ when drafting the contract I would then go on to state exactly what that means. Making the wording in the contract as clear and transparent as possible really helps in dealing with any future issues that might arise. The key is to record exactly what both parties agree to.

So, understanding what you mean by good faith and ensuring you also understand what the other business expects, is the key.

For more information or advice on these issues, please contact Kirsty Davey at Coodes Solicitors on 0800 328 3282 or email kirsty.davey@coodes.co.uk

For advice on disputes, please contact Abi Lutey on 01872 246200 or abi.lutey@coodes.co.uk