Chapter 15 Updates to the Law

Good faith
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Chapter 15: Good Faith

15.1 The definition of good faith

P577, add

In Health and Case Management Ltd v Physiotherapy Network Ltd [2018] EWHC 869 (QB), [80], Nicklin J defined good faith in the context of an express term to act in good faith:

  1. Good faith has been held to mean, " playing fair ", " coming clean " or " putting one's cards on the table " (Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1999] 1 QB 433, 439 per Bingham LJ)
  2. A contractual obligation to act in good faith means:

"... a contractual obligation to observe reasonable commercial standards of fair dealing in accordance with their actions which related to the Agreement and also requiring faithfulness to the agreed common purpose and consistency with the justified expectations of the First Claimant.”
(Berkeley Community Villages Ltd v Pullen [2007] 3 EGLR 107, [97])

  1. "... the content of the obligation of utmost good faith in the [contract] was to adhere to the spirit of the contract... and to observe reasonable commercial standards of fair dealing, and to be faithful to the agreed common purpose, and to act consistently with the justified expectations of the parties."

(CPC Group Ltd v Qatari Diar Real Estate Investment Co [2010] EWHC 1535 (Ch) [246], albeit construing a contractual obligation to act in the utmost good faith)

  1. The construction of the relevant contractual term of good faith is context-sensitive (Mid-Essex Hospital Services NHS Trust v Compass Group UK & Ireland Ltd [2013] EWHC Civ 200 [109]).
  2. The words " in good faith " have a core meaning of honesty (Street v Derbyshire Unemployed Workers Centre [2005] ICR 97 [41] per Auld LJ). It is an obligation to eschew bad faith (Overlook v Foxtel [2002] NSWSC 17, quoted in CPC Group Ltd [240]).  Dishonesty is sufficient but not necessary for bad faith [109].
  3. A party subject to a good faith clause is not required to subordinate its own interests so long as the pursuit of those interests does not entail unreasonable interference with the enjoyment of a benefit conferred by expressed contractual terms so that such enjoyment is rendered worthless or nugatory (Overlook quoted in Qatari Diar [2010] EWHC (Ch) 1535 [240]).

 

The case concerns an agreement between HCML (a company providing services to insurance companies by managing referrals to physiotherapy clinics on behalf of insurance companies’ insured) and TPN (which had established a nationwide network of physiotherapy clinics) to work together in the arrangement of physiotherapy services for a major insurance company client of HCML. HCML agreed expressly that it would “act in good faith towards TPN at all times”. Referrals were made by HCML in a way considered satisfactory by TPN for a period, but they were later reduced and ceased principally because HCML had set up its own clinic network. The High Court found that HCML had dishonestly obtained data from TPN and had used this to covertly set up its own network and divert referrals which were likely to have gone to TPN.

The judge held that the express term of good faith had been breached:

  1. HCML failed to adhere to the spirit of the contract, to observe reasonable commercial standards of fair dealing and to be faithful to the agreed common purpose and to act consistently with the justified expectations of the parties. The fact that the Services Agreement did not impose an obligation on HCML to make any particular number of (or indeed any) referrals rather heightens the importance of the good faith provision in the contract. TPN was a commercial partner of HCML. There was an expectation by both parties that HCML would do so; that was the shared commercial objective. The nature of the arrangement, particularly HCML's dependency itself upon Aviva Health for the stream of work, meant that no firmer commitment could be provided.[128]
  2. HCML’s covert use of data was ‘probably sufficient itself to amount to a breach of good faith. But the breach goes further than that. The fact that TPN had not sought to protect its position by including an exclusivity or non-competition clause in the Services Agreement does not diminish the importance of the good faith clause (and arguably enhances it). ‘Setting up the rival network Innotrex (hidden from TPN, but making use of its data) when HCML knew and intended that, once established, TPN would be cut out of the picture; whilst, at the same time, continuing to benefit from a commercial relationship that (in all probability) would have been terminated had TPN known HCML's true intentions was opportunistic, underhand and exploitative.’ [129]