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GOOD FAITH IN CONTRACTS: IS THERE AN IMPLIED PROMISE TO ACT HONESTLY?

Published online by Cambridge University Press:  09 August 2016

J.W. Carter  and
Wayne Courtney
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Abstract

This article critiques the model for implementation of good faith suggested by Leggatt J’s obiter comments in Yam Seng Pte Ltd v International Trade Corp Ltd. He considered that a general term of good faith may be implied as a matter of construction or as a factual implication under traditional implied terms rules; and that further terms might be implied as specific manifestations of the general term. These further terms would reflect “shared values and norms of behaviour”, including the “core value of honesty”. The article contends that the reasoning to support the general implication contradicts the proposition — accepted by Leggatt J — that good faith has not been recognised “as a duty implied by law”; and that, for several reasons, the analysis used to support implication on the basis of shared norms is flawed.

Keywords

good faithimplied termsconstructionrepudiation
Type
Shorter Article
Information
The Cambridge Law Journal , Volume 75 , Issue 3 , November 2016 , pp. 608 - 619
Copyright
Copyright © Cambridge Law Journal and Contributors 2016 

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References

1 Bhasin v Hrynew 2014 SCC 71; [2014] 3 S.C.R. 494, at [33], per Cromwell J. (for the court). Noted in this Journal by Hunt, C.D.L., “Good Faith Performance in Canadian Contract Law” [2015] C.L.J. 4 CrossRefGoogle Scholar.

2 The second contribution is noted in our conclusion.

3 Yam Seng Pte Ltd. v International Trade Corp Ltd. [2013] EWHC 111 (QB); [2013] 1 Lloyd's Rep. 526.

4 A recent example is Braganza v BP Shipping Ltd. [2015] UKSC 17; [2015] 1 W.L.R. 1661, where the implied term included a requirement of rationality as well as honesty.

5 Whether the duty is non-excludable (as under Canadian law) is unclear.

6 See e.g. Whittaker, S., “Good Faith, Implied Terms and Commercial Contracts” (2013) 129 L.Q.R. 463 Google Scholar; Granger, E., “Sweating over an Implied Duty of Good Faith” [2013] L.M.C.L.Q. 418 Google Scholar; Campbell, D., “Good Faith and the Ubiquity of the ‘Relational’ Contract” (2014) 77 M.L.R. 475 CrossRefGoogle Scholar; Collins, H., “Implied Terms: The Foundation in Good Faith and Fair Dealing” [2014] C.L.P. 297 Google Scholar. See also Arden, Lady Justice, “Coming to Terms with Good Faith” (2013) 30 J.C.L. 199 Google Scholar.

7 Leggatt J. also held that Yam Seng was entitled to damages under the Misrepresentation Act 1967 for ITC's pre-contractual conduct.

8 Yam Seng Pte Ltd. [2013] EWHC 111 (QB); [2013] 1 Lloyd's Rep. 526, at [119].

9 Ibid., at para. [154].

10 Ibid., at para. [156].

11 Ibid., at para. [159].

12 Cf. Livock v Pearson Bros (1928) 33 Com. Cas. 188.

13 There may be some doubt as to whether he implied the “good-faith” term. See note 34 below.

14 Ibid., at para. [171].

15 This seems unlikely, but cf. Malik v Bank of Credit and Commerce International S.A. [1998] A.C. 20, 38, per Lord Nicholls.

16 See J.W. Carter, Carter's Breach of Contract (Oxford 2012), §3–36.

17 Freeth v Burr (1874) L.R. 9 C.P. 208, 213, per Lord Coleridge C.J. (approved Mersey Steel and Iron Co. Ltd. v Naylor Benzon & Co. (1884) 9 App. Cas. 434). See also note 59 below.

18 There is no reference to the Singapore Court of Appeal's denial of a general rule duty of good faith in Ng Giap Hon v Westcomb Securities Pte Ltd. [2009] SGCA 19; [2009] 3 S.L.R.(R.) 518.

19 Yam Seng Pte Ltd. [2013] EWHC 111 (QB); [2013] 1 Lloyd's Rep. 526, at [131].

20 Ibid., at para. [124].

21 Ibid., at para. [131].

22 Ibid., at para. [148].

23 Ibid., at para. [142].

24 First Energy (UK) Ltd. v Hungarian International Bank Ltd. [1993] 2 Lloyd's Rep. 194, 196. See also Steyn, Johan, “Contract Law: Fulfilling the Reasonable Expectations of Honest Men” (1997) 113 L.Q.R. 433 Google Scholar.

25 Yam Seng Pte Ltd. [2013] EWHC 111 (QB); [2013] 1 Lloyd's Rep. 526, at [150].

26 Ibid., at para. [139].

27 Bank of Credit and Commerce International S.A. v Ali [2001] UKHL 8; [2002] 1 A.C. 251, at [39], per Lord Hoffmann. Leggatt J. also relied on Investors Compensation Scheme Ltd. v West Bromwich Building Society [1998] 1 W.L.R. 896, 912–13, per Lord Hoffmann.

28 Yam Seng Pte Ltd. [2013] EWHC 111 (QB); [2013] 1 Lloyd's Rep. 526, at [133].

29 Ibid., at para. [134].

30 Ibid., at para. [135].

31 Ibid., at para. [141].

32 Ibid., at para. [138].

33 Ibid., at para. [149].

34 Although Leggatt J. referred to “almost all contractual relationships”, he also expressed himself more broadly. See note 42 below and cf. also note 21 above.

35 Cf. Granger, “Sweating over an Implied Duty of Good Faith”, p. 424 (“sub-terms”).

36 See generally R. Zimmerman and S. Whittaker (eds.), Good Faith in European Contract Law (Cambridge 2000), chs 1, 2; W. Ebke and B. Steinhauer, “The Doctrine of Good Faith in German Contract Law” in J. Beatson and D. Friedmann (eds.), Good Faith and Fault in Contract Law (Oxford 1995), ch 7. See also the Principles of European Contract Law, art. 6:102(c), where “good faith and fair dealing” is a distinct basis for implying terms, and note arts 1:201, 1:202.

37 See e.g. Luxor (Eastbourne) Ltd. v Cooper [1941] A.C. 108, 115–17, per Viscount Simon L.C.

38 Scally v Southern Health and Social Services Board [1992] 1 A.C. 294, 307, per Lord Bridge.

39 See Southern Foundries (1926) Ltd. v Shirlaw [1940] A.C. 701, 717, per Lord Atkin (referring to the implied term that neither party will prevent the other from performing the contract).

40 Cf. Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd. [2013] EWCA Civ 200, at [105], per Beatson L.J. (“If the parties wish to impose such a duty they must do so expressly”); MSC Mediterranean Shipping Co. SA v Cottonex Anstalt [2016] EWCA Civ 789, at [45], per Moore-Bick L.J.

41 See e.g. Crema v Cenkos Securities plc [2010] EWCA Civ 1444; [2011] 1 W.L.R. 2066, at [45], [50]–[53], per Aikens L.J.

42 Yam Seng Pte Ltd. [2013] EWHC 111 (QB); [2013] 1 Lloyd's Rep. 526, at [137]. See also at [132]–[135].

43 Attorney-General of Belize v Belize Telecom Ltd. [2009] UKPC 10; [2009] 1 W.L.R. 1988, at [21] (“whether [the implication]…would spell out in express words what the instrument, read against the relevant background, would reasonably be understood to mean”).

44 Marks and Spencer plc v BNP Paribas Securities Services Trust Co. (Jersey) Ltd. [2015] UKSC 72; [2016] A.C. 742, at [25]–[31], per Lord Neuberger (Lords Sumption and Hodge agreeing), [75]–[76], per Lord Clarke, cf. [67]–[70], [73], per Lord Carnwath. See also Philips Electronique Grand Public S.A. v British Sky Broadcasting Ltd. [1995] E.M.L.R. 472, 481–82, per Sir Thomas Bingham M.R.

45 Yam Seng Pte Ltd. [2013] EWHC 111 (QB); [2013] 1 Lloyd's Rep. 526, at [135].

46 In addition, exclusions of liability (e.g. Banque Financière de la Cité S.A. v Westgate Insurance Co. Ltd. [1991] 2 A.C. 249 (fraud or deception)) and qualifications on exclusions (e.g. Walker v Stones [2001] Q.B. 902 (liability of trustee)) sometimes include references to dishonesty.

47 Recent cases seem concerned to support good-faith negotiation clauses on that very basis. See United Group Rail Services Ltd. v Rail Corporation of New South Wales [2009] NSWCA 177; (2009) 74 N.S.W.L.R. 618; Emirates Trading Agency LLC v Prime Mineral Exports Pte Ltd. [2014] EWHC 2104 (Comm); [2015] 1 W.L.R. 1145.

48 Shirlaw v Southern Foundries (1926) Ltd. [1939] 2 K.B. 206, 227, per Mackinnon L.J. (affirmed sub nom Southern Foundries (1926) Ltd. v Shirlaw [1940] A.C. 701). See generally Phang, A., “The Challenge of Principled Gap-Filling: A Study of Implied Terms in a Comparative Context” [2014] J.B.L. 263 Google Scholar.

49 Attorney-General v Blake [2001] 1 A.C. 268.

50 See generally Tai Hing Cotton Mill Ltd. v Liu Chong Hing Bank Ltd. [1986] A.C. 80; Hawkins v Clayton (1988) 164 C.L.R. 539; Spring v Guardian Assurance Plc [1995] 2 A.C. 296; CGU Workers Compensation (NSW) Ltd. v Garcia [2007] NSWCA 193; (2007) 69 N.S.W.L.R. 680, at [143], per Mason P.

51 Bhasin 2014 SCC 71; [2014] 3 S.C.R. 494, at [88], per Cromwell J. (for the court).

52 Manifest Shipping Co. Ltd. v Uni-Polaris Shipping Co. Ltd. [2001] UKHL 1; [2003] 1 A.C. 469, at [62]. See also Versloot Dredging BV v HDI Gerling Industrie Versicherung AG [2016] UKSC 45, esp. at [8], per Lord Sumption; and Insurance Act 2015, s. 12(1).

53 See e.g. Hochster v De la Tour (1853) 2 E. & B. 678, 689; 118 E.R. 922, 926.

54 Contrast Wight v Foran (1987) 11 N.S.W.L.R. 470, 486, per McHugh J.A. (reversed on other grounds sub nom. Foran v Wight (1989) 168 C.L.R. 385); Spira v Commonwealth Bank of Australia [2003] NSWCA 180; (2003) 57 N.S.W.L.R. 544, at [48], per Handley J.A.

55 Davis Contractors Ltd. v Fareham Urban District Council [1956] A.C. 696, 729, per Lord Radcliffe.

56 Hongkong Fir Shipping Co. Ltd. v Kawasaki Kisen Kaisha Ltd. [1962] 2 Q.B. 26, 71, per Diplock L.J.

57 Woodar Investment Development Ltd. v Wimpey Construction UK Ltd. [1980] 1 All E.R. 571; [1980] 1 W.L.R. 277.

58 See Carter, Carter's Breach of Contract, §8–09.

59 See e.g. Boston Deep Sea Fishing and Ice Co. v Ansell (1888) 38 Ch. D. 339, 362, per Bowen L.J.; English and Australian Copper Co. Ltd. v Johnson (1911) 13 C.L.R. 490; Concut Pty Ltd. v Worrell [2000] HCA 64; (2000) 176 A.L.R. 693, at [25], per Gleeson C.J., Gaudron and Gummow JJ.

60 Malik [1998] A.C. 20, 34. See also Shepherd v Felt and Textiles of Australia Ltd. (1931) 45 C.L.R. 359 (wilful disregard of a principal's instructions); SOS Kinderdorf International v Bittaye [1996] 1 W.L.R. 987, 993 (unauthorised loan by employee to third party); Nigel Fryer Joinery Services Ltd. v Ian Firth Hardware Ltd. [2008] 2 Lloyd's Rep. 108 (agent's unauthorised pursuit of outside activities); Concut Pty Ltd. v Worrell [2000] HCA 64; (2000) 176 A.L.R. 693, at [51], per Kirby J. (dishonesty).

61 See e.g. Yam Seng Pte Ltd. [2013] EWHC 111 (QB); [2013] 1 Lloyd's Rep. 526, at [142]. See also Collins, “Implied Terms”, pp. 328–29.

62 See e.g. Renard Constructions (ME) Pty Ltd. v Minister for Public Works (1992) 26 N.S.W.L.R. 234, per Priestley J.A. (three terms of reasonableness were implied in a single clause of a third-party standard form building contract); Burger King Corp v Hungry Jack's Pty Ltd. [2001] NSWCA 187; (2001) 69 N.S.W.L.R. 558 (“terms of good faith and reasonableness” implied in law when no class of contract was identified).

63 Bhasin 2014 SCC 71; [2014] 3 S.C.R. 494, at [33], per Cromwell J. (for the court). On these contributions, see Hunt, “Good Faith Performance in Canadian Contract Law”; McCamus, J.D., “The New General ‘Principle’ of Good Faith Performance and the New ‘Rule’ of Honesty in Performance in Canadian Contract Law” (2015) 32 J.C.L. 103 Google Scholar.