Shift Towards Implied Duty Of Good Faith In English Law

Posted on: February 13th, 2013

The recently-published High Court judgment of Yam Seng Pte Ltd v International Trade Corp indicates a shift towards an implied duty of good faith in long term contracts.

The claimant, a Singaporean company, claimed damages for breach of contract and misrepresentation against the defendant, an English company. The primary issue was whether a duty of good faith was to be implied into the contract.

The judge explained the importance of recognising the doctrine of good faith and fair dealing in all contractual relationships, but especially those involving a longer-term relationship, such as joint venture agreements, franchise agreements and long-term distributorship agreements. Historically, English contract law has not recognised a general duty to perform contracts in good faith, and has drawn “a sharp distinction” between fiduciary relationships containing onerous disclosure obligations, and other contractual relationships in which no duty of disclosure is supposed to operate.

Leggatt J held that this “dichotomy is too simplistic.” Contracts involving a longer term relationship and substantial commitment required a high degree of communication, cooperation and predictable performance based on mutual trust and confidence. They involved expectations of loyalty, which were not legislated for in the express terms of the contract, but were implicit in the parties’ understanding, and were necessary to give business efficacy to the arrangements.

Therefore, the judge J concluded that: “I respectfully suggest 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.”

This case represents a step by the English courts towards a more pro-good faith stance although it remains to be seen how far the upper courts will follow this judgment.