Continued Development of the concept of good faith in contracts

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Yam Seng –v- International Trade Corporation [2013] EWHC111(QBD)

Facts

ITC appointed Yam Seng as a distributor for fragrances in certain countries for  a period of 30 months.  ITC was incompetent, under-cut agreed prices, gave false information to Yam Seng, and failed to comply with its distributorship obligations.  Yam Seng regarded ITC’s conduct as repudiatory and accepted this as a repudiatory breach bringing the contract to an end.  Yam Seng sued for damages.

Court Held

  1. ITC had committed repudiatory breaches entitling Yam Seng to determine the contract.  In particular ITC had acted in breach of a duty of good faith implied from the presumed intention of the parties, and the relevant background against which the contract was made.

Held

  1. In English Law a duty of good faith would not be implied into all commercial contracts by default, but could be implied in particular contracts. This will be based on the presumed intention of the parties, and the relevant background against which the contract was made.
  2. This would apply, for example, to contracts involving a longer term relationship and a substantial commitment by each party to making the objectives of the contract work where a high degree of communication co-operation and predictable performance, based on mutual trust and confidence, were necessary if the project was to work.
  3. In such “relational” contracts there are implicit expectations of loyalty necessary to give business efficacy to the parties’ contractual relations.

Comment

a)             Mr Justice Leggatt has come up with a new concept of “relational contracts” including joint venture agreements, franchise agreements and long term distributorship agreements.  The judge spoke more generally about contracts which involve a longer term relationship between the parties in which each has to make a substantial commitment requiring a high degree of communication, co-operation and predictable performance based on mutual trust and confidence and involving expectations of loyalty not provided for expressly in the contract but nevertheless implicit in the parties’ understanding, and necessary to give business efficacy.

b)            Arguably any major construction contract involves just such considerations.  If an employer is going to put £20m into the construction of a complex project, and a contractor is going to mobilise multi-million resources, over a period of months or often years with substantial periods of credit given to the employer in the process and substantial process and manufacturing risks incurred, arguably the parties might be entitled, as a matter of business efficacy, to expect that each will communicate openly, co-operate fully and perform predictably.

c)             Arguably NEC3 with its express duty of mutual trust and co-operation at clause 10.1 is just such a contract.  This could have substantial implications for future interpretations for construction contracts but particularly NEC3 agreements and any other “partnering” type contracts.  BUT this case should be read in the context also of the recent Court of Appeal Decision in Compass Group –v- Mid-Essex NHS Trust where refused to imply an obligation for good faith requiring the parties sometimes to forebear from exercising their strict contractual rights in order to preserve the relationship and ensure that the project was successful.  See next month’s newsletter.

For further information, help or advice on Construction and Engineering issues please contact Rob Langley on 0191 211 7975.