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How useful are “good faith” clauses?

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When a contract is drafted, it may be difficult to legislate for every possible scenario, and so a “good faith” clause is often included to compensate for this, and to ensure that the “spirit” of the contract is adhered to – just how far do these clauses go?

Background to the case

Health & Case Management Ltd v The Physiotherapy Network, concerned a contract between the two parties (HCML and TPN respectively), which contained three contentious clauses. HCML used data belonging to TPN, that was supposed to be used for referral purposes, to set up their own rival network – the question was, whether or not that was permitted under the terms of the contract.

Firstly, HCML “anticipated that they would make circa 700 referrals to TPN”. The language used here is key. Choosing words such as “anticipate” and “circa” drastically reduces the likelihood that the clause will be determined to be binding. Further, the Court, on this occasion, observed a prior contract between the parties which included words regarding “no minimum volumes”. A combination of these factors allowed the Court to determine that HCML were not in breach of this clause.

Secondly, HCML were obliged to “keep confidential…and will not…disclose…information to any third party”. The use of the word “disclose” did not however explicitly prohibit the use of that information by HCML.

However, HCML used TPN’s data to start up a rival network which was determined to be a breach of the third contentious clause in this case – the good faith obligation.

Good faith clause and how this affects businesses

The commercial objective between the parties was the setting up of a referral scheme.  The Court determined that there was no requirement for a set or minimum number of referrals. However, it was held that the setting up a rival network, using data provided by TPN, was a clear breach of the good faith clause (despite the use of the information not being explicitly prohibited).

What business can do to ensure that this doesn’t happen to them

Business owners should be aware of the wording of their contracts, and think pragmatically about whether or not those clauses will achieve the desired purpose of the commercial transaction. A good faith clause allows for a more rounded view of the contractual; arrangement, looking at the overarching commercial objective behind the agreement, and may be a useful tool when drafting.

The key with contractual terms is to ensure that they relate to and are appropriate to the purpose of the agreement in question. The inclusion of a good faith clause may provide assistance to a party where the strict wording of the contract cannot be enforced or does not provide cover for specific events.

Contact

If you require assistance with any of the issues discussed above, please contact Aaron Marshall on 0161 684 6946 at your earliest convenience.

Please note that the information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Pearson Solicitors and Financial Advisers Ltd or any of its members or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.

This blog was posted some time ago and its contents may now be out of date. For the latest legal position relating to these issues, get in touch with the author - or make an enquiry now.

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