An Implied Duty Of Good Faith In English Law Franchise Agreements - Is The Genie Out Of The Bottle?

Introduction

The English law of contract is well known for not having a general duty of good faith and the approach to dealing with good faith situations in case law has been piecemeal, in line with the general development of common law. One of the main reasons advanced for this is the uncertainty which would arise if a general duty of good faith was imported into contracts generally.

However, recent case law has reignited the debate over whether or not English law recognises a general duty of good faith in commercial contracts.

In a recent High Court case between Yam Seng Pte Limited ("Yam Seng") and International Trade Corporation ("ITC"), the judge, Mr Justice Leggatt, held that a distribution agreement governed by English law contained an enforceable, implied obligation on the parties to act in "good faith".

Subsequent to the Yam Seng case, the Court of Appeal heard a case between Mid Essex Hospital Services NHS Trust ("NHS Trust") and Compass Group UK and Ireland Limited ("Compass"). The Yam Seng case was cited in the Court of Appeal's judgement, in which, the Court of Appeal rejected the first instance ruling that there was an implied term which required the NHS Trust not to exercise a contractual discretion arbitrarily, capriciously or irrationally.

An even more recent High Court judgment (TSG Building Services plc v South Anglia Housing Ltd - 8 May 2013) also cited the Yam Seng case but followed the rationale of the Compass case, where the judge ruled that an express good faith clause did not extend to acting reasonably when terminating the contract, and that there was not an implied duty of good faith which would restrict the parties' contractual right to terminate at any time.

If the Yam Seng judgment was an attempt to let the genie of good faith out of the bottle, the Compass ruling can be interpreted as the Court Appeal acting swiftly to try and push it back in.

Nevertheless, all three cases highlight a growing tendency to attempt to imply obligations of good faith into commercial contracts. If the Yam Seng case is more than an a mere aberration in English case law, is it indicative of a slow but steady creep towards recognising a general duty of good faith in English law with regard to certain types of commercial contracts?

Franchisors and distributors should take heed of these developments and exercise caution before exercising contractual discretion and bear in mind that their longer term relational contracts may be held to a...