In the case of Yam Seng PTE Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB), the High Court considered the doctrine of good faith and the extent to which it may be implied in contractual relationships.

The facts

In May 2009, the defendant, International Trade Corporation Limited (ITC), and the claimant, Yam Seng Pte (Yam Seng), entered an agreement whereby Yam Seng was granted the exclusive right to distribute “Manchester United” branded merchandise in certain duty free outlets.

The contract was to run until December 2011; however Yam Seng terminated the relationship after 15 months following a number of disputes with ITC. Yam Seng alleged that ITC had committed several breaches, including failing to ship orders promptly, failing to make products available, refusing to supply certain products even after Yam Seng had marketed them, undercutting agreed prices, attempting to claw-back certain distribution rights and providing false information in the knowledge that Yam Seng would rely on it. Yam Seng promptly issued proceedings against ITC for breach of contract and misrepresentation. 

As well as looking at each of the specified breaches individually, the main consideration of the court was in regard to whether a duty of good faith was to be implied into the contract.

Decision

The High Court held that ITC had made a number of breaches and misrepresentations in relation to the contract with Yam Seng, including breaches of certain implied obligations of good faith.

Leggatt J began by highlighting the principle established in Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] Q.B. 433, that English law does not generally recognise a doctrine of good faith in relation to the performance of contracts. However, Leggatt J stated that a duty of good faith, although not implied into all commercial contracts by default, could be imposed based upon the presumed intention of the parties and the relevant background information against which the contract was made.

When looking at what background information may be considered “relevant”, Leggatt J emphasised that this not only included facts known to the parties, but also shared values and norms existing between the parties. Leggatt J went on to give examples of such values, including that of honesty and certain standards of commercial dealing that are so generally accepted that they can be taken as read, without the need of actual inclusion in the contract.

As well as breaches of implied obligations of good faith, the court also found that ITC had committed repudiatory breaches and made false representations in relation to the contract. Yam Seng was therefore entitled to terminate the contract and recover damages.

Comment

Although there is no general principle in English law which implies a doctrine of good faith in relation to the performance of commercial contracts, the High Court’s decision in this case demonstrates that such a principle is already somewhat recognised through the implication of terms based on the parties' objectively assessed intentions. As illustrated in this case, such intentions include an intention not to knowingly provide false information or to act contrary to an established industry assumption.