Implied duty of Good Faith

20 March 2013

Author: Declan Magee

Dm2

In the case of Yam Seng PTE Ltd v International Trade Corp Ltd [2013] EWHC 111 (QB) Mr Justice Legatt found that an implied duty of good faith could be read into a contract under UK law.  This was an important departure from a general reluctance on the part of the judiciary to interfere between parties and find such a duty.

Facts 

The case concerned a distribution agreement between Yam Seng and International Trade Corp.  Under this agreement Yam Seng was granted exclusive rights to distribute Manchester United fragrances in particular territories.  More than two years after the contract had been agreed, Yam Seng alleged that International Trade Corp was in breach of the contract, to such an extent that they could justifiably treat the contract as having been terminated, and claimed damages.  The breaches which Yam Seng alleged included a failure to make products available, failing to adhere to agreed prices, and knowingly providing false information.  Yam Seng claimed that an implied term should be read into the contract that the parties would deal with each other in good faith.      

Decision

Mr Justice Legatt acknowledged that there was no generally recognised principle in English law which required parties to deal with each other in good faith.  However, he said that the intention and expectation that a contract would be performed in good faith could be found to be implicit in the agreement between the parties.  

In defining “good faith” the Courts would not look to the subjective opinions of the parties, but rather would look to whether the conduct “would be regarded as commercially unacceptable by reasonable and honest people”.   Mr Justice Legatt stated that certain values and norms could be regarded as implying terms into contracts, and were aspects of good faith.  In particular, the expectation of honesty, fidelity to the bargain reached between the parties, and cooperation were all aspects of good faith.  The expectations that contractual discretion would not be exercised arbitrarily, that consent would not be unreasonably withheld and that onerous or unusual contractual terms would be brought to the attention of another party, were also important examples of good faith.  

Mr Justice Legatt stated that an implied duty of good faith was not a novel concept, but should be regarded as an extension of the principles already enshrined in law, namely that the reasonable expectations of parties should be protected.  In justifying the development of the principle of good faith, Mr Justice Legatt stated that most civil law systems, including France and Germany, and Common Law systems such as the USA and Australia, recognised the principle.  

While this is an important judgment in the development of the principle of good faith, it is important to recognise that this duty will not necessarily be found in all cases.  Whether or not such a duty will be relevant will depend upon the facts of each case, and on the intentions of the parties in reaching an agreement.  

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