An Article on the Development of English Law?

We imagine that some of our readers might be somewhat surprised by this article: Is the development of the concept of "good faith" in English law not something that one would more appropriately expect to find in the newsletters of English law firms? Perhaps, yes. However, the recent decision of Mr. Justice Leggatt in Yam Seng PTE Ltd v International Trade Corp Ltd [2013] EWHC 111 (QB) ("Yam Seng v ITC") and its possible future implications appear to us to be a matter of interest not limited to English lawyers, their clients, and those interested in English law, for it may be regarded as a (further) narrowing of the gap between some key principles of English common law and European civil laws.

Good Faith in English Law

The concept of "good faith", then, is not generally recognised in the English common law relating to contracts (with the term "common law" referring to the unwritten English law). As already alluded to above, this is in stark contrast to continental European jurisdictions (including Germany), where a duty of good faith is generally well recognised in a number of broadly similar guises. Such a duty also exists in certain circumstances in US and Australian law.

English courts have traditionally been hostile to finding that a general duty of good faith exists in the common law, for the reasons that the contracting parties should be entitled to pursue their own self interest, and have freedom to contract as they desire. In other words, they should be entitled to expressly provide for their own rights and remedies, without interference by the courts. Notwithstanding, where a contract binds the parties by an express duty, English courts will give effect to the intentions of the parties and seek to enforce that duty.

On English law as it stands, English courts will accordingly not generally imply a duty of good faith, but will give effect to an express duty of good faith in a contract. This, at least, was the situation prior to Yam Seng v ITC, in which case Mr. Justice Leggatt has found that an implied duty of good faith could also be applied to English contract law in certain circumstances.

The Facts of Yam Seng v ITC

This case concerned a distribution agreement entered into in May 2009 between Yam Seng PTE Ltd ("Yam Seng") and International Trade Corp Ltd ("ITC"), in terms of which ITC granted to Yam Seng the exclusive right to distribute certain Manchester United branded fragrances in specified territories in the Middle East, Asia, Africa and Australasia.

In July 2010, Yam Seng alleged that ITC was in repudiatory breach of the agreement, which breach Yam Seng accepted, whereupon the agreement was terminated. Yam Seng proceeded to claim damages from ITC as a result of ITC's breaches, including the provision of false information, undercutting agreed prices, and licensing products despite not having the right to do so. The brevity of the agreement, however, meant that these allegations could not be tied to particular express obligations. Instead, Sam Yeng thus claimed that ITC was in breach of an implied term that the parties would deal with each other in good faith.

The Judgment

Judgment was given for Yam Seng. On the facts, there were specific repudiatory breaches of the agreement which justified termination by Yam Seng. Yam Seng was also entitled to damages for misrepresentation. But perhaps the most interesting part of the judgment is Mr. Justice Leggatt's consideration of the doctrine of good faith, and the question of whether or not there was an implied term in the agreement that the parties would deal with each other in good faith - as was asserted by Yam Seng.

Acknowledging the widely held view that English law did not recognise a general duty to perform contracts in good faith (save for certain exceptions, for example, employment and partnership contracts), Mr Justice Leggatt went on to say that while he doubted English law had reached the stage where it was ready to "recognise a requirement of good faith as a duty implied by law, even as a default rule, into all commercial contracts", he saw no difficulty "in implying such a duty in any ordinary commercial contract based on the presumed intention of the parties". The test of good faith is an objective one. It will depend "not on either party's perception of whether particular conduct is improper but on whether in the particular context the conduct would be regarded as commercially unacceptable by reasonable and honest people". Mr Justice Leggatt's view was that recognising an implied duty of good faith in the performance of contracts would not be a new or novel concept in English law. Rather, he thought it would just be an extension of the principle that already exists in contract law - that reasonable expectations must be protected. Thus, while there had in fact been a clear previous reluctance to imply a general implied duty to act in good faith in English contract law, Mr Justice Leggatt did not accept the reasons for this to be robust.

In summarising his decision on this issue, Mr Justice Leggatt suggested that the "traditional English hostility towards a doctrine of good faith in the performance of contracts, to the extent that it still persists, is misplaced". He saw no difficulty in "implying such a duty in any ordinary commercial contract based on the presumed intention of the parties".

Comment

Although "only" being a first instance decision that may be considered further on appeal, the present decision is an important one, which could mark a shift away from the principle that there is no general duty of good faith in English contract law. Outlining evolving attitudes to the doctrine of good faith in other countries, Mr Justice Leggatt sought to dispel the traditional hostility to a binding good faith principle among many members of the English legal fraternity. While major questions remain unanswered (such as what agreements the principle should apply to, what it should involve in practice, etc.), the judgment may be regarded as a (further) narrowing of the gap between some key principles of English common law and European civil laws.

But while it is clear from the judgment that a general duty of good faith will be implied in at least some commercial cases, it should also be remembered that such a duty will not merely be implied in all cases. Whether the duty can be implied will be a question of fact to be decided on a case-by-case basis. How then can the consequences of such an as yet undefined implied duty of good faith be avoided?

It has been suggested that this can be achieved by including a general boilerplate clause in the relevant contract, which expressly excludes any implied duties - including the duty to act in good faith. This would be unthinkable in civil law systems such as the German one. And it does indeed appear to be somewhat strange that one contracting party should wish to expressly advise the other - and thereupon embody this declaration in an agreement - that the dealings between the parties will and shall not be conducted in good faith.

The exact implications of Yam Seng v ITC for English law-governed contract drafting purposes thus remain to be seen, and we await the further development of English law on this topic with great interest. What is certain, however, is that the last word has not been spoken on this matter.

Dr. Albert Schröder, Gundo Haacke