The English court continues to rebuff attempts to imply a duty of good faith into commercial contracts. However, this is not to say that, in the right circumstances, such a duty will not be implied. In Svella Connect Ltd v Virgin Media Ltd [2026] EWHC 2223 (TCC), Pepperall J reiterated that the starting point, when considering whether a duty of good faith (or indeed any contractual term) should be implied, is whether the parties’ agreement has been fully set out in their contract. A term cannot be implied if the parties have already provided for it in their agreement.
Summary of the facts
Svella and Virgin were parties to 200-page detailed framework agreements, pursuant to which Virgin could award Svella contracts to expand fibre optic networks (they were also parties to an exit and settlement agreement, which is not considered in this piece). The framework agreements were for an initial term of 3 years, which could be extended to a maximum of 5 years. Clause 10.2 of the framework agreements contained an express term that the parties would “act in a spirit of mutual trust and co-operation”. Pursuant to clause 26.2, Virgin had an apparently unfettered right to terminate the framework agreements. The agreements were expressly not joint ventures and did not guarantee the award of any orders.
From about March 2024, Svella alleged that Virgin started putting pressure on it, including by taking action to make the framework agreements less profitable. Svella brought proceedings against Virgin. Amongst other things, Svella asserted that the framework agreements were “relational” contracts and each contained an implied term of good faith. It then asserted that Virgin had breached this duty.
The law
Pepperall J started with the principle, set out in Marks & Spencer plc v BNP Paribas Securities Services Trust Co. (Jersey) Ltd [2015] UKSC 72, that it is only after the process of construing the express words of a contract that the court can consider the implication of terms. After that, terms could be implied by fact, given the circumstances of the case, or as a matter of law by reference to statute or as a necessary incident of a particular type of contractual relationship (for instance, an employment relationship).
Drawing on BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 (PC), in conjunction with Marks & Spencer, the following conditions emerged from Pepperall J’s judgment for a term to be implied in fact:
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- It must be reasonable and equitable. However, a term should not be implied into a detailed commercial contract merely because it appears fair. Further, the question is what notional people in the position of the parties at the time they were contracting would have agreed, not what the parties themselves would have agreed.
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- It must be necessary to imply the term if, without it, the contract would lack commercial or practical coherence (i.e. to give it business efficacy). Alternatively, it must be so obvious that it goes without saying.
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- It must be capable of clear expression.
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- It must not contradict any express term of the contract.
Looking at the implication of terms of good faith, Pepperall J quoted Leggatt J (as he then was) in Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB), and later Leggatt LJ in Sheikh Al Nehayan v Kent [2018] EWHC 333 (Comm). Both judgments recognised the implication of a duty of good faith in “relational” contracts, which involve a longer term relationship between the parties in which they make a substantial commitment, which may require a high degree of communication, co-operation and predictable performance based on mutual trust and confidence and involve expectations of loyalty which are not legislated for in the express terms of the contract but are implicit in the parties’ understanding and necessary to give business efficacy to the arrangements. In Yam Seng, Leggatt J considered that such relational contracts might include some joint venture agreements, franchise agreements and long-term distributorship agreements. In Bates v Post Office (No. 3) [2019] EWHC 606 (QB), Fraser J (as he then was), analysed the characteristics of a relational contract and set out nine characteristics that would be relevant, including exclusivity and a high degree of communication, co-operation and predictable performance based on mutual trust and confidence and the expectation of loyalty.
Application of the law to the facts
Whilst Pepperall J went on to apply the criteria in Bates as a sense check, ultimately, he concluded that there was no gap in the framework agreements and therefore there was no need to imply a duty of good faith. There was no need to imply the terms to give business efficacy to the agreements and the terms were not so obvious that notional people in the parties’ position would have confirmed that they intended to agree such terms. Finally, the agreements contained express clauses providing that the parties did not intend to create partnerships or joint ventures and, indeed, Virgin was not obliged to guarantee Svella any work.
Practical consequences
The door has been left open for the implication of a duty of good faith into a “relational” agreement. However, it seems very difficult to envisage a situation whereby a commercial contract, negotiated by sophisticated parties, could be considered both relational and eligible for the implication of such a term. In particular, if a commercial contract could be considered relational, it is difficult (though not impossible) to conceive that the parties would need to imply a duty of good faith into it. Rather, one would expect the relevant party to be able to cite the breach of an express term. Notwithstanding, parties in potentially relational contracts, such as long-term joint venture, franchise or distributorship agreements should consider whether they are obliged (either expressly or by implication) to act in good faith and what consequences that may have on their conduct.
Although this judgment is a reminder that it is difficult to succeed when arguing that a party to a commercial contract has breached an implied duty of good faith, if such an argument is to have any hope of succeeding, it must be pleaded with precision. It is not enough to invoke broad judicial statements about good faith without identifying the precise term said to arise, why it is necessary, and how it was breached.
