Traditionally, English law has rejected any overriding principle that parties performing contracts should act in good faith or deal fairly with each other. The English court has preferred to allow parties freely to follow self-interest, to avoid the uncertainties such issues as “good faith” create and to find incremental solutions to difficult and special cases. However, under the influence of European law and moves in other common law jurisdictions, might the English court’s view be about to change? The recent High Court decision of Mr Justice Leggatt in Yam Seng Pte Limited v International Trade Corporation Limited [2013] EWHC 111 (QB) suggests it might.

The case involved a distribution agreement for Manchester United branded fragrances and toiletries. The Claimant (distributor) alleged that breaches by the Defendant amounted to a repudiation of the contract, entitling it to terminate and claim damages. Among the breaches it alleged, the Claimant asserted the distribution agreement included an implied term that the parties would deal with each other in good faith. Mr Justice Leggatt spent much of his judgment addressing this argument.

After reviewing English case law and textbooks and considering other common law jurisdictions’ gradual recognition of a contractual doctrine of good faith, the judge’s mind turned to the particular commercial relationship in this case. He decided the Defendant was under a duty not to give false information to the Claimant (although he also found the Defendant had not breached that duty). He decided this by using existing English law principles for interpreting contracts and implying terms (“so obvious that it goes without saying” and “necessary to give business efficacy to the contract”). However, his reasoning and critique of English law’s reluctance to recognise an implied duty of good faith in contracts raises the possibility that this case could witness the dawn of a new era in English law.

The judge recognised that English law requires parties to behave honestly when negotiating and performing contracts. That is a core value of good faith. He then accepted that the background to certain contracts would result in expectations that go beyond plain honesty. He recognised that English law acknowledges this in, for example, the context of fiduciaries, trusteeships and partnerships, and certain special contracts, such as insurance and employment contracts. Consistent with these ideas, he then leapt into new territory by considering that certain commercial contracts, which he described as “relational contracts”, should also include implied duties of good faith or fair dealing. He said these contracts:

"…may require a high degree of communication, cooperation and predictable performance based on mutual trust and confidence and involve expectations of loyalty which are not legislated for in the express terms of the contract but are implicit in the parties’ understanding and necessary to give business efficacy to the arrangements."

He identified joint venture, franchise and long-term distributorship agreements as cases where an implied duty of good faith may arise. There may be other long-term contracts to which a similar principle could apply, e.g. sale and purchase agreements.

Finally, the judge attacked the main justifications for English contract law refusing to recognise an overriding implied duty of good faith: freedom to follow self-interest and uncertainty. It is difficult to disagree with his comment that "the essence of contracting is that the parties bind themselves in order to cooperate to their mutual benefit". It is also true that "[the] application [of an implied duty of good faith] involves no more uncertainty than is inherent in the process of contractual interpretation." However, he may have been a little naïve to suggest parties that do not want any duty of good faith implied into their contract would simply expressly "exclude it altogether". We would be suspicious of any party that proposed that during negotiations.

In conclusion, the judge conceded: “I doubt English law has reached the stage… where it is ready to recognise a requirement of good faith as a duty implied by law, even as a default rule, into all commercial contracts”. However, in years to come this case may be seen as a key milestone along the road to English law finding many more commercial contracts do carry duties of good faith. We anticipate that future travellers on that road will be using this case to good effect as they argue towards their destination.