Despite the attempts of numerous litigants over the years the concept of a general duty of good faith is still unlikely to find favour with the English courts in a commercial contract governed by English law where there is no express term imposing one. The courts have repeatedly rejected efforts by litigants to imply a duty of good faith into commercial contracts.

Background

Yam Seng PTE Limited v. International Trade Corp Limited [2013] EWHC 111 may have represented the high point for implied duties of good faith.  Subsequent decisions have pulled back from any wider development of the concept.

Yam Seng suggested that there might be scope in long term "relational contracts" for duties of good faith between the parties.  However, the facts of Yam Seng – a combination of a "skeletal" contract and the knowingly misleading activities of the Defendant – have given significant latitude for the Courts to distinguish subsequent cases.

In Ilkerler Otomotiv v. Perkins Engines Company Limited [2017] EWCA Civ 183, the Claimant sued for wrongful termination of its distribution agreement with the Defendant.  It claimed that termination provisions had been varied and the Defendant, under an implied duty of good faith, had to take certain steps before terminating.

In Ilkerler the appellant was the former Turkish distributor of Perkins, the Defendant. Perkins terminated relying on a term of the distributorship agreement which permitted it (outside a 3 year initial term) to terminate upon 6 months' notice.

Ilkerler said that due to the significant investments it had made in 2011/12, at the request of Perkins, the termination provisions had been implicitly varied by conduct. Other provisions had been expressly amended but the express termination provisions had remained unchanged.

In addition, Ilkerler argued that there were implied terms that each party would provide the other with "accurate and honest appraisals for the prospects from time to time of the relationship continuing" and/or that prior to termination each party would warn the other in "clear terms of the reasons which had led it to consider termination and provide the other party with an opportunity to alter its conduct and/or make representations" prior to termination. Both arguments had been rejected by the first instance court.

The Court of Appeal referred to the case of Globe Motors Inc. v. TRW Lucas [2016] EWCA Civ 396 where the Court held that a "no oral variation" clause in a contract would not preclude a variation by conduct, even if not reduced to writing.  However, in circumstances where certain provisions had been expressly varied, but the termination provisions remained unchanged, the Court was not willing to find an implied variation, especially where it would cut across the express terms of the contract.  Under the terms of the contract in Ilkerler, Perkins had a choice as to which termination provision to rely on and in the Court's view that choice could not be taken away based on its conduct.

In respect of the alleged implied terms relating to good faith, the Court of Appeal confirmed the decision of the first instance Court that to imply "appraisals" would be to introduce an entirely new concept into the contract.  In relation to the second proposed implied term, Ilkerler referred to comments in Yam Seng about expectations that the parties will "share information".  The Court drew a distinction between communication and co-operation in the performance of a contract, and in respect of termination.  Such requirements were very different and the Court was not willing to stretch the terms of contract.

Comment

The decision in Yam Seng in 2013 was considered a potential sea change, but has not generally been picked up by the English Courts. Overall, English contract law is founded on freedom of contract and parties with equal bargaining power are expected to look after their own commercial interests.

Implying a requirement that a party had to give a warning that termination of a distributorship agreement might be on the cards, without an express provision or any discussions between the parties, was always likely to be an uphill struggle, but many brand owners and manufacturers will have been reassured to see the attempt thwarted in Ilklerler.

If an agreement is being renegotiated and amended with a substantial investment likely to be required, then the party making the investment may want to make revision of the grounds for termination a point of discussion. For example, requiring a period from the date of the investment being made into the business in which termination is prohibited save for particular specified material breaches.

Good faith remains unlikely to plug holes in contracts. It is therefore generally advisable for parties to expressly record any key duties and how they are to be exercised.