The concept of “good faith” in commercial contracts: what is it and when does it apply in the sports industry?

“Good faith has two elements or aspects: (1) Adherence to reasonable commercial standards of fair dealing; and (2) Faithfulness to the agreed common purpose of the contract and to the reasonable expectations of the parties arising from it.”

The concept of ‘good faith’ has been acknowledged by numerous judges and commentators and, while somewhat nebulous, is broadly captured by the quote above. The question of whether or not a contract imposes obligations of good faith (whether by express provision or implication) can have significant ramifications for the parties both in terms of performance of the contract, and termination.

This article examines the development of the case law on ‘good faith’ in recent years, where it currently stands, and the key questions the sports industry should ask when considering the issue of good faith. Specifically, it looks at:

• The established case law on “good faith”

• The Landscape After Yam Seng

• The circumstances that determine whether or not there is a “relational contract”

• Key checklist for the sports industry on when good faith obligations might arise

Background

The existence of good faith obligations will have a qualitative effect on the parties’ obligations under the contract; it is likely also to affect the standard to which parties must perform their obligations under the contract.

The existence (or not) of good faith obligations will be particularly important if a contract is not clearly drafted, or if it leaves matters unresolved, and to be agreed at a later date: in the absence of a good faith obligation a party may be permitted to act cynically or in its own commercial self-interests to the detriment of the other without breaching the terms of the contract, whereas in its presence, the parties will likely be stymied from such behaviour.

Equally importantly, the existence of good faith obligations will ordinarily broaden the circumstances in which the parties are able to terminate the contract, and seek remedies following such termination: if a party has not dealt honestly with the other, or has acted in a way that undermines the purpose of the agreement, that might not otherwise entitle the innocent party to terminate. If, however, good faith obligations exist, such conduct is likely to entitle the innocent party to terminate.

For these reasons, the question of whether or not such long-term contracts have implied obligations of good faith may be critical to resolving the disputes that may arise in litigation. Recent years have seen an increased focus on this question.

Comments (1)

• Josep F. Vandellos Alamilla

  • 26 October 2018 at 20:31
  • #

  Great article! I really enjoyed it. In civil law jurisdictions the principle of good faith (bona fides) in contractual obligations is something present in most civil codes.

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