The Financial Markets Law Committee paper on Duties of Good Faith in Wholesale Financial Contracts
11 November 2022
11 November 2022
The Financial Markets Law Committee (FMLC) has just published an insightful paper on "Duties of Good Faith in Wholesale Financial Contracts" in English law as interpreted by the English/UK courts.
The FMLC identifies issues of legal uncertainty or misunderstanding in wholesale financial markets and considers how such issues should be addressed. The committee has highlighted duties of good faith in wholesale financial contracts as a topic with the potential for misunderstanding about the circumstances in which - in a contract governed by English law - there is a duty to act in good faith. In its recently published paper on this important area of law, the FMLC notes that the traditional view in English law is that the scope of the duty of good faith is narrow and of limited application when conducting business in wholesale financial markets.
The paper discusses the recent case law on the nature and extent of the duty. The paper's analysis of English law concludes that:
The paper also considers the related duty of rationality as applied to the exercise of contractual discretions - the so-called "Braganza" duty - the decision-making process must be rational in a public law sense, and any decision must be made rationally, in good faith, and be consistent with its contractual purpose. The paper examines cases where the duty has been found to exist but concludes that there is no general doctrine of abuse of rights nor is it a general duty to act reasonably. The paper highlights that, in wholesale financial markets, the duty does not apply to the exercise of an absolute contractual right (eg a termination right, which a party should have an unfettered right to exercise).
In particular, we note that the paper looks at the obligation under the 1992 ISDA Master Agreement for losses to be “reasonably determine[d] in good faith”, which imposed only a Braganza duty. In contrast, an obligation under the 2002 ISDA Master Agreement to “act in good faith and use commercially reasonable procedures in order to produce a commercially reasonable result” required the decision-maker to use procedures that were objectively commercially reasonable in order to produce an objectively, commercially reasonable result.
The paper serves as a very useful "one stop" reminder of where the law stands on these issues and it includes a helpful comparative law analysis of the approach taken in other legal systems.
Authors: Tom Connor, Partner and David Capps, Senior Consultant
The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
Readers should take legal advice before applying it to specific issues or transactions.