Is there an implied duty of good faith?

In many other jurisdictions – for example, in continental Europe, Australia and North America – contracting parties have duties of good faith and fair dealing towards each other as a matter of law. It is often said that the position is different in the UK: we have freedom of contract, and no duty of good faith applies unless the agreement expressly provides for it.

But in Yam Seng PTE Limited v International Trade Corp Limited, a recent case in the High Court, we are described as swimming against the tide. The judge said that, especially in some contexts, it goes without saying that the parties cannot act towards each other in a commercially unacceptable way, judged by the standards of reasonable and honest people. To that extent, the parties would have to act in good faith, whether the contract says so or not.

Subsequent comments by the Court of Appeal appear to signal that implied good faith is a feature only of particular types of contract.

The facts

The case was about a distribution agreement. ITC granted Yam Seng a licence to sell branded toiletries in parts of the Middle East, Asia, Africa and Australasia at specified prices. The agreement was a very short document and looked as if it had not been prepared by lawyers.

Yam Seng claimed that ITC was in breach for various reasons, such as providing false information, undercutting agreed prices, and licensing products despite not having the right to do so. The brevity of the document meant that these allegations could not be tied to particular express obligations. Instead, it was claimed that ITC was in breach of an implied term that the parties would deal with each other in good faith.

Implied good faith

The judge said that what good faith requires depends on the context. In other words, it is a matter of analysing and interpreting the contract, but as part of the process the court will take account of aspects of the relationship that might go without saying, either because they are so obvious that they can be taken as read or because they are necessary to give the contract effect.

For example:

• facts known to the parties might be relevant.
• dealing at arm’s length does not mean having to draft the document as if the other party is a cheat. The parties can legitimately expect honest treatment from each other: not just that one party will not set out to deceive the other, but that conduct falling short of a lie, such as deliberately avoiding giving an answer, or being generally evasive, is not permitted.
• it is not a question of a party’s own perception of whether conduct is improper, but whether the conduct would be regarded as commercially unacceptable by reasonable and honest people.

Not all commercial contracts will be treated in the same way, but as a starting point it has to be recognised that contracts cannot expressly provide for every possible event. The language must be given a reasonable interpretation that reflects the values and purposes expressed or implicit in the contract.

This is likely to be so especially with what the judge called relational contracts, which envisage long-term relationships between the parties and involve substantial commitments, such as joint venture agreements, franchise agreements and long-term distribution agreements. These usually require a high degree of communication, cooperation and predictable performance based on mutual trust and confidence.

The court ruled that Yam Seng had been entitled to terminate the contract. It was not necessary for a contract of that nature to spell out that behaviour like ITC’s was prohibited.

Express duty of good faith

The Court of Appeal has already – in passing, in a different case – endorsed the judge’s approach on the meaning of good faith, but has emphasised that the duty is implied by law only in certain categories of contract. Otherwise, there is still no general doctrine of good faith in English contract law. If the parties want it, they must include it expressly.

If there is an express duty, it will be a matter (says the Court of Appeal) of judging whether – in the particular context – a party’s conduct would be regarded as commercially unacceptable by reasonable and honest people; and it will also be a process of working out the meaning of the contract.

In the case under appeal, which concerned a catering contract with an NHS trust, express good faith obligations did not, as had been argued, generally permeate all the parties’ dealings with each other. Instead, as a matter of interpretation of the contract, they applied only to certain very specific purposes. The parties were taken to have agreed to work together, honestly endeavouring to achieve those purposes.

Comment

In a face-to-face negotiation it can be hard to resist a request for an express declaration that the parties will deal with each in good faith. But there has been uncertainty about what it means. Good faith has been characterised in other cases as playing fair, coming clean or putting your cards face upwards on the table. There could be understandable concern that this sort of openness will not always be appropriate: would it mean, for example, that a party must reveal that it is looking to terminate in favour of a better deal? Is a party allowed to decide the timing according to its own commercial interests, or must it weigh up the impact on the other party?

Yam Seng provides reassurance on what good faith means, whether express or implied. It is not unduly onerous in practice. Despite the Court of Appeal’s saying that implied good faith is limited to certain categories, like joint venture agreements, franchise agreements, long term distribution agreements and similar agreements, it is easy to see how the same principles can come into play in other contracts, too. Contract-drafting is not a matter of identifying and prohibiting every sort of commercially unacceptable practice the other side might get up to.

If there is an express duty of good faith it will be interpreted in the context of the contract as a whole. Other express provisions could have a bearing – for example, to make the duty apply narrowly, and the parties might expressly reserve their freedom to do certain things. Even an implied duty of good faith will not override express provisions that are inconsistent with it.