The Emergence of an Implied Duty of Good Faith in Contracts Governed By English Law

One of the issues that distinguishes U.S. law from English law is the concept of an implied contractual duty of good faith. While U.S. law has embraced this concept, it was believed that English law had not. However, as a result of the recent decision of Yam Seng PTE Ltd v International Trade Corp Ltd (2013) EWHC 111 (QB), English law now appears to have been brought considerably closer to that of the U.S. and other EU legal systems in that an implied duty of good faith will be part of English contract law in certain circumstances.

The Facts in a Nutshell
This case related to a claim for breach of contract and misrepresentation brought by a distributor in Singapore (YSP) against an English supplier (ITC) of products bearing the logo of the famous English football team, Manchester United. The distribution agreement gave YSP the exclusive right to promote and sell these products throughout the Asia-Pacific region. However, at the time the agreement was entered into, ITC had not acquired all the rights it purported to license.

As part of YSP’s case, it pleaded that there was an implied term in the Agreement that the parties would deal with each other in good faith.

The Judgment
In summary, Mr Justice Leggett found that ITC was held to have both repudiated the agreement and procured it by misrepresentation. In reaching this decision, he also considered in great detail whether or not there was an implied term in the agreement that the parties would deal with each other in good faith. Although Mr Justice Leggett recognized a previous reluctance to imply a duty to act in good faith in English contract law, he found that the “traditional English hostility towards a doctrine of good faith in the performance of contracts, to the extent that it still persists is misplaced”. Further he saw no difficulty in “implying such a duty in any ordinary commercial contract based on the presumed intention of the parties”.

Comment
This decision is significant in that that it dispels the idea that there is no general duty of good faith in English contract law. To the contrary, it is clear that such a duty will be implied in at least some commercial cases. Although the foundations of this duty could be said to have now been set, there are still questions surrounding the various types of “commercial” contracts as to which the duty should be implied.

In terms of the impact of this decision on those negotiating commercial contracts governed by English law, for those wishing to avoid the consequences of such an as yet undefined, implied duty, it would be prudent to consider including a general boilerplate clause expressly excluding any implied duties, including the duty to act in good faith. Alternatively, one may wish to consider including a clause that expressly embraces this duty – such a clause being recently upheld as enforceable in the case of Compass Group UK and Ireland Limited v Mid Essex Hospital Services NHS Trust (2012) EWHC 781 (QB). Either way, it would be unwise simply to avoid the issue on the misplaced understanding that a duty to act in good faith will not be implied under English law if the circumstances so warrant.

Topics:  Covenant of Good Faith and Fair Dealing, Yam Seng v International Trade Corp

Published In: General Business Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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