The English High Court in the recent case of Bristol Groundschool Limited v Intelligent Data Capture Limited [2014] EWHC 2145 (Ch) (Bristol) recently endorsed the approach taken  in Yam Seng Pte Limited v International Trade Corporation Limited [2013] EWHC 111 (QBD) (Yam Seng) in implying a duty of good faith into a contract pursuant to which the parties had collaborated on producing training manuals for commercial airline pilots.

In reaching its decision, the Court in Bristol found that the agreement in question was a ‘relational’ contract (a term coined by Leggatt J in Yam Seng) and that “good faith extends beyond, but at the very least includes, the requirement of honesty”. The relevant test is whether the conduct in question would be regarded as “commercially unacceptable” by reasonable and honest people in the particular context involved. On the facts, the Court found that the unauthorised downloading of material by Bristol was commercially unacceptable and in breach of the implied duty of good faith.

THE GAME CHANGER?

Yam Seng is oft cited as the high point in the development of a good faith doctrine. In that case, the claimant Yam Seng purported to terminate an agreement under which it was granted exclusive rights to distribute Manchester United fragrances through its duty free outlets, claiming that the defendant ITC had breached an implied term of good faith by failing to, amongst other things, ship orders promptly, make the products available, undercutting agreed prices and providing false information knowing that Yam Seng would rely on it. In his judgment, Leggatt J made the following observations:

  • English contract law has not historically recognised  a  legal principle of good faith of general application but this traditional hostility towards a doctrine of good faith in the performance of contracts was misplaced.
  • A duty of good faith is implied by law in some categories of contract (employment contracts, partnership agreements and agreements involving fiduciary relationships) but English law has not gone so far as to imply by law a duty of good faith into all commercial contracts.
  • A duty of good faith could, nonetheless, be implied in fact into an ordinary commercial contract based on the presumed intention of the parties. In this regard, one of two criteria must be satisfied: the term must be so obvious that it goes without saying or it is necessary to give business efficacy to the contract.
  • As contracts are interpreted contextually, norms of behaviour (whether generally accepted socially or more specifically in the context of a trade, commercial activity or contractual relationship) are relevant factors, even if such norms are not expressly drafted into an agreement. Leggatt J cited, as an example of such a ‘norm’ in contractual relationships, the expectation of honesty which is both obvious and necessary to give business efficacy to commercial transactions.
  • In particular, there are ‘relational contracts’ which require a high degree of communication, co-operation and predictable performance based on mutual trust and confidence and which involve expectations of loyalty which (if not legislated for expressly) are implicit in the parties’ understanding and necessary to give business efficacy to the arrangements. Some joint venture agreements, franchise agreements and long term distributorship agreements were cited as examples.
  • In every instance, “what good faith requires is sensitive to context”. The test of good faith is objective in that it depends not on either party’s perception of whether particular conduct is improper but on whether, in the particular context, conduct would be regarded as “commercially unacceptable by reasonable and honest people”. In other words, an objective analysis of the parties’ presumed intention and the relevant context in which the contract was made could justify implying a duty of good faith.

Should We Raise a Glass?

Before we get carried away it bears noting that in Bristol, it appears the defendant did not dispute but instead recognised the implied duty of good faith. Secondly, appropriate weight should be accorded to Yam Seng and Bristol as first instance decisions.

Though the UK Court of Appeal case of Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd [2013] EWCA Civ 200 (Mid Essex) referenced Yam Seng, the Court of Appeal (in declining to imply a term that the Trust would not, in awarding service failure points or in making decisions, act in an arbitrary, capricious or irrational manner) was dealing with an express obligation of good faith which the Court found was not general in nature but specifically focused on the two purposes stated in the relevant contractual provision. Yam Seng was relied upon as supporting the notion that there is no general doctrine of ‘good faith’ in English contract law and also as a useful approach in interpreting an express obligation to act in good faith.

THE SINGAPORE EXPERIENCE

Our Court of Appeal had occasion to comment on the law relating to implied terms in Ng Giap Hon v Westcomb Securities Pte Ltd [2009] SGCA 19 (Ng’s Case) when asked to consider implying (a) a duty of good faith between Ng (a remisier) and Westcomb (a stockbroking firm) as agent and principal; and (b) a term that Westcomb would not do anything to deprive Ng from earning his commission under the agency agreement (the Agency Agreement). In delivering the judgment of the Court of Appeal, Andrew Phang JA made the following observations:

  • A term may be implied ‘in law’ on policy grounds or ‘in fact’ on the basis that the contracting parties would have intended the same.
  • From a jurisprudence perspective, once a term is implied in law, such term will be implied in all future contracts of that particular type. For that reason the courts exercise caution before implying terms on this basis. Contrast terms implied in fact under the ‘business efficacy’ and ‘officious bystander’ tests which relate to a particular term(s) being implied into a particular contract only.
  • If a term relating to good faith was to be implied into the Agency Agreement, there were no policy reasons to premise this as a term implied in law, considering the ‘precedent’ effect a term implied in law would have, as well as the Court’s view that the doctrine of good faith remained controversial and was far from settled or accepted in English and Singapore contract law. Until the theoretical foundations and structure of the doctrine were settled, the Courts would not endorse an implied duty of good faith in Singapore.
  • The concept of good faith could, however in a particular factual matrix, be implied in fact. In undertaking this analysis, the Court would not (a) rewrite the contract based on its own sense of the justice of the case as the key focus when considering terms implied in fact was to give effect to the parties’ presumed intention, that such term was necessary to satisfy the ‘business efficacy’ or ‘officious bystander’ test; or (b) interfere with freedom of contract except in the most exceptional case.

In Ng’s Case, the precise factual matrix did not warrant implying a term in fact along the lines submitted by the remisier.

TO TOAST OR NOT TO TOAST?

It bears noting that the Singapore Court of Appeal did not, in Ng’s Case, have the benefit of considering Yam Seng (and its subsequent line of cases) which was decided only in 2013. When the occasion arises, it would be interesting to see how the Singapore Courts would react to the doctrinal direction set by the Yam Seng line of cases.

Would our Courts be prepared to hold that a duty of good faith could be implied by law in the types of contracts highlighted by Leggatt J, i.e. employment contracts, partnership agreements and agreements involving fiduciary relationships, bearing in mind the ‘precedent effect’ a term implied by law would have on all contracts of the same nature in future? While the foundational approaches expounded in Ng’s Case and Yam Seng when considering a duty of good faith as a term implied in fact appear doctrinally consistent, would our Courts accept that this should be the case for ‘relational contracts’?

Assuming the ‘implication’ hurdle can be surmounted, parties (and the Courts) will still need to figure out what ‘good faith’ means as “what good faith requires is sensitive to context”. Yam Seng and Bristol have held that the test of good faith is objective in that it depends not on either party’s perception of whether particular conduct is improper but on whether, in the particular context, conduct would be regarded as “commercially unacceptable by reasonable and honest people”, and that, at a minimum, good faith must include honesty.

In the meantime, parties seeking to exclude any duty of good faith will need to do so expressly and in no uncertain terms. The corollary to this is that parties looking to incorporate a duty of good faith will do well to clearly define the nature and scope of, and when, such a duty arises.