Despite a general reluctance on the part of judges to do so, many businesses have tried to persuade courts to imply good faith clauses into commercial contracts. Generally though, businesses are reminded that they can only expect to rely on the clauses that are actually contained in their contracts.
There are exceptions to every general rule however and the decision in Yam Seng PTE Ltd v International Trade Corporation Ltd [2013] (Yam Seng) suggests that English courts may be more willing to imply a duty of good faith into commercial contracts where they are long term.
Is There A General of Duty of Good Faith?
The duty to perform contracts in good faith has been extensively discussed in academic literature but it is not generally recognised in English law except in specific types of agreement such as partnership agreements. Thus there is no overriding legal principle of good faith that must be applied to commercial contracts although the courts have developed piecemeal solutions in response to demonstrated problems of unfairness.
This follows the preferred method of English law to proceed incrementally by fashioning particular solutions in response to particular problems. It recognises that parties should be allowed to pursue their own self-interest both when negotiating and performing contracts, provided they do not act in breach of a term of the contract. It also negates the fear that any general requirement of good faith would create contractual uncertainty - a goal which the English law gives great weight.
Other jurisdictions are less opposed to the general principle of good faith which is derived from Roman law and it is recognised by most civil law systems including those of Germany, France and Italy. References to good faith have thus entered into English law via EU legislation.
Yam Seng PTE Ltd v International Trade Corporation Ltd [2013]
The Yam Seng case makes particular reference to ‘relational’ contracts which may require a high degree of communication, cooperation and predictable performance based on mutual trust and confidence.
Examples of such relational contracts might be joint venture agreements or long term distributorship agreements - the latter being the subject of the dispute in this case. In such instances it may be easier to imply that good faith was an obvious part of the agreement to both parties and that it was necessary for business efficacy.
In Yam Seng the court confirmed that a test of good faith would be objective in the sense that it depends, “not on either party's perception of whether particular conduct is improper but on whether in the particular context the conduct would be regarded as commercially unacceptable by reasonable and honest people”.
Conclusion
It appears that the courts may be willing imply a duty of good faith to ‘relational’ contracts due to the level of trust that these contracts rely upon. However, they are only likely to do this on a case-by-case basis and the breaches of good faith will probably have to be severe.
Parties to commercial contracts are best advised to be clear about their contractual aims from the beginning and ensure that good faith is explicitly applied to the contract as a whole or the operation of particular clauses from the outset. For more information please contact James Crichton via e-mail jcrichton@rollingsons.co.uk or by telephone on 0207 611 4848.
