Source: http://hk-lawyer.org/content/have-little-faith
Timestamp: 2019-04-23 06:29:01+00:00

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Although the orthodox view of no general doctrine of good faith in commercial dealings remains the common perception of most common lawyers, a gradual turn in the judicial prism is slowly shifting that perception.
This principle is likewise familiar to a common lawyer carrying the Roman-Dutch legal tradition – for example, the Constitutional Court of South Africa recently re-affirmed, at §45 in Botha v Rich NO  ZACC 11, that “in our law all contracts are subject to good faith”. Such principle also features in the laws of the United States, as §1-304 of the Uniform Commercial Code (the UCC) provides that “[e]very contract … within the [UCC] imposes an obligation of good faith in its performance and enforcement”, with §205 of the subsequent Restatement (Second) of Contracts (1981) extending the general duty of good faith to “[e]very contract”, beyond just commercial transactions within the UCC.
At Anglo-Saxon common law, and as early as 1766 (being 10 years before Adam Smith published The Wealth of Nations which arguably laid the foundation for the modern-day laissez faire economics of contracts), Lord Mansfield at  in Carter v Boehm (1766) 3 Burr 1905 considered good faith – in reference to prohibiting against “concealing what [one] privately knows [in order] to draw the other into a bargain … from his ignorance of that fact” – as a “governing principle … applicable to all contracts and dealings”. However, Lord Mansfield’s attempt to plant a general principle of good faith applicable to all English contracts did not subsequently bear fruit, as Bingham LJ indicated in Interfoto Picture Library v Stiletto Visual Programmes  EWCA Civ 6 that “English law has, characteristically, committed itself to no such overriding principle but has developed piecemeal solutions in response to demonstrated problems of unfairness.” Lord Ackner, in a later speech at p.138 in Walford v Miles  2 AC 128, echoed a similar sentiment and delivered perhaps the strongest disapproval of applying good faith, at least within the context of contract negotiation, by characterizing good faith as inherently “repugnant to the adversarial position of the parties” and “unworkable in practice”.
Given such resistance, English common law had traditionally only recognized good faith as an operative principle concerning a limited class of contracts, viz. insurance, employment, and partnership agreements. Nonetheless, good faith, being the antithesis of commercial immorality, was never far away from the minds of the English judges – for example, Lord Bingham himself, subsequent to Interfoto Picture, recognized that “[g]ood faith … is not an artificial or technical concept; nor, since Lord Mansfield was its champion, is it a concept wholly unfamiliar to British lawyers” at §17 in Director General of Fair Trading v First National Bank  UKHL 52 and also observed that “[p]arties entering into a commercial contract … will assume the honesty and good faith of the other; absent such an assumption they would not deal” at §15 in HIH Casualty and General Insurance v Chase Manhattan Bank  UKHL 6. Lord Hoffmann at §68 in HIH further expressed that “[p]arties contract with one another in the expectation of honest dealing …. [I]t goes without saying that underlying the contractual arrangements of the parties there will be a common assumption that the persons involved will behave honestly”.
In other words, instead of treating contracting parties in general as adversaries locked in unrelated transactions and limiting the application of good faith to only a rigidly defined class of agreements, the Australian case law indicated the willingness to imply good faith in those situations requiring contracting parties to be treated as deriving mutual and possibly continuing benefits in a relational context. In allowing a litigant to advance a contractual argument based on good faith, Thomas J of the New Zealand Court of Appeal in Bobux Marketing v Raynor Marketing  1 NZLR 506, concerning a distributor agreement, put the matter as follows at §: “[t]he fundamental flaw of the classical conception of contract law [reflecting ‘laissez faire economics’ as his Lordship had indicated previously at §] was its empirical premise that most contracts are discrete. That premise is false. Most commercial contracts are in fact relational contracts. The great bulk of contracts either create or reflect relationships”.
The business course of dealings behind Yam Seng v International Trade Corporation  EWHC 111 represented another manifestation of exactly this type of relational arrangement, which presented Leggatt J with the opportunity to reassess the place of good faith in English contract law. In that case, the parties’ agreement conferred Yam Seng with, inter alia, the distribution rights of Manchester United-branded fragrances at Singapore airport duty free shops, whereas International Trade Corporation (ITC) separately contracted with another entity concerning the distribution of the fragrances for the in-town market. In simple commercial terms, and in order for the bargain between Yam Seng and ITC to work, ITC would have to maintain the in-town price to be at least the duty free price plus the duty. However, and notwithstanding the vital importance of such pricing floor, the parties did not expressly incorporate this restriction in their written contract. The evidence subsequently revealed that although ITC had, on multiple occasions, sought to reassure Yam Seng that the in-town price was maintained above the duty free price, Yam Seng eventually found out that the in-town price had undercut the duty free price by approximately 20%.
In England, Yam Seng has gained traction across different divisions of the High Court, viz. Bristol Groundschool v Intelligent Data Capture  EWHC 2145 (Ch) concerning a joint venture involving content supply and production of pilot training manuals, Emirates Trading Agency v Prime Mineral Exports  EWHC 2104 (Comm), in which Teare J at §51 praised the analysis of Leggatt J as “masterly”, D&G Cars v Essex Police  EWHC 226 (QB) concerning a “relational contract par excellence” according to Dove J at §176 that conferred the right on the claimant to assist the police in disposing of certain vehicles, National Private Air Transport Services v Windrose Aviation  EWHC 2144 (Comm), in which Blair J (who recently sat as a Deputy High Court Judge of Hong Kong) at §135 affirmed the analysis of Leggatt J although without finding such duty of good faith in connection with an aircraft lease, and Sheikh Tahnoon v Kent  EWHC 333 (Comm) concerning a joint venture agreement that required additional tranches of funds for hotel acquisitions and operations.
In Singapore, the Court of Appeal at §44 in The One Suites v Pacific Motor Credit  SGCA 21 regarded Yam Seng as having adopted the same reasoning as exhibited in the earlier Singapore case of Ng Giap Hon v Westcomb Securities  3 SLR(R) 518. Finally, and in Hong Kong, Lisa Wong J of the Court of First Instance recently took notice of the possibility of an implied duty of good faith within the context of another distributor agreement involving luxury watches at §94 and footnote v in Golden Miles Group Holdings v Jacob & Co  HKCFI 441, although her Ladyship, given the interlocutory nature of the application, did not have to pronounce a definitive view on the applicability of Yam Seng in Hong Kong.
Peter is a solicitor practicing in general civil litigation. Peter is a former member of the Hong Kong Bar Association and holds his doctorate in Economics from the University of Texas at Austin. He is also active in Freshfields’ pro bono matters in relation to asylum and LGBT issues.

References: §45
 §1
 §205
 EWCA 
 §17
 UKHL 
 §15
 UKHL 
 §68
 §51
 §176
 §135
 §44
 §94