Good faith in commercial contracts: English court provides helpful guidance

The Technology and Construction Court granted summary judgment in Svella Connect Ltd v Virgin Media Ltd to strike out a party's claim for breaches of implied good faith obligations. In doing so, the court provided helpful guidance on the English law position on implied good faith obligations in commercial contracts, including long-term framework agreements and settlement agreements. 

Svella v Virgin Media background

Virgin Media Ltd entered into three NEC (New Engineering Contract)-based framework agreements for the expansion of its fibre optic network throughout the UK. Each contract contained an express obligation requiring the parties to act in a “spirit of mutual trust and co-operation”.

The relationship between the parties deteriorated and they subsequently entered into an exit and settlement agreement in July 2024. The agreement provided for Svella's exit under two of the three framework agreements, together with a mutual waiver of claims arising under those two agreements. Virgin Media also agreed to award further work to Svella under the remaining framework agreement.

The settlement agreement did not repair the commercial relationship and Svella alleged that Virgin Media was in breach of good faith duties under that agreement. Svella alleged that breaches of this obligation included Virgin Media pressurising it to reduce costs, which raised safety concerns; victimising Svella through the reduction of build volumes; issuing threats not to renew the framework agreements; and giving ultimatums over overhead working rates. 

Svella subsequently brought claims against Virgin Media alleging that the two framework agreements and the settlement agreement were relational contracts and that, as such, they were subject to implied duties of good faith. Virgin Media applied for summary judgment to strike out Svella's claims in respect of breaches of implied duties of good faith. The court found in favour of Virgin Media, concluding that Svella had no real prospect of succeeding in its claims.

Good faith in English law

It is well established that English law does not recognise a general implied duty of good faith in commercial contracts. This contrasts with many civil law systems where good faith obligations are frequently implied and represent a foundational principle of contract law. 

Under English law, good faith obligations may arise in limited circumstances. Certain long-term, collaborative contracts characterised by a high degree of mutual trust and confidence may be found to be "relational contracts" into which a duty of good faith may be implied.

Where a contract confers a discretion on one party, there may be an implied obligation to exercise that discretion in good faith and not in an arbitrary, capricious or irrational manner, known as the "Braganza duty". Where express good faith obligations are included in contracts.

A central question in this case was whether the framework agreements and the settlement agreement fell within the first category of relational contracts.

The court's findings

The court held that a term will only be implied into a contract where it is necessary to give business efficacy to the agreements. This test is the same when considering whether any term should be implied into a contract and is not varied because the obligation being considered is one of good faith.

While the determination of whether or not a contract is "relational" is a relevant consideration, it does not displace the orthodox rules for the implication of terms in fact. A term cannot be implied in respect of a matter that the parties have already provided for in their agreement.

In this case, the framework agreements were detailed commercial agreements running to over 200 pages. Virgin Media successfully established that there was no gap in those agreements that made the implication of an obligation of good faith necessary The court confirmed that the checklist of possible indicators of a relational contract set out in Bates v Post Office Ltd (No 3) remains relevant. 

Applying the Bates criteria, the court identified a number of features of the framework agreements that conflicted with the characteristics of a relational contract:

• the initial contract period of three years, with a one-sided option to extend to a maximum of five years, was not especially long-term;
• the agreements could be terminated at will and for convenience; and
• the agreements expressly provided no guarantee of work and entitled Virgin Media to seek competitive quotes and to award orders as it saw fit.

Even if the framework agreements had fallen within the definition of a "relational contract" the court emphasised that the designation as a relational contract does not, of itself, give rise to implied duties of good faith. The starting point is for the court in each instance is to assess the parties' express bargain and consider whether it is necessary to imply the pleaded terms to give business efficacy to the agreement.

A settlement agreement is unlikely to be a relational contract. The court was clear that “it is inherently unlikely that duties of good faith should be implied into a carefully negotiated settlement agreement intended to bring to an end a troubled contractual relationship”. The court further observed that a settlement agreement which brings an end to agreements that were not themselves relational contracts, was unlikely to properly be regarded as relational. 

The framework agreements were based on NEC standard form terms, which include an obligation on the parties to act "in a spirit of mutual trust and co-operation." That clause regulated the parties' relationship and should not be treated as an invitation to read in wider implied duties of good faith.

Osborne Clarke comment

Svella Connect v Virgin Media is a helpful clarification of the English law position on implied good faith. The judgment makes clear that, regardless of the long-term or collaborative nature of a commercial relationship, the key question as to whether a good faith obligation will be implied is whether it is necessary to give business efficacy. 

The Bates checklist remains a useful sense-check for relational contracts, but it is not a substitute for the traditional tests for implication of terms. The the court's comments that the NEC obligation to act "in a spirit of mutual trust and co-operation" is not a relevant factor to imply a duty of good faith and that carefully negotiated settlement agreements are inherently unlikely to attract implied duties of good faith are helpful.

The decision underscores the importance of comprehensive, precise drafting as the primary means of protecting each party's position.