Contractual duties of ‘good faith’ often mean requiring parties to ‘do the right thing’ or ‘play fair’. In business, these distinctions can become blurred and often leads to disputes.
What’s a Breach of Duty of Good Faith?
As the school summer holidays are upon us, a seasonal example is set out below:
- Tom has lemonade making equipment and his Grandma’s recipe. He sells lemonade outside his house during school holidays.
- Tom’s classmate Jon agrees to help him produce and sell lemonade, splitting profits 50:50.
- Jon gets permission to sell lemonade to staff at his mum’s office.
- Jon uses Tom’s equipment and recipe, without Tom’s knowledge, to make lemonade which he sells directly to his mum’s colleagues, keeping all of the profits and freezing Tom out.
Jon appears to have breached his duty of good faith to Tom. Jon’s behaviour may win praise amongst some particularly hard-nosed business people but it is pretty clear that he has not done the right thing by his friend Tom.
What Are the Risks for Businesses?
Businesses that behave like Jon are at risk of being the subject of a commercial dispute.
The High Court recently considered a claim between a company that referred patients to physiotherapists (the referrer) and a physiotherapist (the Physio). The Physio claimed that the referrer infringed its rights in a commercially sensitive database in breach of its contractual duty of good faith. It stated that the Referrer intentionally misled it to access its database, which included details of treatments and prices.
The referrer then began opening its own physiotherapy clinics in direct competition with the Physio.
Over the next two years, the number of referrals it received from the referrer dropped until they stopped completely. The real reason for the referrer’s use of the Physio’s database became clear.
The Physio felt that the referrer had breached its contractual duty of good faith: the reasons given for accessing the database were not true. If the referrer had been honest with the Physio, access to the databases would have been refused.
The Court found that whilst the referrer had been granted access to the Physio’s data, it had intentionally misled the Physio. It therefore misused the data and had breached its obligations of good faith and infringed the Physio’s database rights.
As this case shows, getting good faith wrong can be expensive and time consuming.
If you would like to discuss minimising risks, or pursuing a claim in this regard, please contact Ben Holt, Partner at award-winning law firm VWV at firstname.lastname@example.org or on 0117 314 5478.