Introduction
Concept of 'good faith'
Facts
Decision
Comment


Introduction

Yam Seng PTE Limited v International Trade Corp Limited(1) concerned a claim for breach of contract and misrepresentation commenced by a Singapore-based distributor, Yam Seng PTE Limited (YSP), against an English supplier, International Trade Corp Limited (ITC). The goods in question were principally fragrances sporting the Manchester United brand. The distribution agreement afforded YSP the sole right to promote and sell the goods in a number of global markets. However, at the time of entering into the distribution agreement, ITC had yet to acquire all of the rights it was purporting to license. Indeed, at the time of its first pre-contract communication with YSP on January 23 2009, it represented to YSP that it had signed a licence agreement for the products, when in fact it had not acquired any such licences and did not do so until May 5 2009.

The judge's decision in the case is of particular interest because of his comments that the historical and firmly entrenched English "hostility" towards a generally applicable duty of good faith in performing contracts is "misplaced" and "swimming against the tide". The judge stopped short of suggesting that English law is ready to acknowledge that a requirement of good faith be implied in all commercial contracts, but he did give limited guidance as to the circumstances in which it may properly be implied.

It now appears to be inevitable that this decision will signal a substantial shift in the approach of the courts towards the dealings of contracting parties.

Concept of 'good faith'

A duty to act in good faith has been a well-established principle of law applicable in several European jurisdictions. Jurisdictions, which already impose a duty of good faith on commercial parties, extend the duty to all facets of a commercial relationship, in both the negotiation and contractual stages. However, the precise scope of a duty of good faith varies from country to country.

English courts have, in the main, been unwilling to interfere with a contract in circumstances where the parties have freely negotiated the terms. This rationale underpins the court's objection to implying such a duty of good faith in English common law. However, more recently a number of other common law jurisdictions, such as Australia, New Zealand and Canada, have begun to recognise a duty of good faith in commercial contracts.

Facts

YSP entered into a distribution agreement with ITC in May 2009, pursuant to which ITC granted to YSP exclusive rights to distribute Manchester United-branded fragrances and other toiletries in the Middle East, East Asia, Australasia and Africa. At the outset, the contract was set to expire on April 30 2010. However, it was extended to December 31 2011. The contracting parties were both commercial entities, yet it was clear that, in reality, this was a bargain struck between two individuals.

In July 2010 YSP alleged that ITC had committed a repudiatory breach of the contract that YSP sought to accept. Accordingly, the contract was terminated. YSP claimed damages from ITC as a result of the various alleged breaches. The relationship had first turned sour after:

  • the withdrawal of some of the goods after YSP had already begun marketing them;
  • significant and unacceptable delays in the supply chain;
  • an attempt to renege on certain distribution rights; and
  • persistently poor communication from ITC in response to YSP's enquiries (in particular, ITC was said to have provided false information about the price at which the goods were being marketed in Singapore, thereby fundamentally undermining YSP's trading position in that market).

YSP also claimed that it was induced to enter into the contract by ITC's alleged misrepresentations. ITC denied all of the claims and, further, disputed the quantum of damages sought. Crucially, YSP pleaded that there was an implied term of the contract that the parties would deal with each other in good faith. The principle issue to be decided by the judge was whether a duty of good faith could be implied in the contract.

Decision

The judge held that ITC was in breach of a number of express terms of the contract. Two of the breaches were not deemed to be repudiatory and YSP had, in any event, affirmed the contract (by reason of the fact that it had been aware of the breaches and so could not subsequently rely on them as grounds for termination). The judge found that a further breach was repudiatory and went on to assess whether a duty of good faith was to be implied in the contract.

Although the judge did not determine that English law had reached a point at which it was ready to find a requirement of good faith as a duty implied by law in all commercial contracts, he did not regard it as unconscionable to imply such a duty in an ordinary commercial contract, where it could be said that the parties had originally intended to conduct themselves on that basis. He expressed the importance of acknowledging the concept of good faith in all contractual relationships, but he went on to emphasise that such good faith is particularly vital to contracts involving a long-term relationship.

Contracts involving a substantial commitment require fair and open dealings, founded upon a spirit of cooperation and communication. In short, the judge sought to make clear that the fundamental plinth on which any contract stands is the honesty of the parties. Such an imposition of implied contractual obligations clearly went beyond any express contractual terms agreed by YSP and ITC and, furthermore, went beyond historical contractual interpretation by the English courts.

The judge fully accepted that the general view appears to be that there is no principle of good faith in English contract law (save for in certain specific circumstances). As once expressed by the then Lord Justice Bingham, "English law has, characteristically, committed itself to no such overriding principle but has developed piecemeal solutions to demonstrated problems of unfairness".(2)

However, it should be borne in mind that the concept of 'good faith' has already found its way into English law through EU legislation, most notably in the Unfair Terms in Consumer Contracts Regulations 1999. Nevertheless, in the particular circumstances before him in the dispute between YSP and ITC, the judge was prepared to follow "the established methodology of English law of the implication of terms in fact, in implying any such duty in any ordinary commercial contract based on the presumed intention of the parties", and it was this which enabled him to find in favour of YSP on the question of good faith.

Comment

The judge indicated in the course of his judgment that the relevant context in which contracts are negotiated and agreed encompasses "shared values and norms of behaviour". This approach appears positively to require equivalent levels of openness and fair dealing from both parties. This marks a substantial sea change in the preceding English case law on the subject. Commercial parties might justifiably be somewhat concerned by this judicial approach, notwithstanding the judge's attempts to assuage those concerns by his remarks that this decision need not fetter contracting parties' commercial freedoms.

In summary, this decision has given rise to a number of noteworthy issues. The judge held that there was an implied duty of good faith, which included a duty to act honestly in performing the contract. He went so far as to say that "[a]s a matter of construction, it is hard to envisage any contract which would not reasonably be understood as requiring honesty in its performance". From a practical perspective, in cases where a party is attempting to evade its obligations (eg, where the other side's conduct has been manifestly underhand), this contention of the requirement for honesty may be deployed by a litigant.

In a tangentially connected aspect of the judgment, dealing generally with the issue of losses, the judge held that in various respects, both parties had failed to adduce adequate evidence on loss to support their cases. As a consequence, YSP's claim for loss of profits failed, but its claim for wasted expenditure for breach of contract succeeded on the basis that ITC had failed to adduce evidence to demonstrate that YSP's losses in this regard were, in reality, for a bad bargain so as to reduce this measure of loss. Finally, ITC had not submitted sufficient evidence to enable the court to ascertain what losses would have been suffered by reason of YSP entering into the contract in any event (albeit at a later date). As such, YSP's damages for misrepresentation were not reduced on this basis.

It is likely that the types of contract into which the duty of good faith should be implied will continue to be a source of academic debate and judicial consideration. However, this decision has undoubtedly paved the way for future claims to be founded on a general duty of good faith, which has been hitherto rejected by the English courts. It may be that this particular case turned very much on its own facts and will not have far-reaching impact. It is yet to be seen how the true scope of good faith, as a principle of English common law, develops.

For further information on this topic please contact Adam Forster at RPC by telephone (+44 20 3060 6000), fax (+44 20 3060 7000) or email (adam.forster@rpc.co.uk).

Endnotes

(1) [2013] EWHC 111 (QB).

(2) Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] 1 QB 433 at 439.