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07.März 2013

Existence of a duty to act in good faith in commercial contracts governed by English law?

After the decision in Yam Seng PTE Ltd v International Trade Corp 2013 EWHC 111 (QB) it would appear that such a duty does exist – at least in certain circumstances. Whilst a duty to act in good faith has been a long established principle in civil law jurisdictions the English courts have been reluctant to imply such a duty in English common law despite the fact that other common law jurisdictions such as Canada and Australia have started to recognize a duty of good faith in commercial contracts. In the case in hand exclusive distribution rights to distribute Manchester United fragrances in the Middle East, Aisa,  Africa and Australasia were granted by the principal to the distributor. The distributor alleged that certain actions of the principal had caused him to be in repudiatory breach of the contract, which the Distributor accepted. The distributor therefore claimed damages at court as a result of the principals breaches of contract. One of the breaches alleged was provision by the principal of false information. The court held that the principal had in bad faith provided false information to the distributor as to the retail price of the products in Singapore and that the principal knew that the distributor would rely on such false information. In his judgment Mr Justice Legatt doubted that English law was ready to recognize a requirement of good faith as a duty implied by law into all commercial contracts. He saw however no difficulty in implying such a duty in any ordinary commercial contract based on the presumed intention of the parties. He didn’t consider this the recognition of a new concept in English law, rather an extension of the existing principle that reasonable expectations must be protected. In his view requirements of good faith are “sensitive to context” and require a core value of honesty. The test of establishing whether a duty of good faith should be implied is an objective one. In the judge’s own words it will depend “not on either party’s perception of whether particular conduct is improper but on whether in the particular context the conduct would be regarded as commercially unacceptable by reasonable and honest people”. Although this is only a first instance decision and therefore may be considered further on appeal, it is potentially an important general decision, marking a move away from the general principle that there is no general duty of good faith in English contract law.