The Hard Sell: The Limits of Good Faith

LAYTONS The Hard Sell The Limits of Good Faith

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The Limits of Good Faith We have written a fair amount recently concerning recent decisions of the English High Court that appeared to demonstrate an increasing readiness to imply a duty of good faith into certain forms of commercial contracts1.

However, the decision of the Court of Appeal in the recent case of Ilkerler v Perkins 2 demonstrates that the doctrine of good faith has limits even in the context of so-called relational contracts.

1

In particular, Yam Seng Pte Ltd v International Trade Corp Ltd [2013] EWHC 111 (QB)

Ilkerler Otomotiv SVTA Sirketi and Another v Perkins Engines Company Limited [2017] WLR (D) 2046

2

The Hard Sell | Good Faith

Good faith Good faith is, in essence, a principle of fair and open dealing. It encompasses acting honestly, but does not end there (it is hard to envisage a commercial contract which would not require honesty in its performance). Suitable colloquialisms might include ‘playing fair’, ‘coming clean’, ‘putting one’s cards face upwards on the table’ or to put it another way, not to dealing improperly, in a commercially unacceptable manner or unconscionably.

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Good Faith | The Hard Sell

When does a duty of good faith exist?

A duty of good faith is implied by law into certain categories of contract, such as contracts of employment, between partners and in so-called ‘fiduciary’ relationships which classically include those between trustee and beneficiary, solicitor and client, principal and agent amongst others. The English court has historically been slow to recognise any default requirement of good faith in all commercial contracts. However, until the recent Court of Appeal decision, the English Courts had been developing the good faith doctrine very broadly in relation to so-called “relational” contracts.

“Relational” contracts The types of commercial contracts into which an obligation of good faith might arise include those which involve a longer term relationship between the parties in which they make a substantial commitment.

They are contracts in which the relationship may:

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require a high degree of communication, cooperation and predictable performance based on mutual trust and confidence; and

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involve expectations of loyalty which are not spelt out in the express terms of the contract, but which are implicit in the parties’ understanding and which are necessary to give business efficacy to the arrangements.

Examples of such relational contracts might include long term distributorship agreements, joint venture agreements and franchise agreements. Recently, the court implied a duty of good faith into a contract between a police authority and a company it used to crush offenders’ cars (amongst other things): the court took into account the long term nature of the contract, the high volume of transactions and the substance of the contract which entailed handling the public’s property as part of criminal investigations, which required a high degree of mutual trust and confidence3.

3

D&G Cars Limited v Essex Police Authority [2015] EWHC 226

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The Hard Sell | Good Faith

Ilkerler v Perkins The case concerned the termination of a distribution agreement. The claimants had sought to argue that the 6 months’ written notice to terminate given by the defendant to the claimants in accordance with the terms of the written contract between the parties was ineffective. The claimants argued that (amongst other things) the defendant was in breach of an implied term of good faith or fair dealing by giving notice when it did.

The Court of Appeal supported the decision of the first instance judge, who dismissed the claim. The Court revealed the limits of the doctrine of good faith by referring to comments from the Yam Seng case (see footnote 1, above) as, “interesting and informative”, but not supportive of the claimants’ case. Notably, the Court emphasised that the requirements for communication and co-operation in the performance of a relational contract are not to be implied in relation to its termination.

This suggests that the effects of the doctrine have now been circumscribed and will apply only when the interests of the parties to a relational contract converge. In matters

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such as termination, where they can be expected to behave selfishly, the doctrine has no relevance.

Comments Parties to relational contracts need only take account of their own selfish interests when contemplating whether – and how - to terminate. Provided they comply with the contract’s requirements for termination, the doctrine of good faith should not lead to an unexpected outcome.

Agency & Distribution We have substantial experience in acting for and advising principals, agents and distributors in relation to: • • • • • • •

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the suitability or otherwise of particular structures the preparation and negotiation of terms of agreements competition law issues trade marks and other intellectual property rights tax issues termination of agency and distributorship agreements cross-border issues which can arise in managing and terminating agency and distribution arrangements claims and disputes including:

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enforcing an obligation to supply failure to give contracted notice to terminate non-payment claims arising on termination other breaches of contract claims based on competition law the insolvency of one or more of the parties

Geraint Thomas Partner | Disputes geraint.thomas@laytons.com +44 (0)20 7842 8000

Russell Beard Partner | Disputes russell.beard@laytons.com +44 (0)20 7842 8000

Rebekah Parker Associate Partner | Disputes rebekah.parker@laytons.com +44 (0)20 7842 8000

This information is offered on the basis that it is a general guide only and not a substitute for legal advice. We cannot accept any responsibility for any liabilities of any kind incurred in reliance on this information.

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