Jurisdiction - Hong Kong
News
Hong Kong – Fight The Good Faith Fight – The Battle Continues.

7 July, 2013

 

Legal News & Analysis – Asia Pacific – Hong Kong – Dispute Resolution

 

This article revisits the scope of good faith obligations which the English courts have continued to grapple with recently.

 

Express and implied duties to co-operate in good faith

 

The High Court's 2012 decision in Compass Group UK and Ireland Ltd (t/a Medirest) v Mid Essex Hospital Services NHS Trust – the Trust had breached an express contractual term to co-operate in good faith, by acting in an arbitrary, capricious and irrational manner. The appeal of this decision is discussed below, but since Medirest, the apparent trend of the English courts towards finding good faith obligations has received further support from the recent case of Yam Seng PTE Ltd v International Trade Corporation Ltd.

 

ITC granted Yam Seng rights to distribute Manchester United-branded fragrances. ITC failed to ship orders, allowed others to undercut agreed prices and provided false information. Yam Seng argued an implied term to deal in good faith.

 

After a wide overview of English law's resistance to the concept of a general duty of good faith, Leggatt J found for Yam Seng. The court held that ITC was in repudiatory breach, having breached the exclusivity given to Yam Seng, and given, in bad faith, false information on which it knew Yam Seng would rely. Either of those breaches alone justified termination.

 

On the implied duty of good faith, he sought to overcome the traditional resistance by using normal principles of construction for implied terms. In fact, he saw no difficulty in implying such a duty into any ordinary commercial contract, based on the parties' intentions. Intentions may be ascertained by attributing the shared purposes and values which reasonable people in the situation would have had: "…many such norms are naturally taken for granted…when making any contract without being spelt out in the document recording their agreement". Honesty is one such norm. In addition, the fact that the agreement in Yam Seng was skeletal and not professionally drafted, as well as the existence of a common industry assumption, were also important factors in implying a duty of good faith.

 

As was observed in Medirest, albeit in connection with the scope of an express duty to co-operate in good faith, context is key. "Relational contracts" (for example, joint venture, franchise and long term distributorship agreements) will require a higher degree of communication, co-operation and predictable performance based on mutual trust, which are implicit in the parties' understanding of what they would each give and receive and are necessary to give business efficacy to the arrangements.

 

Scope of good faith duties revisited

 

In the Medirest case in the Court of Appeal, Jackson J allowed the Trust's appeal. In respect of the express contractual term to act in good faith, Jackson J revisited the authorities considered by the first instance judge and repeated that the content of a duty of good faith is heavily conditioned by its context. In this case, the good faith provision was included in a clause that contained a jumble of different statements, with several possible meanings. Medirest argued for a wider construction (an overarching obligation to act in good faith) and the Trust a narrower one (good faith to be applied to two limited purposes contained in the clause, which had nothing to do with service failure points or deductions). Jackson J, construing the clause, agreed with the Trust. He also held that the obligation to act in good faith here was to act honestly. While the Trust may have acted mistakenly in levying some of the deductions, there was no finding that it had acted dishonestly.

 

Jackson J also pointed out that the cases relied on by the judge were clear that in a contract where one party is permitted to exercise discretion in making an assessment or choose from a range of options, taking into account the interests of both parties, then there is an implied obligation for that discretion to be exercised in good faith along the lines suggested by the first instance judge. It would have been "absurd" in those cases to read the contracts in question as allowing discretion to be exercised in an arbitrary, irrational or capricious manner. However, this was not the case here. The contract contained a precise specification for determining the service failure points and making consequent deductions. It was therefore a matter of calculation, not discretion. There was no need to imply the term for making the deductions; the Trust was simply operating a contractual right to do so.

 

Whilst the Court of Appeal referred to the Yam Seng case, it did so only in the context of approving established general principles, including that there is no general doctrine of good faith in English law. It therefore does not provide any support for the approach of implying a good faith term as suggested in Yam Seng.

 

Express good faith duty narrowly interpreted in partnering contract

 

The implication of an express duty of good faith was further addressed in the recent case of TSG Building Services plc v South Anglia Housing Ltd. In this case, the contract was based on the ACA Standard Form of Contract for Term Partnering. There was a general right for the parties to terminate the contract without any reason. South Anglia Housing exercised this right to terminate the contract by notice. TSG claimed that the termination was unreasonable and the exercise of the right was subject to the good faith obligations as stipulated in the contract in the following terms:

 

"The Partnering Team members shall work together and individually in the spirit of trust, fairness and mutual co-operation for the benefit of the Term Programme, within the scope of their agreed roles, expertise and responsibilities as stated in the Partnering Documents, and all their respective obligations under the Partnering Contract shall be construed within the scope of such roles, expertise and responsibilities and in all matters governed by the Partnering Contract they shall act reasonably and without delay."

 

The judge however gave a narrow interpretation to the requirements to "work together and individually in the spirit of trust, fairness and mutual co-operation for the benefit of the Term Programme" and "to act reasonably" and held that they were concerned with the "assumption, deployment and performance of roles, expertise and responsibilities". These requirements did not apply to each and every obligation, power or right of the parties generally. In the circumstances, the right of termination remained unqualified by the good faith provision and it was held that South Anglia Housing was entitled to terminate the contract.

 

The court then turned to consider whether there was an implied term for the parties to act in good faith, since TSG's argument was focused on this issue. In light of the general law on the implication of terms into a contract, Akenhead J found that since there was an express term of good faith in the contract, there was no need to imply a term to that effect in this case and that, in any event, a term could not be implied to take away from South Anglia Housing the unqualified right to terminate as provided in the contract. The case did not therefore address the approach suggested in Yam Seng to imply a duty of good faith.

 

What trends can be detected in the courts' approach?

 

Taken together, the cases continue to show the development (though not unrestricted) of the English courts' thinking on good faith. Whilst there was an attempt by the English High Court to imply a duty of good faith based on the parties' intentions, it remains to be seen whether the higher courts of England and Wales will approve the implying of a good faith duty and, if so, discuss in more detail what such an implied term would mean in practice, particularly in "relational contracts". The courts may also face cases in which they are required to provide guidance on the application of Medirest and TSG to the scope of the good faith obligation in the NEC3 standard forms and whether, for example, the termination provisions in that suite of contracts are qualified by the obligation to act in a spirit of mutual trust and co-operation. One way of reading TSG, in light of general English law principles on the implication of terms, may be that good faith duties will not be implied into contracts where there is already an express, but limited, good faith obligation, and where to imply a term in relation to other clauses would cut across, and potentially undermine, other unqualified rights in the contract.

 

 

For further information, please contact:

 

Timothy Hill, Partner, Hogan Lovells
timothy.hill@hoganlovells.com
 
Damon So, Partner, Hogan Lovells
damon.so@hoganlovells.com
 

Comments are closed.