A duty imposed in many continental European jurisdictions. The duty extends to all phases of commercial relationships both in the pre-contractual and contractual stages. The duty of good faith exists when negotiations commence. Entering into heads of terms may help to crystallise the duty and make it easier to enforce, for example, a letter that sets out detailed terms agreed in principle would be evidence of the closeness of the relationship and of what each party is expecting from the other.
The exact scope of the duty of good faith varies from country to country. Broadly, it creates an obligation:
• To inform each other, where reasonable, of all important points that the other party could not discover on its own.
• To apply reasonable diligence in the performance of pre-contractual and contractual obligations.
• To observe moral and ethical standards of behaviour where they are not already implied by local law.
• Not to break off negotiations without reasonable cause in circumstances where the other party reasonably anticipates that an agreement will be signed.
Practical Law Dictionary. Glossary of UK, US and international legal terms. www.practicallaw.com. 2010.