Towards An Implied Duty Of Good Faith Under English Law

"I respectfully suggest that the traditional English hostility towards a doctrine of good faith in the performance of contracts, to the extent it still persists, is misplaced." So said a High Court Judge, Leggatt J, in the recent case of Yam Seng Pte Limited v International Trade Corporation Limited.1 On its face, this was a bold assertion. Jurisdictions around the world generally recognise the principle that contracting parties owe each other a duty of good faith in the performance of their contractual obligations. In the United States, this principle is enshrined in the Uniform Commercial Code which provides that "every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement".2 Similar provisions are found in the commercial codes of most civil law jurisdictions, and the courts in common law jurisdictions such as Australia and Canada increasingly recognise a broad principle of good faith and fair dealing. England stood out as one of the few jurisdictions that did not recognise an implied duty of good faith between contracting parties. A leading commentary on the issue notes that:

... in keeping with the principles of freedom of contract and the binding force of contract, in English contract law there is no legal principle of good faith of general application, although some authors have argued that there should be.3

Under English law, duties of good faith are owed by those in a fiduciary relationship and can exist as the result of an expressly agreed contractual term. A duty of good faith can be implied in specific contractual relationships (for example in partnership, agency, employment or insurance contracts) but, as a general rule, the English courts would not imply a duty of good faith into a commercial contract. That position appears to be changing. For a long time, commentators have suggested that a general duty of good faith would be introduced into English law as a result of efforts to standardise contract law within the European Union. Such a duty is already recognised in most EU Member States' systems of law, and the implementation of EU legislation has resulted in the concept of good faith being applied for various purposes in relation to specific kinds of contract.4 The further extension of the principle is widely anticipated. By way of example, the proposed Common European Sales Law provides that "Each party has a duty to act in accordance with good faith and fair dealing".5 Change may have come sooner than expected and from an unexpected quarter. In the recent Yam Seng decision, Leggatt J found that a duty of good faith could be implied into contracts as a matter of English law. Indeed, the judge's reasoning suggests that such a duty should be implied into many if not all commercial contracts. Yam Seng v International Trade Corporation The case related to a distribution agreement for Manchester United branded fragrances, deodorants and other toiletries pursuant to which ITC granted certain distribution...