The Meaning of ‘Good Faith’

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We now have some further clarification as to the interpretation the Courts place on the phrase ‘acting in good faith’.

This arises out of the complicated case where the underlying agreement was held to be unenforceable.  To demonstrate the complexity of the case I note that the judgment ran to some 119 pages of A4.  The facts are, to say the least, unusual. 

Two parties entered into Heads of Terms for the sale of some land, unspecified but consisting of 100 acres, with intended options over a further 400 acres.  The Heads of Terms were dated 2015.  Among other things, the Parties agreed to use all reasonable endeavours to enter into a final binding agreement to incorporate the Heads of Terms and to act in good faith to each other. 

The potential purchaser, Brook Homes (Bicester) Limited, between 2015 and 2018 paid to the Defendant, Portfolio Property Partners Limited, the sum of £1.8 million by way of pre-payments, despite there being no formal agreement.  That, to me, is strange and decidedly unusual – not to say risky. 

By 2018 there was no agreement in place and negotiations had broken down.  Brook Homes had had enough and issued proceedings for specific performance and damages in excess of £500 million.  To me, that seems like a big stakes poker game to play on a weak hand. 

Not surprisingly, the Judge rejected the claim for a breach of contract in respect of the land because:

a.          you cannot have an agreement to agree; and

b.         the Parties have made, throughout the negotiation, various amendments – none of which were made in accordance with the technical provisions of the Law of Property (Miscellaneous Provisions) Act 1989.

Was all lost for Brook Homes?  Luckily for it, the answer was ‘no’.  In two respects the Judge found that whilst the basic agreement failed, Brook Homes succeeded.  Those two heads related to the failure to use all reasonable endeavours by Portfolio Property and that company’s failure to comply with the good faith obligation.  To avoid this blog becoming overly technical and long, and trusting that I still have your attention, I am only going to deal with the good faith issue. 

The Judge summarised the duty of good faith is requiring, subject to the other terms of the agreement:

a.          a duty to act honestly, judged by reference to reasonable and honest people;

b.         the observance of reasonable commercial standards of fair dealing;

c.          fidelity or faithfulness to the common purpose or contractual purpose; and

d.         more generally, to act consistently with the justified expectations of the parties.

As I have indicated, there are a variety of other issues and parties to the action which I could have highlighted but I have written on the one involving the phrase which is much used but often not fully understood. 

As a footnote the Judge awarded Brook Homes damages of £15.5 million.  I just hope that Portfolio has the resources to meet that award, otherwise Brook’s victory could be Pyrrhic.

Hugh Ellins