The parties to a written contract will often assume the contract contains all relevant clauses. However, when a dispute arises one or other of the parties will often argue that the written contract does not contain the full picture and will see to imply additional terms into the contract in order to ensure that it makes “business sense”.
In the case of Yam Seng Pte Limited –v- International Trade Corporation [2013] EWHC 111 (“the YSP case”) Mr Justice Leggatt gave extensive consideration to the question of implying a duty of good faith in a contract, beginning with a recognition that
“the general view among commentators appears to be that in English contract law there is no legal principle of good faith of general application” and ending with the conclusion that “the traditional English hostility towards a doctrine of good faith in the performance of contracts, to the extent that it still persists, is misplaced”.
The Judge’s analysis in the YSP case included the following:
“Under English law a duty of good faith is implied by law as an incident of certain categories of contract, for example contracts of employment and contracts between partners or others whose relationship is characterised as a fiduciary one … there seems to be no difficulty, following the established methodology of English law of the implication of terms in fact, in implying such a duty in any ordinary commercial contract based on the presumed intention of the parties.
As a matter of construction, it is hard to envisage any contract which would not reasonably be understood as requiring honesty in its performance …
In addition to honesty there are other standards of commercial dealing which are so generally accepted that the contracting parties would reasonably be understood to take them as read without explicitly stating them in their contractual document. A key aspect of good faith, as I see it, is the observance of such standards …
“… many contracts … involve a longer term relationship between the parties in which they make a substantial commitment. Such “relational” contracts, as they are sometimes called, may require a high degree of communication, cooperation and predictable performance based on mutual trust and confidence and involve expectations of loyalty which are not legislated for in the express terms of the contract but are implicit in the parties’ understanding and necessary to give business efficacy to the arrangement. Examples of such relational contracts might include some joint venture agreements, franchise agreements and long term distributorship agreements …”
In a more recent case under the title Bristol Ground School Limited –v- Intelligent Data Capture Limited and Others [2014] EWHC 2145, Mr Richard Spearman QC had no hesitation in applying these principles to the decision in that case. Referring to an agreement between the parties in 2001 and finding that this was a “relational” contract of the kind referred to by Mr Justice Leggatt in the YSP case, he held that a duty of good faith should be implied, even though the agreement did not fall squarely within the categories referred to by Mr Justice Leggatt in the YSP case.
On the facts of the case, he found that the Claimant was in breach of the implied duty of good faith on the basis that it had downloaded material from the Defendant’s computers without the Defendant’s permission or authority and he regarded this conduct as being commercially unacceptable. Despite this, the Judge did not think it was serious enough to give the Defendant the right to terminate the agreement because it did not “strike at the heart of the trust which is vital to any long term commercial relationship”.
Summary
It seems that even if the express terms of a contract do not provide help to an aggrieved party, many Claimants will now seek to argue that a Defendant is (also) in breach of an implied duty of good faith. Since the meaning of this term has not yet been widely examined, it seems likely that the Courts are going to be required to give further guidance on how such a clause might best be interpreted in the future.