Lloyd's Maritime and Commercial Law Quarterly
A GOOD FAITH GOODBYE? GOOD FAITH OBLIGATIONS AND CONTRACTUAL TERMINATION RIGHTS
David Foxton*
This article considers how far obligations which control the exercise of contractual discretions (“discretion obligations”) should apply to clauses giving a right to terminate a contract. It considers the particular contexts in which discretion obligations have been recognised, and argues that these fall broadly into four categories, none of which engage rights of termination. The article considers the attempt to subject termination clauses to discretion obligations in the USA, Canada, Australia and the UK. It concludes that rights of termination do not constitute the exercise of a discretion, but the making of a choice, and that there are sound reasons of both doctrine and authority for not imposing discretion obligations on termination rights.
In MSC Mediterranean Shipping Co SA v Cottonex Anstalt,1 Moore-Bick LJ warned of the danger that the establishment of a general principle of good faith would “be invoked as often to undermine as to support the terms in which the parties have reached agreement”. It remains to be seen whether the decision brings to a halt a recent run of cases in which the recognition of an implied obligation of good faith in the performance of contracts has been urged.2 One of the fronts on which the “battle for good faith” has been fought is the attempt to extend the duties which have been recognised as governing “contractual discretions” to the exercise of contractual rights such as rights of termination.3 Professor Richard Hooley, for one, has suggested that “there is no material distinction between the
* QC, Essex Court Chambers.
1. [2016] EWCA Civ 789; [2016] 2 Lloyd’s Rep 494, [45].
2. Most notably by Leggatt J: see MSC Mediterranean Shipping Co SA v Cottonex Anstalt [2015] EWHC 283 (Comm); [2015] 1 Lloyd’s Rep 359; Yam Seng Pte Ltd v International Trade Corp. Ltd [2013] EWHC 111 (QB); [2013] 1 Lloyd’s Rep 526; Sir George Leggatt, “Contractual duties of good faith”, COMBAR lecture, 18 October 2016; and JW Carter and Wayne Courtney, “Good faith in contracts: is there an implied promise to act honestly?” [2016] CLJ 608.
3. For recent cases seeking to subject termination rights to the duties recognised in “contractual discretion” cases, see Lomas v JFB Firth Rixson Inc [2012] EWCA Civ 419; Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd (t/a Medirest) [2013] EWCA Civ 200; [2013] BLR 265; TSG Building Services Plc v South Anglia Housing Ltd [2013] EWHC 1151 (TCC); 148 Con LR 228; Hamsard 3147 Ltd v Boots UK Ltd [2013] EWHC 3251 (Pat); Monde Petroleum SA v WesternZagros Ltd [2016] EWHC 1472 (Comm); [2016] 2 Lloyd’s Rep 229 and Monk v Largo Foods Ltd [2016] EWHC 1837 (Comm). It is noteworthy that, in his COMBAR lecture, supra, fn.2, [45], Sir George Leggatt suggested that the contractual discretion cases “could, in time, evolve into a doctrine of the kind I envisaged earlier which treats performance in good faith as an obligation which applies to every contract, except to the extent that the parties have expressly or by necessary implication excluded it”.
GOOD FAITH OBLIGATIONS AND CONTRACTUAL TERMINATION RIGHTS
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