The death of good faith.

At the end of last year, we predicted that 2017 would see at least one further judgment in which an attempt was made to breathe life back into the idea of an implied general contractual duty of good faith, and that the matter would once again come before the Court of Appeal, which would firmly put Yam Seng to the sword. As we pass the year’s half-way mark, it is worth briefly looking at two cases that have expressly considered Yam Seng and rejected its doctrine of an implied contractual duty of good faith.

Developments in 2017

The first is the High Court decision in General Nutrition Investment Company v Holland And Barrett International Ltd and Health & Diet Centres Limited. In his judgment (which concerned, amongst other things, an alleged implied contractual obligation of good faith governing the exercise of a termination provision in an IP licence), Mr Justice Warren made two striking findings. These were that:

1. contrary to the Yam Seng doctrine, “relational” contracts did not automatically attract any implied contractual duty of good faith, and
2. “…there is no principle, in English law, that a duty of good faith is to be implied into commercial contracts. That is the conclusion which Leggatt J reached in Yam Seng…”. This finding in particular puts a strikingly different gloss on Yam Seng, and would no doubt have been greeted with a degree of surprise by many (including perhaps Mr Justice Leggatt).

The Judge went on to note that he could not see how the conduct complained of could in any event have been said to amount to a breach of any such implied contractual duty of good faith.

The second decision of note is that of the Court of Appeal in Ilkerler Otomotiv Sanayai Ve Ticaret Anonim Sirketi and Anor v Perkins Engines Company Limited. This case, again, concerned an alleged implied contractual obligation of good faith that was said to govern how a termination right was exercised. At first instance, the Judge gave the argument short shrift, and the Court of Appeal affirmed this decision. Lord Justice Longmore, who gave the reasoned decision, quoted the operative paragraphs from Yam Seng and characterised them as “Interesting and informative”. He went on to note that Mr Justice Leggatt in Yam Seng “…was prepared to contemplate the possibility of a general good faith term”, before concluding that in this particular instance any such duty “if it existed”, would not have been broken.

A (progressively more) distinguished decision

On one view, the Court of Appeal has once again declined to take a firm and unequivocal stance on the doctrine advanced in Yam Seng. However, it is apparent from both of these decisions that Yam Seng is being increasingly distinguished and marginalised as being a very fact-specific case that did not (and did not purport to) set out any general principle of implied good faith for wider application. Thus, while the issue theoretically remains open for the time being, it should be evident to litigants that this is not a fertile area of ground on which to base a breach of contract allegation.

The two cases also suggest that the courts will, as an alternative tack, set a very low bar for meeting any implied contractual obligation of good faith. It remains to be seen whether this will bleed across into how English courts interpret and apply express contractual obligations of good faith. Should it do so, then, in accordance with the law of unintended consequences, the legacy of Yam Seng might even be the reduction of the scope and relevance of good faith in English contract law.