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Implied duties of good faith – farewell Yam Seng

The decision of the High Court in Yam Seng in 2013 suggested new possibilities for arguing that obligations of good faith could be superimposed on commercial agreements, especially in the case of long-term “relational” contracts, such as distribution agreements.

Although initially the decision found some favour in other cases, at both High Court and Court of Appeal levels, more recently the tide has turned.  Two recent decisions of the Court of Appeal have firmly knocked on the head:

  • firstly, that idea that there is a special category of long-term “relational” contracts that are likely to be subject to implied duties of good faith*
  • secondly, the idea that there is or should be a “general organising principle” of good faith in contract law.**

All this is consistent with recent decisions of the UK Supreme Court reaffirming the need for a strict approach to (a) the interpretation of contracts, and (b) the implication of terms into contracts.   But note that it may not be the position in other jurisdictions, for example Australia, Canada, the USA and civil law countries.

Why does this matter?

It means that distribution agreements governed by English law must still be seen as essentially “adversarial” – each party is entitled to act entirely in its own interests, provided it abides by the terms of the contract.  Unless the contract expressly requires it, neither party can require the other to act in good faith and deal fairly.  Even a duty to act honestly will not necessarily be implied in all circumstances.

The moral, as so often, is that if either the producer or the distributor wants a particular right or protection – which is another way of saying that it wants the other party to have a particular obligation – the contract must expressly provide for it.

Alternatively, should choosing the law of another country as the governing law be considered?

*Globe Motors v TRW Lucas (Court of Appeal, April 2016)

**MSC Mediterranean Shipping v Cottonex Anstalt (Court of Appeal, July 2016)

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