Historically English Courts have been reluctant to imply a duty of good faith into commercial contracts. The Courts have only  implied a duty of good faith into specific contractual relationships (for example in partnership  and insurance contracts). Duties of good faith are owed by those in a fiduciary relationship and  can exist as the result of an expressly agreed contractual  term.

Other jurisdictions around the world recognise the principle that contracting parties owe each  other a duty of good faith in the performance of their contractual obligations. Such a duty can be  found in the commercial codes of most civil law jurisdictions and the Courts of other common law  jurisdictions.

The decision in Yam Seng Pte Limited v International Trade Corporation [2013] that a duty of good  faith can and should be implied into commercial contracts suggests that the position of English law  is changing, bringing it more in line with foreign jurisdictions; however, caution should be  exercised.

Yam Seng Pte Limited v International Trade Corporation [2013]

International Trade Corporation (ITC) granted Yam Seng the exclusive right to distribute Manchester  United branded fragrances and toiletries across 42 duty free centres in Asia. Yam Seng terminated  the distribution agreement citing persistent breaches of the distribution agreement. Yam Seng claimed that ITC breached an implied term that the parties would deal with each other in good faith. The basis for  this claim were allegations that ITC provided false information that it knew Yam Seng would rely on  in the marketing of products and authorised sales by third parties in the domestic markets covered  by the distribution agreement at a lower retail price than the agreed duty free retail price.

In his judgment Leggatt J held that a contractual duty of good faith could be implied into  commercial contracts and implied a contractual obligation of honesty, stating 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".

He extended this implied term to include an obligation to comply with "other standards of  commercial dealing which are so generally accepted that the contracting parties could reasonably be  understood to take them as read without explicitly stating them in their contractual document" and  that the observance of such standards are key aspects of good faith.

The final aspect of good faith described by Leggatt LJ was a party's fidelity to bargain. Leggatt  LJ noted that contracts can never expressly provide for every event that might happen and in  circumstances not specifically provided for, contractual language must be given a reasonable  construction which promotes the values and purposes expressed or implicit in the contract. Importantly, following analysis of the authorities, Leggatt J held that a contractual duty of good faith could be implied and that the  content of the duty to perform a contract in good faith is dependent on context.

Leggatt J in Yam Seng described the test to determine whether a party has breached the implied duty  to act in good faith as being an objective one, namely, whether in the particular context the  conduct in question would be regarded as commercially unacceptable by reasonable and honest people.  This test is dependent on issues of fact (varying from case to case) and not law and will be judged  in relation to the presumed intention of the parties.

Judgment

In the context of the distribution agreement the judge held that it was clearly implied that ITC  would not knowingly provide false information on which Yam Seng was likely to rely and that ITC  would not authorise sales in the domestic market that undercut the agreed duty-free retail prices.

Leggatt J held that ITC had not authorised the undercutting of the duty-free prices but that ITC  was in breach of "the implied duty of honesty" in their dealings. The Court identified further  breaches by ITC and held that Yam Seng had been entitled to terminate the distribution agreement  and was entitled to damages for misrepresentation.

The impact of Yam Seng

At this juncture it is difficult to determine the exact impact of Yam Seng on English Law. Yam Seng  was cited in Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd [2013],  however, it should be noted that the decision in Mid Essex Hospital Services NHS Trust was not  based upon the principles of Yam Seng. The analysis of the Court merely referred to the analysis of  the historical position contained in Leggatt J’s judgment and refused to imply a duty of good faith  into the commercial contract, preferring to suggest that parties wishing to enforce such a duty  should draft express terms.

Parties entering into long term contracts should be aware that (following Yam Seng) the Court can  imply a duty of good faith and fair dealing into commercial contracts and should carefully consider  how their actions would be judged by the objective test were a dispute to arise.