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Contract interpretation and the duty to act in good faith

  • United Kingdom
  • Construction and engineering


Portsmouth City Council v Ensign Highways Ltd [2015] EWHC 1969 (TCC)

In this recent case, the TCC considered the fundamentals of contract interpretation and an implied duty to act in good faith. 

In 2004, Portsmouth City Council (“PCC”) entered into a 25 year long contract with Ensign to provide maintenance and operation of PCC’s highway network.  The contract permitted PCC to levy service points on Ensign if Ensign’s works breached its obligations under the contract.  There were various categories of penalty for Ensign depending on the number of service points it received. If Ensign received the maximum number of service points within a 12 month period, this would allow PCC to terminate the contract.

Following government funding cuts,  PCC sought to renegotiate the terms of the contract so that it was more favourable to PCC.  Negotiations faltered and PCC embarked on a more aggressive approach to contract management, awarding Ensign the maximum amount of service points for every breach, storing up the service points so Ensign was “ambushed” with a large award. This was contrary to PCC’s previous approach, where it had conducted a practice of not awarding service points for every breach, and where there was a breach, approaching this on a sliding scale and only awarding maximum points for the most serious of breaches.

Consideration was given by the TCC to the application of the service points and whether terms in the contract permitted PCC to apply a sliding scale or whether, in fact, it was to apply a fixed penalty depending on the nature of the breach. The Court affirmed the decision of the Supreme Court in Rainy Sky v Kookmin Bank [2011] 1 WLR 2900 that the correct approach to contract interpretation “is to start (and finish) by looking for and adopting the interpretation that most accords with commercial common sense.”  Where words used have a clear meaning, and that meaning accords with commercial common sense, then one must apply that meaning commercial common sense when interpreting contract terms.

Consideration was also given to the extent of the duty of good faith which was in the contract.  Ensign argued that this clause, which stated that the parties “…shall deal fairly, in good faith and in mutual co-operation with one another and with Interested Parties.", created an overriding duty for the parties to act in good faith.  Whilst the provisions relating to service points did not expressly make reference to an obligation on PCC to act in good faith, Ensign purported that the good faith clause nonetheless applied. 

The Court held that there was nothing in the particular good faith clause which would lead one to conclude that the clause was intended to be applicable to the contract was a whole.  Furthermore, other clauses existed within the contract which contained specific and narrow obligations of good faith.  This was taken to show that the parties and recognised situations where good faith was necessary and had contracted accordingly.  Furthermore, an implied duty of good faith was not considered necessary to for business efficacy reasons. 

With regard to the service point regime, the Court held that whilst the service points were not fixed values, and should be awarded on a sliding scale, there was no overriding obligation to act in good faith. However, the Court did find that a term should be implied that PCC should, when assessing service points, “act honestly and on proper grounds and not in a manner that is arbitrary, irrational or capricious.”

This case demonstrates yet again the importance of clear, unambiguous drafting.  The court will look at the meaning of words used, giving them their ordinary meaning and will also apply the commercial common sense test.  In contracts such as this, which extend over a number of years and where penalty regimes are put in place, one must be clear as to how that regime is to apply and draft accordingly.  It also reaffirms a reluctance by the courts to extend express obligations of good faith more generally in contracts and to imply a term of good faith under English law.  Whilst reluctant to imply good faith obligations, the judiciary has shown a willingness to imply terms on parties to act honestly and on proper grounds where exercising discretion.  

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