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UK distribution agreements – is there a duty of good faith?

The question whether English law does, or should, recognise an implied duty to perform contracts in good faith has been much debated.  In a recent High Court case*, the Judge held that the answer is still no, but that performance of obligations under a commercial contract could be deemed subject to a requirement of good faith where that is necessary, in the context of the particular case, to give proper effect to the contract.

This would be particularly so, he said, in the case of contracts involving long-term relationships – for example, joint venture and distribution agreements:

“… which may require a high degree of communication, cooperation and predictable performance based on mutual trust and confidence, and involve expectations of loyalty which are not provided for in the express terms of the contract.”

Why does this matter?

Because a distribution relationship has traditionally been regarded as “adversarial” – each party is entitled to act in his own interests, provided he abides by the terms of the contract.  But if the distributor or producer can say to the other: “If you do not act in good faith and deal fairly and honestly with me, you will be in breach of contract”, even though there is no express provision for that in the distribution agreement – or where there is no written agreement at all – that could strengthen his position against the other very significantly.

When will it be important?

Probably never while things are harmonious.  But when the relationship turns sour it could become very important.  If one of the parties wants to terminate, a requirement to act in good faith and deal fairly could be quite a constraint on his freedom of action.

For example: say a producer and distributor have got together towards the end of every year to agree a marketing and sales plan for the coming year.  Together they develop the plan for the whole of that year to an advanced stage, with events, activities, promotions and other commitments — and the proposals as to their funding — mapped out in detail.  The distributor places orders and incurs other commitments per the agreed plan.  But the producer has secretly been talking to another distributor, and intends to switch to that distributor as soon as possible.  He does so in the following March, giving only one months’ notice.

In this scenario, the innocent distributor may be able to argue that the producer had a duty to tell him honestly what he intended, as soon as he had formed that intention, and must compensate him for all loss and damage caused by his breach of that duty.  How the dispute pans out will depend on a number of other factors, but the producer may end up wishing he had planned and executed the termination more carefully, and been prepared for it to cost him rather more.

Can you exclude this implied duty?

Yes, in principle, said the Judge.  But as he pointed out, it is unlikely that either of parties who are negotiating a new agreement, about which – presumably – they both feel positive, will want to expressly raise this subject.  How would you put it: Oh, by the way, we want you to agree that we won’t have to deal with you honestly and fairly in all respects?

Do you need to do anything?

Just be aware that this could be important in the future.  If you currently have a situation to which it could be relevant, please feel free to get in touch to discuss it.

*Case:  Yam Seng PTE Limited v International Trade Corporation Limited (High Court, February 2013)

Footnote

The Yam Seng decision has been mentioned with approval by the Court of Appeal in a subsequent case:  Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland (CA, March 2013)

Except where otherwise stated, all information given and any legal opinions expressed on this website assume that English law applies.  See Conditions of use.