Good faith was first mentioned by the judiciary in Carter v Boehm.1  However, there is no clear definition of good
faith. Bingham LJ, in Interfoto v
Stiletto,2 (saying that parties
should act in good faith): ‘This does not simply mean that they should not
deceive each other…its effect is perhaps most aptly conveyed by such
metaphorical colloquialisms as … ‘coming clean’ or ‘putting one’s cards face
upwards on the table.’3

When interpreting contracts, the courts have a choice from
two main approaches: the literal approach4 or
the purposive approach.5
The literal approach aims to achieve certainty by ensuring that the courts only
consider the written wording of the contract, thereby minimising the courts’
interference and upholding sanctity of contract. The purposive approach favours
accuracy, with the courts considering the wording of the contract according to
the wider context and background of the contract.

This essay will argue that the courts have, due to
prioritising different factors at different points in time, failed to take a
consistent approach towards deciding whether to intervene in parties’ contracts
and this has led to a lack of clarity surrounding the law on both good faith
and contractual interpretation. The essay develops, first, by considering the
current approaches taken by the courts when interpreting contracts and will
analyse the extent to which the courts only give effect to the written content
of the contracts, or whether they should also consider the context of the
contract. It will be explained that the courts have made several conflicting
decisions regarding contractual interpretation. Secondly, it considers how the
law on good faith has changed over the past 30 years, and then the current
state of the law. It suggests that the approach taken by the courts recently,
particularly by Leggatt J,6 is
unsatisfactory. Finally, it will contemplate the actions of the courts in such
cases and assess whether the courts have achieved consistency in their
approach. It will be suggested that, despite the adaptability of the law to
different situations, the approach of the courts is inconsistent, due to the
courts considering each case individually, and so effect is not always given to
the written content of contracts.

In Investors
Compensation Scheme v West Bromwich Building Society (ICS),7
Lord Hoffman set out five principles of contractual interpretation. Although
these principles recognised the importance of the wording of the contract, they
primarily favoured the contextual approach. Principles 2, 3, 4 and 5, in
particular, demonstrate the courts’ willingness to interfere with the wording
of contracts that parties have freely agreed to. This is due to the principles’
breadth and because they allow the courts to ‘depart from the natural and ordinary
meaning of the words used by the parties’,8
which goes against the principles of party autonomy and sanctity of contract. An
example of the extensiveness of these principles can be seen in the second
principle, which says that the courts can include ‘absolutely anything’ from
the matrix of fact when considering the background of an agreement. The vastness
of this rule led to Sir Christopher Staughton describing it as being ‘hard to imagine a ruling
more calculated to perpetuate the vast cost of commercial litigation.’9 He,
instead, advocates that the background should include facts that ‘the parties
must have had in mind’.10 The
second principle also encourages parties to write contracts in a more
complicated manner, as there is more room for debate over any clauses, should a
dispute arise.11

In addition to Principle 2, Principles 4 and 5 have
also been subject to disapproval from members of the judiciary, particularly
from Lord Sumption.12
He criticises Lord Hoffman’s ignorance of the language and his eagerness to
consider the background of the agreement, rather than focusing on the meaning
of the actual language used. The language of the contract is the primary
evidence to consider when interpreting a contract, as it has been agreed to by
both parties and is, therefore, likely to be reflective of their intentions.

In contrast to ICS,
in Arnold v Britton,13
the courts focused on the importance of the words: they did not get distracted
by their consequences. The Supreme Court took this approach, despite it leading
to the service charge payments being at extremely high levels at the end of the
lease. In this instance, the Supreme Court focused on upholding sanctity of
contract, and refused to get the lessees out of a bad bargain. Lord Neuberger, particularly
in the third14 and fourth15
factors he explained in his judgment, emphasised that the clarity of the
language meant that there was no reason to depart from the language in the
contract, despite the commercially absurd outcome. This is due to his belief
that ‘Judges are not always the most commercially minded, let alone the most
commercially experienced of people.’16 

Although the decision in Arnold helps with certainty, this comes at the expense of
commercial common sense. If the courts interpret contracts according to
commercial common sense, this prevents the harsh or unfair consequences from
occurring. Often, both parties put forward arguments which could both be used,
for ambiguous clauses, so the court must make their decision based on which
interpretation would be commercially sensible, as they did in Rainy Sky v Kookmin Bank17
and Pink Floyd Music v EMI Records.18 However,
the lack of consistency in the law can be seen in Jackson v Dear19 where,
just two years after Pink Floyd, the
Court of Appeal said that courts should ‘not elevate commercial common sense
into an overriding criterion.’20

Conversely, if the courts did decide to focus on
commercial common sense, there is a risk that they will not just interpret the
contract but will end up re-writing it: this is not their job. Parties are
likely to be better at judging what is commercially sensible than the courts,
and it is clear to see what the parties thought was commercially sensible by
looking at the contract. Judges are likely to help the weaker party to try to
make the outcome fairer, simply because the other party negotiated a good
bargain. This view has been echoed by Lord Sumption, who said that ‘Parties
enter into contracts in a spirit of competitive interest, with a view to
serving their own interest. This is a contrast to Leggatt J’s views, regarding
good faith, who says that ‘the essence of contracting is that the parties bind
themselves … to co-operate to their mutual benefit.’21

From ICS to Arnold, it is clear to see that the
courts failed to achieve consistency in their approach to giving effect to the
written content of parties’ contracts. In ICS,
the context and background of the contract was the main focus of the court in
their decision-making process whereas, in Arnold,
the wording of the contract was the most important factor in reaching the
decision. Considering this substantial change in approach, it is noteworthy
that even Lord Sumption has said that the Supreme Court retreated from ICS ‘with muffled tones’22
and did not overrule the decision from ICS.

In Wood v Capita,23 the
Supreme Court, once again, reinstated the importance of context and suggested
that the language of agreements should be looked at using either ‘textualism’
or ‘contextualism’. Textualism prioritises the specific wording of the
agreement, when interpreting it whereas contextualism prioritises the context
of the agreement. The inconsistency of the courts can be seen by how, in Arnold, the court said that the starting
point, for interpretation, was the language, whereas Wood says they can consider the context first and then look at the
language. However, having considered the context, their view of the language may
be tainted.

Wood allowed
the court to revive the iterative approach to interpretation, which originated
in Ford v Beech.24 This
process involves checking the potential meanings of a clause, against the
contractual document as a whole, and then considering the commercial
consequences of each interpretation. It is suggested that this should happen
even if the wording of the disputed term is, in the abstract, clear.25 Although
using this approach may lead to the correct decision in individual cases, it
will provide less certainty in the law, for contracting parties, as they cannot
be certain whether the court will give effect to the specific wording of the

Having considered these cases, it is evident that,
with regard to contractual interpretation, there is a lack of clarity and
consistency. The court has changed their approach from Arnold to Wood, and they had
previously changed their approach from ICS
to Arnold. The only thing that does
appear to be clear is that ‘no word or group of words has a fixed meaning.’26 In
Wood, it appears as if the courts
have tried to find a mid-point between Arnold
and ICS, by not favouring the
language over the context, and vice versa.

As Lord Carnwarth’s dissenting judgment27
in Arnold makes clear, it is key for
the judiciary to perform a balancing act between commercial common sense and
certainty: although both are important, a judgment should not be such that it
completely ignores one of these in favour of the other. It was said that it is
important look at what happened when the matter got to the courts, rather than
looking at it from the context of when it was made. This disagrees with Lord Neuberger’s
view, that the issue should be looked at from the perspective of when the
agreement was made.

The current position of English law is that it does
not recognise a duty for parties to act in good faith. This position applies to
both the performance of existing contractual obligations and also to pre-contractual
negotiations, as established in Walford v

In Walford,
the House of Lords rejected the argument that the defendant was under an
obligation to conduct negotiations in good faith. This conclusion was reached
on the basis that such agreements, to negotiate in good faith, lack certainty
and are fundamentally inconsistent with how a negotiation process is conducted:
it is an adversarial process. Similarities can be drawn between this and Lord
Hoffman’s principle, in ICS, that
pre-contractual negotiations are inadmissible as evidence of the parties’
intentions, due to their uncertainty. The decision in Walford is further evidence of the courts intervening in contracts,
despite what the parties may have agreed to.

In contrast to the position in Walford, the Court of Appeal, in Petromec v Petroleo,29 was
willing to uphold a promise to negotiate in good faith, where the promise was
an express term in the contract. This was because it was felt that, if both
parties have come to an agreement, it is not the job of the courts to get
involved in this. This attitude is evident within Longmore LJ’s judgment in Petromec: ‘It would be a strong thing to
declare unenforceable a clause into which the parties have deliberately and
expressly entered.’ The approach from Petromec
was confirmed in Emirates Trading v
Prime Mineral Exports.30

In Astor
Management v Atalaya Mining,31
Leggatt J upheld a term requiring a party to use ‘reasonable endeavours’, in
the context of entering an agreement with a third party. His Lordship, as he
now is, followed the decisions from Petromec
and Emirates, and disregarded Andrews
J’s judgment in Dany Lions v Bristol Cars.32
The contrasting opinions of two judges, with both being first-instance
decisions, demonstrate how there is still not clarity over the rules
surrounding good faith. However, the Astor
decision appears to reflect the prevailing attitude of the courts, due to the
pragmatic approach it takes and its upholding of party autonomy: ‘The role of
the court in a commercial dispute is to give legal effect to what the parties
have agreed.’33 Taking such an approach
shows that the courts are, sometimes, willing to give direct effect to the
written content of parties’ contracts and are not interfering with the
contracts. This is similar to the approach taken in Arnold, where the express wording of the agreement was focused on.

Recently, there has been a change in the approach that
courts take toward implied terms. This has primarily been due to the efforts of
Leggatt J. In Yam Seng v International
Trade Corp,34 Leggatt J addressed
whether there was an implied term that parties would deal with each other in
good faith. He concluded that courts should presume that parties intended to
have an implied term of good faith, i.e. It should be implied in fact.35

Leggatt J’s judgment is unsatisfactory for several
reasons. One of the fundamental characteristics of English contract and
commercial law is that it is inherently adversarial, despite Leggatt J’s belief
to the contrary,36 and implying good faith
would restrict self-interest. Parties should not have to contract out of good
faith; it is their choice as to what is in the contracts, not the courts’. When
the contracts were drafted, it is likely that good faith was considered and so,
unless there has been some form of misrepresentation, there is no need for the courts
to interfere with the content of contracts. To do so would increase judicial
intervention to unwelcome levels. Lord Grabiner expressed similar views against
implying terms, saying that ‘a court should be reluctant to alter the terms of
a contract and nor should it add to those terms…’37

In this essay, it was found that the courts have
failed to take a consistent approach with regard to whether they will give
effect to the written content of parties’ contracts or whether they will
intervene. They are, effectively, dealing with issues on a case-by-case basis,
as is evident with the constant changes in which factors will be prioritised,
and this is leading to a lack of consistency and clarity.  In the context of contractual interpretation,
it appears that the courts have taken the correct decision in Wood, regarding using textualism and
contextualism. It is not as black and white an issue as the courts appeared to
believe it was with their decisions in ICS
and Arnold. They should develop a
consistent approach, which considers the language of the contract, but whilst
not forgetting the wider context of the agreement, in order to ‘ascertain the
objective meaning of the language’38
and ensure that that a commercially absurd outcome is not reached.

With regard to good faith, it was found that, despite
the general position of English law being that parties do not have a duty of
good faith to each other, the law has developed significantly over recent years
and is likely to do so in the future. This is due to the ascension of Leggatt
J, to the Court of Appeal, where he will have further scope to reform the law. The
approach taken by the courts is considerably more consistent than that taken
when interpreting contracts. If the position of good faith does change in the
future, this could threaten English law’s place as the leading law used for
contracts around the world due to the uncertainty that would arise.


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