A recent case from the Court of Session has raised interesting issues about the role of good faith in contracts in Scotland.
In Unicorn Tower Limited and Others v HSBC Bank Plc [2018] CSOH 30, a property developer sued a bank for an alleged breach of a loan agreement. So far, fairly standard. However, the developer’s QC deployed an interesting argument – that there was an overarching principle of good faith between parties to a contract, which failing that there was implied term that the bank would act in good faith as regards the contract. The hearing was to establish whether that argument should proceed to an evidential hearing.
The idea that parties to a contract require to act in good faith toward one another is quite normal to the majority of European legal systems. Indeed, the principle of good faith (and fair dealing) is included in the Draft Common Frame of Reference (e.g. Book I. – 1:103), which are a set of principles that seek to unify European private law.
Courts in the UK have been less keen to adopt any such principle. However, a potentially major shift occurred in the English High Court case of Yam Seng Pte Ltd v International Trade Corp Ltd [2013] EWHC 111 (QB) where the Judge held that, whilst there was no historical authority that a party had to perform a contract in good faith, the principle was creeping in to English common law via Europe. This case was however decided on there being an implied term of good faith. Further examples may be found in certain specific contracts, such as consumer contracts (e.g. the Consumer Rights Act 2015), and some security contracts involving relations (e.g. Smith v Bank of Scotland 1997 SC (HL) 111).
Turning back to Unicorn, it was argued that the court should recognise a general principle of good faith, which failing that Yam Seng should be followed, and that the court should find that there was an obligation on the bank to act in good faith under the contract. Unfortunately, the court held that the developer failed to get as far as arguing for a general principle of good faith, as he had not managed to convince the court that such a term should be implied (a different test). Notably, the court sounded somewhat regretful that it did not have to decide the good faith issue.
No doubt this issue will be looked at again by Scottish courts soon – watch this space!
