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Legal Update

The Increasing Influence of Good Faith Obligations

24 January 2013
Mayer Brown JSM Legal Update

The general position of good faith negotiations in English law is stated in Cobbe v. Yeoman's Row Management Limited [2006] EWCA Civ 1139. Under English law, there is no general duty to negotiate in good faith. However, in a recently delivered judgment by Mr Justice Coulson in the Technology and Construction Court in the case of Jacobs UK Ltd v. Skidmore Owings & Merrill LLP [2012] EWHC 3293 (TCC), the increasing influence of obligations of good faith is highlighted.

The court distinguished the case on its special facts from Cobbe. The subject matter of the decision in Cobbe concerned the negotiations to enter into an agreement, in which the negotiating parties were not subject to a duty to negotiate in good faith. In Jacobs, what was in issue was the parties' mutual commercial conduct under an agreement to award contracts. Although the agreement to award contracts was dependent on the parties' negotiations in respect of particular contracts, the agreement was still enforceable as it worked like a framework agreement, under which each separate contract must be negotiated. The court held that there were general obligations of good faith on both sides in the process of negotiating particular contracts in order to make the agreement work:

“SOM [the Defendant] had to consider awarding contracts and Jacobs [the Claimant] had to consider accepting such awards, both in good faith. Only when an agreement was reached in good faith could there be an award of a contract.”

The court in the present case considered that there was no need for implied terms to achieve a mutual duty of good faith. This was because under the agreement, the parties' obligations and consequences were plain. The Defendant was obliged to consider awarding a contract to the Claimant, which in return was obliged to respond positively. Although the obligation to negotiate in good faith was not expressly stated in the agreement, the parties' mutual commercial conduct obviously entailed good faith obligations in order to make the agreement work.

For inquiries related to this Legal Update, please contact Geoffrey Chan or your usual contacts with our firm.

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