Good Faith Implied As A Term In A 'Relational' Contract

ITC (an English company) approached Yam Seng (a Singapore company) in January 2009 about entering into a distributorship agreement, saying it had recently signed an exclusive licence agreement to manufacture and sell "Manchester United" fragrances and toiletries. In May 2009, a distribution agreement was signed, granting Yam Seng exclusive rights to distribute the products in a number of territories for 30 months.

Yam Seng ended up terminating after 15 months due to consistent breaches by ITC, including failing to ship orders promptly, refusing to supply certain products after Yam Seng had marketed them, undercutting agreed prices and attempting to claw back certain distribution rights.

Yam Seng sought damages for breach of contract, with part of its argument being that there was an implied term that the parties would deal with each other in good faith. It also sought damages for misrepresentation on the basis it had been induced to enter into the agreement by ITC's assertion in January 2009 that it was had a licence to manufacture and sell, when it transpired that the licence was only granted in May 2009.

The High Court (Mr Justice Leggatt) gave judgment was given for Yam Seng. On the facts, there were specific repudiatory breaches of the distribution agreement which justified termination by Yam Seng. Yam Seng was also entitled to damages for misrepresentation (the fact the licence had been signed by the time the distribution agreement was signed was of no consequence). The most interesting part of the judgment for lawyers is the judge's consideration of the doctrine of good faith.

He acknowledged that English law has not, historically, recognised a general duty of good faith. However, it has long been recognised in the US and was increasingly being recognised in European countries and other common law jurisdictions. With a duty of good faith and fair dealing infiltrating from Europe, the pressures towards a more unified European law of contract would continue to increase. In refusing to recognise any general obligation of good faith, the English jurisdiction would appear to be "swimming against the tide".

Whilst a duty of good faith was implied under English law in certain categories of contract, principally where there was a fiduciary relationship, such as employment contracts or partnership agreements, it was not implied by default into all commercial contracts. That said, it could be implied based on the presumed intention of the...

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