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'Good faith' in commercial agreements: The Yam Seng decision takes root

25 July 2014

Andrew White

'Good faith' principles continue to take root in English commercial law. A year ago, High Court judge Mr Justice Leggatt issued a milestone judgment in Yam Seng v ITC and concluded that 'good faith' in the sense of honesty should be implied into commercial agreements which are relationship-based and which require ongoing communication and cooperation between the parties.  He argued that:

  • good faith is recognised in most civil law systems and many US states, it is 'gaining ground' in Canada and Australia, and English law would be 'swimming against the tide' if it resisted it; and
  • good faith simply gives effect to the 'presumed intention' of the parties: implying a term of honesty reflects the shared values and norms of the parties.

The judge suggested that the traditional reasons why English lawyers reject the doctrine of good faith were 'misplaced'.  And he singled out 'some joint ventures, franchise and distribution agreements' – or more generally what he called 'relational agreements' - as examples of agreements where implied good faith was appropriate.

Understandably, some commentators called into question how much impact the decision would have.  But the answer is now becoming clear.  In the June 2014 High Court case of Emirates Trading (which concerned a dispute over the failure to deliver iron ore under a long term supply contract), Mr Justice Teare described Mr Justice Leggatt's judgment as "masterly", and approved the reasoning on the circumstances in which a term of 'good faith' could be implied.  In a similar vein, in the July 2014 decision of Bristol Groundschool v IDC, Mr Justice Spearman in the High Court ruled that a duty of good faith shall be implied into a 'relational' contract for the production and distribution of training materials for pilots.  He said that he agreed with the judgment in Yam Seng.  And he also noted that the Court of Appeal in Compass v Mid-Essex NHS Trust in April 2013 had referred to the Yam Seng decision, and "did not express any disapproval" of it.

A standard of good faith is taking shape under English commercial contract law.  These High Court decisions are just the latest sign of this genuine paradigm shift.  And I expect this trend to accelerate in the coming period.

For more information please contact Andrew White or Esther Johnson at Bird & Bird.

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