Contractual duties of good faith: Court of Appeal confirms context is king

The Court of Appeal has allowed an appeal in a case which provides important clarification around the scope and construction of contractual provisions obliging the parties to act in good faith: Re Compound Photonics Group Ltd; Faulkner v Vollin Holdings Ltd [2022] EWCA Civ 1371.

Although set in a non-financial context, the decision will be of interest to financial institutions as it emphasises that good faith clauses must be interpreted by close reference to the particular context in which they appear, and that authorities interpreting similar clauses in other legal or commercial contexts cannot be straightforwardly applied to other situations.

In particular, the Court of Appeal rejected the proposition that it was possible or appropriate to divine from the case law a set of minimum standards that would apply in every case in which a duty of good faith is inserted into a contract, beyond the “very obvious” point that the core meaning of an obligation of good faith is an obligation to act honestly – though it also rejected the argument that a good faith obligation cannot be breached other than by acting dishonestly.

On a practical level, this case serves as a reminder that parties proposing to include an express duty of good faith should define the scope of the duty as clearly as possible within the agreement, including, where feasible to do so, identifying actions that are (or are not) required to satisfy it.

For more information on the decision, see our Litigation Notes blog.

Note: In April 2023, the Supreme Court refused the claimant's application for permission to appeal.