Legal Principles and Key Points
- In the case of Yam Seng Pte Ltd v International Trade Corporation Ltd  E.W.H.C. 111 Q.B, it was held that, despite this not being implied into all commercial contracts by default, English law could imply a term to perform a contract in good faith based on the presumed intention of the parties and the relevant background against which the contract was made.
Facts of the Case
- In January 2009, D contacted C inviting negotiations for a distribution agreement, claiming to have ‘recently signed’ a licence agreement for certain products.
- On 12th May 2009, C and D entered into a distribution agreement granting C exclusive rights to distribute certain branded fragrances in specified territories.
- In reality, D only obtained the licensing agreement around the time the distribution agreement was signed.
- The contract period initially ran from 12th May 2009 until the (extended) deadline of 31st December 2011.
- In July 2010, C informed D that it was terminating the contract, alleging multiple breaches of the agreement by D. This included late shipments, refusing to supply all specified products, undercutting prices and providing false information.
- C also brought an action for damages on the grounds that it was induced to enter the agreement by D’s misrepresentations that it already acquired the licence.
- Could a term to perform the contract in good faith be implied?
Held by the Queen’s Bench Division
- Finding for C, that while commercial conflicts did not imply this by default, a duty of good faith could be implied based on the presumed intention of the parties and relevant background against which the contract was made.
- D had committed two breaches of the agreement, which justified C’s termination. C was entitled to recover the same loss as damages for misrepresentation, having been induced into the agreement with false representations.
- Three main reasons have been given for the ‘traditional English hostility.’ Firstly, the preferred method of English law is to find particular solutions to particular problems rather than enforcing overarching principles. Secondly, English law has previously held that parties can pursue their own self-interest in negotiating and performing contracts (barring breaches). Thirdly, fear that recognising a general performance requirement of good faith would create too much uncertainty.
- In refusing to recognise a general obligation of good faith, English law goes against most other jurisdictions, including Germany, France and Italy. From these sources, references to good faith have already entered into English law via EU legislation. Regardless, a duty of good faith is always implied in certain contracts, for example contracts of employment and contracts between parties with a fiduciary relationship.
- Case law on the construction of contracts has emphasised that contracts are made against a background of unstated shared understandings. The breadth of the relevant background and the fact that it has no conceptual limits have also been stressed. This includes not only matters of fact known to the parties but also shared values and norms of behaviour specific to a trade or contractual relationship.
- “A paradigm example of a general norm which underlies almost all contractual relationships is an expectation of honesty. That expectation is essential to commerce, which depends critically on trust. Yet it is seldom, if ever, made the subject of an express contractual obligation. Indeed, if a party in negotiating the terms of a contract were to seek to include a provision which expressly required the other party to act honestly, the very fact of doing so might well damage the parties’ relationship by the lack of trust which this would signify” .
- Frequently, however, the requirements of honesty go further than simply not making misrepresentations. If A provides information to B-knowing B would rely on it-believing it to be true but later learning it was false, it would be dishonest to not tell B of the true position. Other conduct that may be dishonest is deliberately avoiding giving an answer or being evasive.
- The fear that recognising a duty of good faith would generate excessive uncertainty is unjustified. Its application involves no more uncertainty than is inherent in the process of contractual interpretation.
- The evidence has shown that D was in breach by intending to use another distributor despite having granted exclusivity to C, and giving C false information that D knew C was likely to rely on, and which D knew to be false. Both of these would justify C’s termination of the agreement.