Do You Have to Act in Good Faith in Business Contracts?

Summary

English law does not impose a general duty to act in good faith, but you may have an obligation if your contract explicitly includes a good faith clause or in specific relational contracts like joint ventures.
A good faith clause requires honesty and cooperation, but vague clauses can limit your flexibility and lead to disputes.
Carefully define the clause to avoid ambiguity, ensuring it aligns with your commercial objectives.
LegalVision’s contract lawyers specialise in advising businesses on negotiating clear and enforceable good faith clauses in contracts to protect your rights and commercial interests.

Tips for Businesses
When negotiating contracts that include a good faith clause, ensure the terms are clearly defined and specific to avoid ambiguity and reduce the risk of disputes. Avoid broad or vague language that could restrict your business’s ability to make commercially driven decisions. Review and, if necessary, negotiate the clause to align with your objectives, and always seek legal advice if the clause creates uncertainty or conflict with other contract terms.

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On this page

Does English Law Require You to Act in Good Faith?
What Does a Good Faith Clause Mean in Practice?
Risks for Suppliers When Agreeing to Good Faith Obligations
How You Should Approach Good Faith Clauses in Negotiations
Key Takeaways
Frequently Asked Questions

If you supply goods or services, you need to understand how “good faith” operates in your contracts. Customers often ask you to include good faith clauses, but these clauses can create real legal and commercial risk if you accept them without careful drafting. You should treat these clauses as legally significant, not just commercial formalities. This article explores a high-level introduction to legal issues relevant to good faith and how your business should approach negotiating such clauses in your business-to-business contracts.

Does English Law Require You to Act in Good Faith?

English contract law prioritises freedom of contract. This means you can pursue your own commercial interests, if you act within the terms of your agreement.

Unlike some other legal systems, English law does not recognise a general duty of good faith. You are not automatically required to act “fairly” or “reasonably” unless your contract says so.

However, good faith can still arise in two key ways.

1. You can create an express obligation by including a good faith clause in your contract. If you agree to such a clause, you must comply with it.

2. Courts may recognise more limited duties in specific situations. These typically arise in long-term, collaborative arrangements such as joint ventures, franchise agreements or distribution relationships. In these cases, the court may treat the contract as a “relational contract” and imply obligations of honesty and cooperation.

There is also a related concept known as the Braganza duty. If your contract gives you discretion that affects both parties, you must exercise that discretion honestly and not arbitrarily or irrationally. These exceptions are narrow, but they can have serious consequences if they apply to your contract.

What Does a Good Faith Clause Mean in Practice?

A good faith clause usually requires you to act honestly and cooperate with the other party. However, there is no single definition. The meaning depends entirely on the wording of the clause and the context of the contract.

If the clause is vague, a customer may argue that you acted unfairly or failed to cooperate, even where you believe you acted within your commercial rights.

For example, a broadly drafted clause could limit your ability to enforce strict contractual rights, make commercially advantageous decisions and prioritise your own business interests in negotiations or performance.

Once included, a good faith clause can become a tool for disputes. It can give the other party grounds to challenge your decisions and potentially bring a claim.

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Risks for Suppliers When Agreeing to Good Faith Obligations

You should approach good faith clauses cautiously. While they often appear reasonable, they can introduce uncertainty into otherwise clear contractual arrangements.

If the clause is not tightly drafted, it becomes difficult to predict how a court will interpret your obligations. This can lead to disputes, increased legal costs and disruption to your commercial operations. There is also a practical risk where a broad good faith obligation may restrict how you manage the contract in practice. It can limit your flexibility, particularly where you need to make quick or commercially driven decisions.

In some cases, customers may rely on a good faith clause to challenge decisions that are otherwise permitted under the contract. This can expose you to claims even where you have complied with the express terms of the agreement.

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How You Should Approach Good Faith Clauses in Negotiations

If a customer asks you to include a good faith clause, you should not accept it without review. You need to assess how it will operate in practice and whether it aligns with your commercial objectives.

You should focus on clarity. Where possible, define what “good faith” means in the context of the contract. Link the obligation to specific actions or scenarios rather than leaving it open-ended.

Avoid broad or vague wording that could restrict your ability to act in your own commercial interests. You should also ensure the clause does not conflict with your other contractual rights, particularly any rights to exercise discretion or enforce strict terms.

If the clause cannot be clearly defined or creates uncertainty, you should push back or propose narrower wording.

Key Takeaways

English law does not impose a general duty to act in good faith. You only take on that obligation if your contract creates it or in limited recognised situations. If you agree to a good faith clause, you must comply with it, and its meaning will depend on how it is drafted. Poorly drafted clauses create uncertainty and increase the risk of disputes. You should review and negotiate these clauses carefully. Keep them clear, specific and aligned with your commercial objectives, and seek legal advice where needed.

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Frequently Asked Questions

What can be risky about a good-faith clause?

A good-faith clause can create uncertainty if it is not clearly defined. Because English law does not recognise a general duty of good faith, courts interpret each clause based on its wording and context. If the clause is vague, your customer could argue that you breached it. To mitigate this risk, your business should clearly define its duty so that you are certain about your obligations.

Should I agree to act in good faith if a customer asks?

This requires a careful decision on a case-by-case basis in your business contracts. Review the relevant clause carefully before agreeing to it. Accept it only if it is clear, specific and commercially workable and seek legal advice to understand how it affects your rights if you are unsure

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