28 June 2018
Reading time (1-10 minutes): 3
Sophistication level (1 (idiot) – 10 (expert)): 6
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Meaning of ‘good faith’
Following on from my previous article: Whilst it might make things a bit less commercially certain, my personal preference would be to insert a general duty of good faith into any contract. You can then rely on the English courts’ sense of fair play as to what this means. As with anything else, the case law on this (ie the law set out by a succession of cases in courts over time) will keep developing. The most important case law is set out by the Supreme Court and below that the Court of Appeal, because precedents they set have to be followed by lower courts. Cases at the Commercial Court are less important, but still help to set the tone.
In one recent case the Commercial Court gave some guidance as to what it thought acting in good faith meant.
In this case HCM was a company which provided referrals. It reached an agreement to try to provide referrals to The Physiotherapy Network Limited (‘TPM’), which was a nationwide network of physiotherapy clinics. There was no minimal referral number commitment (the contract just said that HCM anticipated making c700 referrals a month, and ‘anticipated’ is not a legal commitment). HCM later decided it wanted to build its own network of physiotherapy clinics. It sneakily asked TPM for information about its clinic network under the pretext of wanting to ‘develop a geographical pricing model’. It then slowly stopped making referrals to TPM, and used the information TMP had provided to help it recruit clinics to its own new network.
The court didn’t need to consider whether there was an implied duty of good faith here, as the contract already had a clause saying that ‘HCM shall act in good faith towards TPN at all times’. The court said this meant that HCM had to adhere to the spirit of the contract, to observe reasonable commercial standards of fair dealing, to be faithful to the agreed common purpose and to act consistently with the parties’ justified expectations when entering into the contract. The court said HCM had failed in all these, by giving a dishonest reason for its request for data, and by acting in an underhand and exploitative manner by setting up a rival network whilst continuing to benefit from a commercial relationship which TPN would probably have terminated if it had known HCM’s true intentions.
Quickie – be careful your confidentiality agreements cover what you want them to cover
They are often just called ‘NDAs’ (short for non-disclosure agreements), but non-disclosure is not always all that you want out of them. In the HCM v TPN case (see previous article) the referral agreement had a clause saying that “HCM and TPN will keep confidential all information of the other party obtained under or in connection with the agreement… and will not disclose any of that information.” But of course HCM hadn’t disclosed the information that TPN had given it about its clinics – it had just used that information for its own use. So the court said that HCM hadn’t been in breach of this clause. The clause should have also said that HCM mustn’t misuse any confidential information, for example by using it for its own benefit at the expense of TPN.
TPN may not have anticipated that HCM might one day want to set up in competition with TPN and use information provided by TPN to help it do so, but in general any confidentiality clause should include wording saying that any confidential information should only ever be used just for the purpose of helping to carry out the contract.