When is an agent owed a duty of good faith by the principal?

For years, the duties owed by a principal to an agent under English law were few and far between. Whilst this changed for commercial agents with the coming into force of the Commercial Agents Regulations, non-commercial agents remained without rights at common law. However, this too has changed in recent years as several cases in the English courts have established that a duty of good faith is implied into what have been termed “relational contracts”.

So, what is a relational contract? The English High Court has identified a list of factors which may indicate that a contract is a relational contract:

1. the contract is long-term, or it is intended by both parties that there will be a long-term relationship;
2. the parties intend their respective roles to be performed with integrity;
3. the parties are committed to collaborating with one another in the performance of the contract;
4. it is intended that there is a relationship of mutual trust and confidence;
5. the contract involves a high degree of communication and co-operation between the parties;
6. there may be a degree of significant investment by one party (or both) in the relationship; and
7. the relationship may be exclusive.

Given the above list, it is possible that some agents who have been long-term agents for their principals will, even if their agency agreement is not covered by the Regulations, be owed a duty of good faith by their principals. 

The English High Court considered in June 2020 the precise nature of such a duty of good faith, and concluded that conduct will be a breach of the duty of good faith if it would be regarded as “commercially unacceptable” by reasonable and honest people. Whilst this duty does not go as far as the agent’s fiduciary duties to the principal, it provides useful ammunition for an agent whose principal’s conduct is on the sharp side.

At the same time for those agents who are commercial agents the Regulations require principals to act in good faith in their relations with their commercial agents.Finally relational contracts may also include long-term distributorship agreements, supply and franchise agreements meaning that a duty of good faith may be implied into the agreements entered into by suppliers and distributors and franchisors and franchisees.

Take home points

1. The bedrock of the duties owed by an agent to his principal under English law is the duty of single-minded loyalty. A facet of this duty is the duty on the agent to act in good faith.
2. Commercial agents can hold their principals to account as the Regulations require principals to act in good faith.
3. Non-commercial agents may now look to an implied duty of good faith to hold their principals to account.