For years it has been the case that distributors are the poor relation of agents when it comes to legal protection. But this position was altered substantially last year by the High Court.
In deciding that a duty to act in good faith and fair dealing could be implied into distributorship agreements, the High Court was clearly favouring distributors. All that was required was that such an implied term reflected the presumed intention of the parties and the relevant background against which the contract was made (the “Yam Seng decision”). Although historically the English Courts have not recognised a general duty to act in good faith in respect of the performance of contractual obligations, the principle has been entering the English legal system from EU legislation.
Subsequent cases have been construed as watering down the Yam Seng decision. In one case, the Court of Appeal held that an express duty of good faith in relation to specific purposes, one of which was to transmit information efficiently, did not extend to the conduct of the parties more generally. In another case, the Technology and Construction Court decided that a duty to “work together…in the spirit of trust, fairness and mutual co-operation…” did not extend to acting reasonably when terminating the contact.
However, rather than watering down the Yang Seng decision, these cases in fact re-emphasise the point that context is all important. The parties to a contract are free to pursue their own interests and may modify the scope of the duty of good faith by containing express clauses to that effect. In the Court of Appeal case, the duty of good faith was limited to the purposes specified in the contract – it was the parties’ intention to limit the duty of good faith as detailed in the contract.
Whether a duty to act in good faith will be implied into a contract will depend on the facts known to the parties at the time that the contract was entered into and their shared values and norms of behaviour. The Yam Seng decision suggests that the duty may be implied where contracts are entered into to govern long-term relationships which require substantial commitment from the parties – in that case the supplier and the distributor. Such contracts require a high degree of communication, co-operation, and mutual trust and loyalty to give business efficacy to the arrangement.
Whilst the Yam Seng decision concerned a distributorship agreement, it is likely that agency agreements, franchise agreements and supply agreements all have the ability to qualify as “relational contracts” and therefore, a duty to act in good faith may be implied. However, somewhat ironically the distributorship agreement in Yam Seng was a short, relatively informal document. As such, if parties negotiate and enter into a detailed agreement, the Courts may consider that the omission of a clause providing an obligation to act in good faith means that the parties did not intend for such a duty to exist!
If a duty to act in good faith is implied, what does it mean? Behaviour which is in “good faith and fair dealing” would be determined by the standard of conduct which a reasonable party would consider to be taken for granted between the contracting parties. It is conduct which it is reasonable to assume that the parties will adhere to without the need to state it.
Bad faith may include dishonest, improper, commercially unacceptable and unconscionable conduct, depending on the context of the relationship. However, a duty to not act in bad faith may not impose an obligation on a party to act in a manner which is more than simply “neutral” – restricting a party from acting in a negative manner.
In contrast, a duty to act in good faith would suggest that a party has an obligation to act above and beyond what would simply be “neutral” behaviour – there is a positive obligation to ensure that the interests of both parties are best represented. As such, a duty to act in good faith is likely to impose stricter obligations.