Good Faith: English Law v the UAE Civil Code

Article by Claire King1

Introduction

The reluctance of English common law to imply a term of good faith into agreements negotiated between two commercial parties at arm's length is well known and is based on the long-established doctrine of freedom of contract. In stark contrast in civil law countries such as the United Arab Emirates, performing obligations in a manner consistent with good faith is a fundamental part of the contract.

A series of English cases on good faith in early 2013 had raised the prospect that the English courts may be on their way to recognising an overarching duty of good faith but this prospect now seems to have receded. This article provides an update on the latest position under English law whilst highlighting the contrasting position under the UAE Civil Code. Those working with construction standard forms internationally need to keep these very real differences in mind as they can have a significant impact on how some provisions operate in practice.

English case law on good faith: the latest position

The early 2013 case of Yam Seng Pte Ltd v International Trade Corporation Limited ("ITC")2 involved a long-term distribution agreement for fragrances produced by ITC bearing the name "Manchester United". The court adopted a fairly broad and purposive approach regarding the circumstances in which good faith obligations might be implied, raising expectations that the courts were open to an overarching duty of good faith being implied more widely.

In that case Yam Seng (the distributor) argued there was an implied term that the parties would deal with each other in good faith and, specifically, that ITC had: (i) failed to act with an implied obligation of good faith and prejudiced Yam Seng's sales by offering the same products for domestic sale below the duty free prices that Yam Seng was permitted to offer; (ii) instructed or encouraged Yam Seng to incur marketing expenses for products that ITC was unable or unwilling to supply; and (iii) offered false information upon which Yam Seng relied to its detriment. There were no express terms of the contract covering any of these points.

Leggatt J noted: "The content of the duty of good faith is established by a process of construction which in English law is based upon an objective principle. The Court is concerned not with the subjective intentions of the parties ..."

On the facts, only two obligations were implied. First, the court found there was an obligation not to undercut duty free prices, and secondly, there was an obligation not to knowingly provide false information; a duty of good faith was implied in both these respects. The first obligation was contrary to usual standards of commercial dealing and the second was implied into the agreement between the parties as a matter of fact.

The fact that the contract was a long-term distributorship agreement which, the court noted, required the parties to communicate effectively and cooperate with each other in its performance, appears to have influenced the result. The state of the contract, which had not been drafted by lawyers also appears to have swayed the Court.

In stark contrast, the Court of Appeal took a much narrower and restrictive approach in Compass Group UK and Ireland Ltd v Mid Essex Hospital Services NHS Trust.3 This also involved a long-term contract for catering services.

The issue was whether the Trust was entitled to terminate the...