Although good faith in commercial relationships is often discussed, it remains a fledgling concept in most common law jurisdictions. In Singapore, while various statutes refer to “good faith” (such as the Companies Act, the Penal Code and the Marine Insurance Act), the Singapore Court of Appeal has held that, as an independent principle of law, good faith has no general application in commercial relationships regulated by the terms of an agreement (Ng Giap Hon v Westcomb Securities Pte Ltd  3 SLR (R) 518).
A recent case, however has presented the Singapore High Court with the opportunity to review good faith in the context of insurance contracts, namely The Stansfield Group Pte Ltd (trading as Stansfield College) and another v Consumers' Association of Singapore and another  SGHC 1221. In considering whether the insurer had an obligation of good faith towards its insured the High Court endorsed the principle that the duty of good faith, statutorily provided in the Marine Insurance Act was of general application to all insurance contracts. However, the High Court cautioned that the scope and content of such duty on the part of the insurer was something that received little judicial attention even in English jurisprudence.
This appears to be the first reported decision in Singapore where the High Court has expressly endorsed the principle that an insurer owes a continuing duty of good faith to its insured, as opposed to such a duty being limited to pre-contract dealings between the parties. The decision is significant because with the door now open to arguments relating to the scope and content of such duty, it will be interesting to see how future cases develop this area of law, and, in particular, the sort of remedies that the insured can pursue against the insurer for breach of such duty.
Brief facts of the case
The dispute between the parties arose out of the CaseTrust for Education scheme administered by the Consumers’ Association of Singapore (“CASE”) to protect the welfare of foreign students in Singapore. To protect school fees paid by foreign students in case a private educational organisation (“PEO”) became insolvent, PEOs had to either insure school fees paid by foreign students with approved institutions or deposit such fees in escrow accounts with approved institutions under the Student Protection Scheme (“SPS”)2.
NTUC Income Co-operative Limited (“NTUC Income”) provided SPS insurance to Stansfield. In late 2006, CASE and NTUC Income became aware of rumours that Stansfield had been badly burnt in their investment overseas and could be in financial difficulty. Upon investigation, NTUC Income discovered that, over a period of 6 to 8 months, Stansfield had not taken out SPS insurance to cover school fees from more than 450 students. CASE conducted further investigations while NTUC Income took the protective step of freezing Stansfield’s SPS insurance facility to limit its exposure to further risk. Subsequently, CASE suspended Stansfield’s CaseTrust accreditation. About a month after the suspensions took place, and after the investigations into the circumstances surrounding Stansfield’s failure to insure such students were complete, NTUC Income restored its SPS insurance facility, as did CASE, for Stansfield’s CaseTrust accreditation.
Stansfield sued both CASE and NTUC Income claiming substantial damages, including damage it alleged was caused to its reputation and consequential loss of profit.
How the issue of good faith arose
Stansfield alleged that NTUC Income breached its duty of good faith to Stansfield when it suspended Stansfield’s insurance facilities without proper regard to Stansfield’s interests.
In essence, this allegation raised the following issues:-
- whether an insurer had a continuing duty of good faith to its insured for the duration that the policy was in effect;
- what was the scope of such duty if it existed; and
- what were the remedies available to the insured for breach of such duty?
The High Court first referred to the express statement of good faith in section 17 of the Marine Insurance Act (which is the Singapore enactment of the English Marine Insurance Act 1996 and had no applicability to the SPS insurance policies in the present case). This section provides that a contract of marine insurance is a contract based upon the utmost good faith, and, if the utmost good faith is not observed by either party, the contract may be avoided by the other party. The English Courts have accepted that such a duty applies to all contracts of insurance and reinsurance and applies both before a contract is concluded and during the performance of the contract. However, there does not appear to be any local cases adopting the same principle. The decision in the present case hence became the first to expressly recognise the principle in the local context.
Having found that NTUC Income owed a duty of good faith to Stansfield, the High Court then went on to consider whether such duty was breached in the circumstances. The High Court noted that there was not much by way of judicial precedent or academic writing upon which this issue could be considered. The earlier cases appeared to be limited to situations such as the insurers’ treatment of claims by an insured and where the insurer exercised his right to conduct his assured’s defence to a claim by a third party.
The High Court further noted that in cases of breach of the duty of good faith, the remedy available to the innocent party was to rescind or avoid the contract and would not otherwise sound in an award of damages. Hence, it appeared that established law did not support Stansfield’s position that it could claim damages for breach of the duty of good faith.
Stansfield sought to overcome this hurdle by contending that the nature of the duty of good faith it sought to impute to NTUC Income was one that was not based on section 17 of the Marine Insurance Act but rather one that derived from an implied term of the contract.
This argument too was rejected by the High Court as it noted that the insurance policy between the parties was clear in its express terms that NTUC Income had the absolute discretion to refuse to entertain new SPS applications from Stansfield. As this was an unfettered right, it was not possible for the Court to impose an implied duty of good faith that contradicted this express right. Implicit in this reasoning is the possibility of such an implied term if the express contractual terms are not inconsistent with the implied term sought.
Dissatisfied with the trial judge’s decision, Stansfield lodged an appeal, in which it further argued that the time had come for the law to recognise that a breach of the duty of good faith by an insurer should sound not only in rescission but also in damages. It contended that in most cases litigation alleging a breach of the duty of good faith would be in the context of an insurer’s refusal to extend policy coverage and rescission would not be a useful remedy in such cases.
Stansfield’s appeal was dismissed by the Court of Appeal with no grounds of decision issued. Hence, as the law currently stands, the scope of an insurer’s continuing duty of good faith is limited to the very narrow circumstances developed through case law and a breach of such duty will not sound in damages.
Implication to insurers
While this case has not fundamentally changed the law relating to the insurer’s duty of good faith, it is a timely reminder to insurers that the local courts have now endorsed the English position and affirmed the principle that such a duty of good faith enures, not just on the part of the insured but also on the part of the insurer.
To pre-empt arguments of the sort raised in the present case, namely that a particular obligation of the insurer in the insurance contract must be exercised in good faith and in the interests of the insured, insurers should state in clear terms how their obligations towards the insured pursuant to the policy are to be exercised. In the present case, NTUC Income’s clear provisions relating to the exercise of its right to refuse to entertain new SPS insurance applications directly militated against the imposition of an implied duty of good faith which may well have affected the outcome of Stansfield’s claim.
An interesting question that may arise in future cases is whether the implied duty of good faith, now recognised under Singapore law, can be contractually excluded by a suitably worded clause and, if so, whether the same effect could be achieved in relation to any attempt by the insured to raise such arguments via the implied terms route. These arguments will no doubt further define the boundaries of an area of law which has traditionally been circumscribed by rather clear boundaries.