Keep the faith

Friday 5 April 2013

A recent judgment has reignited the debate about the extent to which a duty of ‘good faith’ should exist between contracting parties.  Historically, the law has only recognised an implied duty of good faith in limited circumstances – such as in the context of insurance, contracts of employment and where a fiduciary relationship exists (for example between an accountant and their client).

Case Facts

In the case of Yam Seng Pte Ltd v International Trade Corporation Ltd. [2013] EWHC 111 (QB), a distribution agreement made in 2009 gave Yam Seng exclusive rights to distribute fragrances bearing the Manchester United brand in a number of countries, on behalf of International Trade Corporation Ltd (‘ITC’).  The contract period was initially due to expire on 12^th May 2010 but the parties agreed an extension to 31^st December 2011.

Circumstances changed and the relationship soured, which lead to Yam Seng issuing proceedings for the late shipment of orders, failure to supply products, misrepresentation and in respect of a disagreement regarding the selling price.

Decision

The Court found that ITC had breached express terms of the distribution contract by making false representations and accordingly made an order for damages for fraudulent misrepresentation.

The Court also went on to consider whether the principle of good faith should be implied. When assessing the relevant factors, the Court took the view that it was not just the facts known to the parties that should be considered, but also shared values and norms existing between the contracting parties (in other words, honesty).

The court found that ITC was in breach of an implied duty to act in good faith when it knowingly withheld information regarding the Singapore domestic retail price of the product.  Yam Seng was awarded $339,000 (£191,000) in damages.

Faith in the Future

The Court confirmed that the principle of good faith is recognised throughout many other legal systems and the Judge expressed his view that the ‘English courts are swimming against the tide’ the more they refuse to recognise good faith as a principle of contract law.

This case provides the most comprehensive analysis by the Court of the principle of good faith and could demonstrate a change to the approach which courts will take in the future. The decision could therefore have wide-reaching effects, particularly for parties that have entered into joint ventures, franchise agreements, long-term distribution agreements and the like.