9 Jun
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How “relational contracts” can be the gateway to the application of the principle of Good Faith in English Law

Within contract law, many foreign jurisdictions have long recognized an obligation to act in good faith when making and performing contracts. However, English Contractual Law does take a different approach. It is said in the Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd ruling, that English law has “committed itself to no overriding principle of good faith but it has developed piecemeal solutions in response to demonstrated problems of unfairness”. An example of these piecemeal solutions is that judges recognize that parties can include the express obligation to act in good faith within the contractual relation.

It is a recurrent tenet of the academic writings, that English judges have to interfere as little as possible with the will of the parties (the “laisez-faire” doctrine), then their first task is to enforce what the parties have agreed. In contrast to Civil Law systems, where the judge, despite what the parties have chosen, will try to find the most equitable solution. Then, how is safeguarded the interest of the parties in English Law? By the requirement of “consideration”. This means that, contracts must always contemplate an exchange between the parties. Nevertheless, the judge will not, as a general rule, enter into a discussion on whether the consideration is fair or not.

Thus, this reticent attitude towards the judge’s interpretative task, leaves implied duties of good faith in a residual place in English Law.

The most significant development regarding this area came up in 2013. In the Yam Seng case (Yam Seng PTE Ltd v International Trade Corporation Ltd), Leggatt J argued how the relevant background against which contracts are made includes also shared values and norms of behaviour. In order to imply those “shared values” he used the “objective test” (the test normally used to imply any term in English law). Hence, it made contracts, that are relational in nature, the exception of the rule when dealing with implied duties of good faith.

The case referred to, is about two parties (Yam Seng and ITC), which in 2009 enter into a distribution agreement. ITC, the defendant, granted the other party exclusive rights to distribute certain fragrances in specific territories in the Middle East, Asia, Africa and Australia. However, in July 2010 the relationship ended up with the claimant informing the defendant that it was terminating the contract as he was in breach. The plaintiff alleged, among other things, that ITC had breached the implied obligation that “the parties should act with each other in good faith”.

In summary, the court in this case aimed to provide a default rule for this particular kind of contracts (relational contracts), with forward-looking expectations that will serve to regulate this market transaction.

 

But what are “relational contracts”?

There is no precise definition of what relational contracts are. But, following the Yam Seng ruling, relational contracts require:

 

“a high degree of communication, co-operation and predictable performance based on mutual trust and confidence and involve expectations of loyalty which are not legislated for in the express terms of the contract but are implicit in the parties’ understanding”.

 

To ascertain if a particular contract is relational or not, it will depend on the specific circumstances of the relationship: (1) the agreement and (2) the commercial context.  The court mentioned how other characteristics will also be relevant to be taken into account: mutual intention of a long-term relationship, a commitment to collaboration, trust and confidence, exclusivity of the relationship and so forth. In addition, the court states clearly how the contract should be from a long-term nature, with the mutual intention of the parties that this relationship would actually be a long-term one.

Contracts that fulfil those requisites are relational in nature, therefore, are subject to an implied duty of good faith. Examples of these contracts are: Joint ventures, franchisors, distribution agreements, among others.

In conclusion, if parties have not expressly agreed upon including any good faith duty within the performance of contracts ruled by English Law, they might be able to enforce their expectations into court, only if it is a relational contract. 

For the moment, no accepted doctrine is stablished, however, the Yam Seng Case opened up the path towards a future acceptance of good faith, at least, in relational contracts. Indeed, the main feature that slows down this process is the functioning of English courts. As they operate as a continued conversation between judges, it is ineluctable that different views overlap. One of the greatest threats to the English legal system is its own system.

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