GOOD FAITH IN THE PERFORMANCE OF COMMERCIAL CONTRACTS REVISITED

• Date: 01 December 2014
• Citation: (2014) 26 SAcLJ 111
• Author: TER Kah Leng LLM (Bristol); Barrister (Lincoln's Inn), Advocate and Solicitor (Singapore); Associate Professor, NUS Business School, National University of Singapore.
• Published date: 01 December 2014

Singapore contract law does not recognise a general doctrine of good faith. Its existence and scope have been a matter of great controversy, igniting a bewildering array of authorities and academic debates throughout the common law world. This paper revisits the controversy and explores the possibility of implying an obligation of good faith into the performance of commercial contracts in the Singapore context, in light of recent significant developments in other common law jurisdictions where the doctrine has attracted recognition.

I. Good Faith In Common Law Jurisdictions

1 The doctrine of good faith has its proponents as well as opponents from among the judiciary and academia. Scholarly papers and case commentaries on this contentious issue have sprouted around the Commonwealth. A survey of major common law countries, apart from the US where good faith is established, reveals that although the doctrine is not lacking in supporters, there is yet a firm endorsement of its general application.

2 This article seeks to discuss the implication of good faith in the performance of a concluded contract. The issue of whether there is a duty of good faith in the context of pre-contract negotiations1 goes beyond the scope of this article.

A. Singapore

3 The current position is that an obligation of good faith performance is not part of Singapore contract law. This was decided by

the Court of Appeal in Ng Giap Hon v Westcomb Securities Pte Ltd2 (“Ng Giap Hon”). The case concerned an agency agreement where the appellant was a remisier with the respondent stockbroking firm. He sought to recover payment of commission due to him in respect of placement shares allocated to S and A, two of the respondent's customers. The appellant claimed that S and A were in fact his customers by reason of the fact that S had opened a trading account with the respondent through him, while A would have opened an account through him had the respondent not “hijacked” A as its own customer. One of the issues raised on appeal was whether there was an implied duty of good faith between the appellant and the respondent as agent and principal. The court found that the respondent was not legally bound to allot the placement shares through the appellant even though S had opened a trading account with the respondent through the appellant. In the case of A, the placement shares he subscribed for did not go through the respondent but through another company. The appellant was therefore not entitled to the commission that he claimed was due to him. Andrew Phang Boon Leong JA (delivering the judgment of the court) dealt with the issue of implied terms at some length. He determined that a duty of good faith fell to be considered under the broader category of terms implied by law, a category firmly entrenched in local contract law. He went on to distinguish between terms implied by law and terms implied in fact. A term implied by law sets a precedent for all future contracts of that particular type, whereas a term implied in fact does not create any precedent as the court is only concerned with arriving at a just and fair result in the particular context of that case. For this reason, Phang JA advised that the court should be more careful in implying terms as a matter of law than in implying terms in fact. As to the applicable tests for the latter, the court reiterated the celebrated “business efficacy”3 and “officious bystander”4 tests as being firmly established in Singapore contract law. Although the relationship between the two tests is not as clear in Singapore as in English law, the court preferred to view them as complementary5 rather than as alternative tests, with the “officious bystander” test being the practical mode by which the “business efficacy” test is implemented. The court thus concluded, having regard to the relevant historical and judicial background and the general logic involved.

4 Returning to the present issue, the court held that good faith could not be implied as a matter of law into the agency agreement for the following reasons: (a) it would undermine the concept of sanctity of contract, unless required in exceptional circumstances and in accordance with legal principles; (b) it tends to generate some uncertainty with the use of broader policy considerations as the criteria; (c) it sets a precedent for implying the same term in all future contracts of the same type; (d) it involves the doctrine of good faith which is “a fledgling doctrine” in contract law in England and other common law jurisdictions, and definitely in Singapore;6 (e) the doctrine needs clarification as to its meaning and application in view of the differing academic opinions; (f) the doctrine is far from settled in view of the vigorous arguments against it;7 (g) the case law is apparently in a “state of flux”, notably in the US, Australia and Canada; and (h) on the basis of leading academic opinion8 that good faith is inherent in all aspects of contract law, there is no reason for the court to imply good faith into a contract.

5 For these reasons, the court concluded that much clarification is required, even on a theoretical level and until “the theoretical foundations [and] structure of this doctrine are settled”, it would be inadvisable to apply it in the practical sphere.9 This was the strongest reason for the Court of Appeal's reluctance to imply an obligation of good faith in contractual performance under Singapore law.

B. England

6 The Singapore approach is consistent with English contract law which does not recognise an overriding legal principle of good faith of general application. However, a notable shift from this position was taken in Yam Seng Pte Ltd v International Trade Corp Ltd10 (“Yam Seng”) where Leggatt J implied a duty of good faith into a distribution agreement and suggested that such a duty could exist in English contract law in certain circumstances. This novel approach breaks new ground. Yam Seng is notably the first English case to consider and review contractual good faith performance in some depth in the context of a long-term commercial contract. The plaintiff in this case was a company incorporated in Singapore. It entered into a distribution agreement with

the defendant English company under which the plaintiff was granted exclusive rights to distribute “Manchester United” branded products in specific territories. At the start of negotiations, the defendant misrepresented to the plaintiff that it already had a licence in respect of the products which, in fact, was only obtained at a later stage. Fifteen months into the contract, the plaintiff terminated the agreement on the basis of the defendant's repudiatory breaches in: (a) failing to ship orders promptly; (b) failing to make products available; (c) undercutting agreed prices; and (d) providing false information knowing that the plaintiff would rely on it. The plaintiff pleaded, inter alia, that there was an implied term of the agreement that the parties would deal with each other in good faith. It sought damages for breach of contract and misrepresentation and succeeded in all its claims.

7 In considering the good faith issue, Leggatt J acknowledged that English contract law does not generally recognise good faith performance. However, such a duty is already established in certain contracts such as employment and partnership contracts or where the parties are in a fiduciary relationship such as trusteeship. He observed that while English law is not ready to recognise good faith as a duty implied by law, even as a default rule, in all commercial contracts, he saw no difficulty in implying such a duty in any contract based on the presumed intention of the parties using the established methodology for implying terms into contracts. The presumed intention will be assessed objectively on “whether in the particular context the conduct would be regarded as commercially unacceptable by reasonable and honest people”.11 Understood in this way, Leggatt J did not find anything novel or foreign to English law in introducing an implied duty of good faith. This is consonant with the theme running through English law that reasonable expectations must be protected12 and is a concept already reflected in well-established authority.13 In this case, the absence of standards of open and honest behaviour on the part of the defendant was contrary to the reasonable expectations of commercial morality in business transactions. Such an expectation of honesty is so obvious that “it goes without saying”.14 By holding that good faith could be implied based on the presumed intentions of the parties and the particular context of the case, Leggatt J was widening the scope for the implication of good faith in contract law. He did not analyse this as an obligation implied by law, unlike the Singapore Court of Appeal.

8 Referring to the reasons for the reluctance of English law to recognise a general duty of good faith, Leggatt J made the following observations:

(a) Since the content of the duty is heavily dependent on the factual matrix of the case and on the rules of construction, its recognition is entirely consistent with the case-by-case approach favoured by common law. Hence, it is unnecessary to adopt civil law methods in order to accommodate the principle.

(b) As the basis of the duty is the presumed intention of the parties and the meaning of their contract, implying a duty would not restrict the parties' freedom in pursuing their own interests.

(c) A further consequence of (b) is that it is open to the parties to modify the scope of the duty by express terms in the contract.

(d) The duty can be described as one of good faith and fair dealing. Fair dealing can be defined by the contract and by the standards which the parties reasonably presume without the court imposing its own views on the parties.

(e) The fact that English courts are less willing than other...