The case of Yam Seng Pte v International Trade Corporation [2013] 1 All ER (Comm) 1321 was seen as the ‘high-water’ mark of the doctrine of good faith being implied into commercial contracts. Since then, there have been few cases to support this position and the majority of cases since Yam Seng have been reluctant to build upon such principles. The recent case of Ilkerler Otomotiv and Another v Perkins Engines Company Ltd [2017] EWCA Civ 183 continued this trend.

A recap

In Yam Seng, the High Court found that there could be an implied a duty of good faith in commercial contracts. In this particular case it was a duty of good faith being implied into a distribution agreement and the case set out that:

  • such a duty would prevent a party from:
    • knowingly providing false information to the other; or
    • undercutting prices of products which were also sold under the distribution agreement.

  • a good faith duty being implied into a contract would depend on the intentions of the parties and the actual circumstances in which the contract was entered into between the parties. For example, courts would more likely be able to see an implied duty of good faith into what the judge in Yam Seng termed “relational contracts”, such as franchise agreements and long term distributorship agreements, as well as certain joint venture agreements, on the basis that these contracts typically require a high degree of communication and cooperation between the parties.

Since Yam Seng, there have been numerous cases on the implied duty of good faith, some of which have followed Yam Seng, others of which have moved away from its decision.

In support of Yam Seng

The case of Bristol Groundschool Limited v Intelligent Data Capture Limited [2014] EWHC 2145 (Ch) followed Yam Seng by implying a duty of good faith into a contract pursuant to which the parties had collaborated on producing training manuals for commercial airline pilots.

Bristol found that the contract in question was a “relational contract”, given its collaborative nature (a principle established in Yam Seng). The judge in Bristol stated that “good faith extends beyond, but at the very least includes, the requirement of honesty”.

The relevant test set out in Bristol was whether the conduct in question would be regarded as “commercially unacceptable” by reasonable and honest people in the particular context involved. On the facts, the Court found that the unauthorised downloading of material by Bristol was commercially unacceptable and in breach of the implied duty of good faith.

Contrary to Yam Seng

On the flip side, several cases have tried to distance contractual interpretation from the doctrine of an implied term of good faith. Even where that has been an express good faith provision, it is not always certain that such term will cover all dealings. For example, in TSG Building Services plc v. South Anglia Housing Ltd [2013] EWHC 1151 (TCC), the parties entered a four-year contract for TSG to provide gas servicing and associated work which had a clause which stated:

"The [parties] shall work together and individually in the spirit of trust, fairness and mutual co-operation for the benefit of the Term Programme, within the scope of their agreed roles, expertise and responsibilities as stated in the Partnering Documents…and in all matters governed by the Partnering Contract they shall act reasonably and without delay."

The Partnering objectives set out in the Partnering Documents set out that "trust, fairness, mutual co-operation, dedication to agreed common goals and an understanding of each other's expectations and values" were expected of each party. Despite this, the Court refused to imply a good faith requirement on the party exercising a right to terminate for convenience, with the judge stating:

“Even if there was some implied term of good faith, it would not and could not circumscribe or restrict what the parties had expressly agreed…that either of them for no good or bad reason could terminate at any time…"

The latest set back

In the recent judgment of the Court of Appeal in Ilkerler Otomotiv, the Court, whilst recognising the possibility of a general good faith term, dismissed the legal authority relied upon as "interesting and informative" but not sufficient in supporting the general case for implied good faith terms.

In Ilkerler Otomotiv, the Appellants sought to rely on implied terms, founded in good faith, which in effect would restrain the other party's ability to terminate for convenience, despite the fact that the contract gave the Respondent a clear right to do so.

In dismissing the appeal in Ilkerler Otomotiv, Lord Justice Longmore relied upon:

  • the inconsistency of the implied term with the express terms of the contract;
  • the fact that the implied terms introduced an entirely new concept that was not already part of the  contract; and
  • the fact that parts of the implied term were unnecessary (largely due to common law liabilities) or "hopelessly vague".

Conclusions

Whilst the latest case of Ilkerler Otomotiv has dealt a blow to the implied term of good faith, it is worth noting that the case of Yam Seng related to the performance of the contract, whereas Ilkerler Otomotiv related to termination of the contract.

In some respects, the decision in Ilkerler Otomotiv is helpful as it has narrowed the potential scope for the principle of implied good faith, although does not go as far as providing a definitive authority on implied good faith.

Ultimately, if the parties to a contract do wish to incorporate the principles of good faith into their contract, they will be best protected by express terms. Defining the term “good faith” and what its scope and exclusions are will also help any interpretation issues should it be required.

To the extent that good faith is required to be exercised in respect of a specific clause (for example a right to terminate for convenience), this should be set out as clearly as possible as the Courts to date have taken a narrow view of trying to imply good faith into commercial contracts.

About the author

Thomas Coe Solicitor

Thomas assists a wide range of businesses across various sectors, from small owner managed businesses to multinational companies in areas of general commercial law as well as more specific areas such as internet and e-commerce law, agency and distribution and outsourcing.