N.B. While every effort is made to ensure the accuracy of the information given in these notes,
they are not intended to be relied upon as legal advice and no liability will be accepted in relation to such reliance.
Bristol Law Society’s Dispute Resolution Conference, 12th June 2013
Good faith in commercial relations – a topical and developing subject
Or: Big and cunning beasts free to roam the market place?
Guy Adams, St John’s Chambers
1.
By the end of the 20th Century Victorian ideas of a free market became associated
with the law of the jungle, where fraudsters and monopolists roamed devouring
lesser beasts and innocent members of the public. The only way to constrain such
activities was for government hunters to set forth armed with reams of regulations
to capture and tie down the strong who could otherwise be expected to abuse their
powers. After all it was Alfred Lord Tennyson in 1850 who asked whether it was
not in man's nature to be "red in tooth and claw"1.
2.
The Victorian judges were painted by University lecturers as the arch upholders of
such a laissez faire approach. It is my theme today that such a picture is something
of a misrepresentation of the Victorian judges, rather it was the commercial judges
of the 1930s, faced by the unprecedented financial circumstances, and perhaps
fearing financial disaster for financiers and other pillars of the economy, that tended
towards a harsher line. And thereafter leaving it to Parliament to attempt to reign
in the excesses of the markets.
3.
Faced with yet another financial disaster, caused, at least in part by a failure of such
legal regulation, these issues are back in the fore. Not least because of the almost
1
In Memoriam A. H. H. Canto 56
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they are not intended to be relied upon as legal advice and no liability will be accepted in relation to such reliance.
exponential increase in standard and printed terms that it would be wholly
impracticable for us all to read, digest and if necessary take advice upon. Who has
not clicked "Accept" on an internet site without reading all or any of the terms?
4.
Last year at the Bristol Law Society Property Conference, I finished my paper on
section 2 Law of Property (Miscellaneous Provisions) Act 19892 with one of the most
famous and fundamental quotations of principle in the entire body of common law
(not equity), namely what Lord Mansfield said at the end of the famous case of
Carter v Boehm (1766) 3 Burr 1905:
"What has often been said of the Statute of Frauds may, with more
propriety, be applied to every rule of law, drawn from principles of natural
equity, to prevent fraud— 'That it should never be so turned, construed, or
used, as to protect, or be a means of fraud.'"
5.
For the purposes of this talk it is worth setting out a somewhat longer passage from
earlier in his judgment:
"First, insurance is a contract upon speculation. The special facts upon which
the contingent chance is to be computed lie most commonly in the
knowledge of the insured only. The underwriter trusts to his representation,
and proceeds upon confidence that he does not keep back any circumstance
in his knowledge to mislead the underwriter into a belief that the
circumstance does not exist, and to induce him to estimate the risk as if it did
not exist. Keeping back such circumstance is a fraud, and, therefore, the
policy is void. Although the suppression should happen through mistake
without any fraudulent intention, yet still the underwriter is deceived, and
the policy is void, because the risk run is really different from the risk
understood and intended to be run at the time of the agreement. The policy
would equally be void, against the underwriter if he concealed, as if he
2
Proprietary estoppel and contracts for the sale of land - available for download at
www.stjohnschambers.co.uk
Page 2 of 16
N.B. While every effort is made to ensure the accuracy of the information given in these notes,
they are not intended to be relied upon as legal advice and no liability will be accepted in relation to such reliance.
insured a ship on her voyage which he privately knew to be arrived, and an
action would lie to recover the premium.
The governing principle is applicable to all contracts and dealings. Good faith
forbids either party, by concealing what he privately knows, to draw the
other into a bargain from his ignorance of that fact and his believing the
contrary. But either party may be innocently silent, as to grounds open to
both, to exercise their judgment upon. Aliud est celare; aliud, tacere; neque
enim id est celare quiequid reticeas; sed cum quod tuscias, id ignorare
emolumenti tui causa velis eos, quorum intersit id scire: CICERO, DE OFF, lib
3, c 12, 13. This definition of concealment, restrained to the efficient motives
and precise subject of any contract, will generally hold to make it void in
favour of the party misled by his ignorance of the thing concealed.
There are many matters as to which the insured may be innocently silent. He
need not mention what the underwriter knows: Scientia utrinque par pares
contrahentes facit. An underwriter cannot insist that the policy is void,
because the insured did not tell him what he actually knew, what way soever
be came to the knowledge. The insured need not mention what the
underwriter ought to know, what he takes upon himself the knowledge of
or what he waives being informed of. The underwriter needs not be told
what lessens the risk agreed and understood to be run by the express terms
of the policy. He needs not to be told general topics of speculation. The
underwriter is bound to know every cause which may occasion natural perils,
as the difficulty of the voyage - the kind of seasons - the probability of
lightning, hurricanes, earthquakes, etc. He is bound to know every cause
which may occasion political perils from the ruptures of States from war and
the various operations of it. He is bound to know the probability of safety,
from the continuance or return of peace, from the imbecility of the enemy,
through the weakness of their counsels, or their want of strength, and so on.
If an underwriter insures private ships of war, by sea and on shore, from
Page 3 of 16
N.B. While every effort is made to ensure the accuracy of the information given in these notes,
they are not intended to be relied upon as legal advice and no liability will be accepted in relation to such reliance.
ports to ports, and places to places, anywhere, he needs not be told the
secret enterprises they are destined upon, because he knows some
expedition must be in view; and, from the nature of his contract, without
being told, he waives the information. If he insures for three years, he needs
not be told any circumstance to show it may be over in two, or if he insures
a voyage, with liberty of deviation he needs not be told what tends to show
there will be no deviation. Men argue differently from natural phenomena
and political appearances. They have different capacities, different degrees of
knowledge, and different intelligence. But the means of information and
judging are open to both. Each professes to act from his own skill and
sagacity, and, therefore, neither needs to communicate to the other.
The reason of the rule which obliges parties to disclose is to prevent fraud
and to encourage good faith. It is adapted to such facts as vary the nature of
the contract which one privately knows, and the other is ignorant of and has
no reason to suspect. The question, therefore, must always be whether there
was, under all the circumstances at the time the policy was underwritten, a
fair representation or a concealment, fraudulent if designed, or, though not
designed, varying materially the object of the policy, and changing the risk
understood to be run." (my underlining)
6.
Lord Mansfield expressed these principles in universal terms, but the conventional
modern view is that the principle of "utmost good faith" has been confined to
certain categories of contracts such as insurance contracts - see per Lord Hobhouse
in Manifest Shipping Co Ltd v. Uni-Polaris Insurance Co Ltd [2003] 1 AC 469 at
para 45: "The commercial and mercantile law of England developed in a different
direction preferring the benefits of simplicity and certainty which flow from
requiring those engaging in commerce to look after their own interests."
(my
underlining). For the proposition that the universal application of the principles had
not survived, Lord Hobhouse cited Lord Atkin in Bell v Lever Bros Ltd [1932] AC 161
Page 4 of 16
N.B. While every effort is made to ensure the accuracy of the information given in these notes,
they are not intended to be relied upon as legal advice and no liability will be accepted in relation to such reliance.
at 227. Bell v Lever Bros is a difficult case, but even there Lord Atkin, did not
express his view in absolute terms:
"Ordinarily the failure to disclose a material fact which might influence the
mind of a prudent contractor does not give the right to avoid the contract.
The principle of caveat emptor applies outside contracts of sale. There are
certain contracts expressed by the law to be contracts of the utmost good
faith, where material facts must be disclosed; if not, the contract is voidable.
Apart from special fiduciary relationships, contracts for partnership and
contracts of insurance are the leading instances. In such cases the duty does
not arise out of contract; the duty of a person proposing an insurance arises
before a contract is made, so of an intending partner." (my underlining)
Note the echo of trust and confidence, which is the mark of a fiduciary relationship,
mentioned by Lord Mansfield in Carter v Boehm, an importation from equity into
law.
7.
Lord Hobhouse in Manifest Shipping Co Ltd v. Uni-Polaris Insurance Co Ltd did
however point out that what Lord Mansfield had in mind in Carter v Boehm was not
actual fraud, as known to the common law, but a form of mistake of which the
other party was not allowed to take advantage - para 42. He did however also
draw attention to two passages from later cases.
Firstly per Lord Mansfield in
Pawson v Watson (1778) 2 Cowp 785 to emphasise that this was a rule of law:
"But as, by the law of merchants, all dealings must be fair and honest, fraud infects
and vitiates every mercantile contract.
Therefore, if there is fraud in a
representation, it will avoid the policy, as a fraud, but not as part of the
agreement." (my underlining) and secondly from the judgment of Lord Cockburn CJ
in Bates v Hewitt (1867) LR 2 QB 595 at 606-7:
"If we were to sanction such [non-disclosure], especially in these days, when
parties frequently forget the old rules of mercantile faith and honour which
used to distinguish this country from any other, we should be lending
Page 5 of 16
N.B. While every effort is made to ensure the accuracy of the information given in these notes,
they are not intended to be relied upon as legal advice and no liability will be accepted in relation to such reliance.
ourselves to innovations of a dangerous and monstrous character, which I
think we ought not to do."
8.
In terms of pre-contract dealings we are therefore dealing, at common law, with
the limits of the doctrine of caveat emptor, namely the point at which a party
comes under a legal duty of candour to disclose a matter to the other party in order
to protect their, not his, interests. More fundamentally we are dealing with how a
court of law determines if parties have entered into contractual relations at all and,
if so, the terms of such contract. As to the latter, a party who has entered into a
contract under a misapprehension may of course not wish to get out of the
contract, but rather to enforce it according to his understanding.
9.
In the very recent Supreme Court case of VTB Capital plc v Nutritek International
Corp and others [2013] UKSC 5 Lord Neuberger reminded us of "one of the most
fundamental principles on which contractual liabilities and rights are based, namely
what an objective reasonable observer would believe was the effect of what the
parties to the contract, or alleged contract, communicated to each other by words
and actions, as assessed in their context" - at para 140. He referred by way of
example to the very well known case of Smith v Hughes (1871) LR 6 QB 597 at 607.
There Blackburn J, after agreeing with Cockburn CJ, that a vendor was not
generally under any legal duty to disabuse a purchaser as to a mistake he had made
as to a quality of the thing he was purchasing, unless the vendor had done
something to encourage such mistake, pointed out that in many instances a
contract effectively arises by way of estoppel and not because the parties are ad
idem:
"I apprehend that if one of the parties intends to make a contract on one set
of terms, and the other intends to make a contract on another set of terms,
or, as it is sometimes expressed, if the parties are not ad idem, there is no
contract, unless the circumstances are such as to preclude one of the parties
from denying that he has agreed to the terms of the other. The rule of law is
Page 6 of 16
N.B. While every effort is made to ensure the accuracy of the information given in these notes,
they are not intended to be relied upon as legal advice and no liability will be accepted in relation to such reliance.
that stated in Freeman v. Cooke (1). If, whatever a man's real intention may
be, he so conducts himself that a reasonable man would believe that he was
assenting to the terms proposed by the other party, and that other party
upon that belief enters into the contract with him, the man thus conducting
himself would be equally bound as if he had intended to agree to the other
party's terms."
It is probably this passage that Lord Neuberger had particularly in mind.
It is
consistent with the authorities on ostensible authority, which was recently
confirmed by the Privy Council to be an estoppel principle - Kelly v Fraser [2012] 3
WLR 1008 at §15 - and which applies unless the contracting party is on inquiry due
to circumstances giving rise to suspicion as to the extent of the agents authority
Houghton & Co v Nothard [1927] 1 KB 246 at 260-261, Hopkins v TL Dallas Group
Ltd and another [2005] 1 BCLC 543 at para 94.
10.
As to when a party is under a duty to speak out if the other party is acting under a
mistake, Cockburn CJ approved at page 604 the statement in Story on Contracts
that "mere silence as to anything which the other party might by proper diligence
have discovered, and which is open to his examination, is not fraudulent, unless a
special trust or confidence exist between the parties, or be implied from the
circumstances of the case" (my underlining). He then went on to give examples of
when such trust and confidence might arise:
"If, indeed, the buyer, instead of acting on his own opinion, had asked the
question whether the oats were old or new, or had said anything which
intimated his understanding that the seller was selling the oats as old oats,
the case would have been wholly different; or even if he had said anything
which shewed that he was not acting on his own inspection and judgment,
but assumed as the foundation of the contract that the oats were old, the
silence of the seller, as a means of misleading him, might have amounted to
Page 7 of 16
N.B. While every effort is made to ensure the accuracy of the information given in these notes,
they are not intended to be relied upon as legal advice and no liability will be accepted in relation to such reliance.
a fraudulent concealment, such as would have entitled the buyer to avoid
the contract."
11.
Modern authorities have applied the test laid down by Lord Wilberforce in his
dissenting speech in Moorgate Mercantile Co Ltd v Twitchings [1977] AC 890 at
903 namely that "the duty necessary to found an estoppel by silence or
acquiescence arises where a reasonable man would expect the person against
whom the estoppel is raised, acting honestly and responsibly, to bring the true facts
to the attention of the other party known by him to be under a mistake as to their
respective rights and obligations" - see in particular ING Bank v Ros Roca SA
[2012] 1 WLR 472, where Rix LJ, before affirming the test in Moorgate Mercantile
Co Ltd v Twitchings, pointed out at para 92:
"Outside the insurance context, there is no obligation in general to bring
difficulties and defects to the attention of a contract partner or prospective
contract partner. Caveat emptor reflects a basic facet of English commercial
law (the growth of consumer law has been moving in a different direction).
Nor is there any general notion, as there is in the civil law, of a duty of good
faith in commercial affairs, however much individual concepts of English
common law, such as that of the reasonable man, and of waiver and
estoppel itself, may be said to reflect such a notion. In such circumstances,
silence is golden, for where there is no obligation to speak, silence gives no
hostages to fortune. If, however, the contractor speaks, then he may have to
live up to what he says; so also where what is unsaid is sufficiently closely
connected with what he has said to render what has been left unsaid
misleading." (my underlining)
12.
The most common example of when a person will be estopped from denying he
agreed the terms of a contract, even if ignorant of them, is when a party signs a
document (or nowadays clicks the accept button) in which the terms of the
proposed contract are set out in writing knowing that it is intended to have legal
Page 8 of 16
N.B. While every effort is made to ensure the accuracy of the information given in these notes,
they are not intended to be relied upon as legal advice and no liability will be accepted in relation to such reliance.
effect, thereby representing to the other contracting party that he agrees the terms.
Indeed, at least in commercial cases3, it has been raised into an almost immutable
rule - per Moore-Bick LJ in Peekay v ANZB [2006] 2 Lloyds' LR 511 at 520: "It is an
important principle of English law which underpins the whole of commercial life;
any erosion of it would have serious repercussions far beyond the business
community." and referring to L'Estrange v Graucob [1934] 2 KB 394 as the "classic
example".
13.
In that case AT Denning appeared for the vending machine company, which
supplied a cigarette vending machine purchased on an instalment contract by the
owner of a café.
She signed a form containing a deal of small print without
knowing the contents in the presence of the travelling salesman, who had called on
her at her premises. The judge at first instance had found that in the circumstances
the company could not rely upon the clause excluding all warranties and gave
judgment for damages for breach of an implied warranty of fitness for purpose.
The judgment was overturned on appeal. Scrutton LJ gave the leading judgment4
and having cited Parker v South Eastern Ry. Co (1877) 2 CPD 416 for the
proposition that "In an ordinary case, where an action is brought on a written
agreement which is singed by the defendant, the agreement is proved by proving
his signature, and, in the absence of fraud, it is wholly immaterial that he has not
read the agreement and does not know of its content" held that "When a
document containing contractual terms is signed, then, in the absence of fraud, or, I
will add, misrepresentation, the party signing it is bound, and it is wholly immaterial
whether he has read the document or not".
Per Lord Denning MR in Jaques v Lloyd D George & Partners [1968] 1 WLR 625 at
14.
630G "I well remember Scrutton LJ in L'Estrange v F Graucob Ltd saying with
emphasis: "in the absence of fraud . . . . or, I will add, misrepresentation, the party
3
But see the more flexible approach adopted by the Supreme Court in the recent employment case
Autoclenz v. Belcher [2011] ICR 1157
4
Per Maugham LJ "I regret the decision to which I have come, but I am bound by legal rules and
cannot decide the case on other considerations."
Page 9 of 16
N.B. While every effort is made to ensure the accuracy of the information given in these notes,
they are not intended to be relied upon as legal advice and no liability will be accepted in relation to such reliance.
signing it is bound." Indeed Scrutton LJ expressly noted that no such case had been
pursued by the claimant.
15.
In Jaques Lord Denning held that, as the terms of the agreement were
misrepresented, the defendant, company sales agent, which had explained the
terms orally, could not rely on the unusual printed terms as to when payment was
due. He followed his own judgement Dennis Reed ltd v Goody [1950] 2 KB 277,
where he held an estate agent could not rely on unusual written terms when he
had represented that signing them was a "merely a routine matter" and held the
representation in that case that "If we find a suitable purchaser and the deal goes
through, you pay £250" was equivalent to a representation that usual terms apply.
16.
Such an approach is consistent with what Baggallay LJ said in Parker v South Eastern
Ry. Co at 428:
"The truth is, people are content to take these things on trust. They know
that there is a form which is always used - they are satisfied it is not
unreasonable, because people do not usually put unreasonable terms into
their contracts. If they did, then dealing would soon be stopped. Besides,
unreasonable practices would be known. The very fact of not looking at the
paper shews that this confidence exists."
17.
Other cases where a similar approach has been taken to estop a party relying on a
particular written term are Curtis v Chemical Cleaning and Dyeing Co [1951] 1 KB
805, which was recently explained in AXA Sun Life Services plc v Campbell Martin
Ltd [2011] EWCA Civ 133, [2012] 1 All ER (Comm) 268 as being a case where as a
matter of construction the oral representation trumped the written term so that it
never became part of the contract. Such an approach is consistent with the basic
rule referred to by Lord Neuberger that the task of the court is to determine what
an objective observer would consider had been agreed between the parties. In
other words the terms of the contract were drawn from not only the writing but
also the parties oral exchanges.
It perhaps matters not whether the cases are
Page 10 of 16
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they are not intended to be relied upon as legal advice and no liability will be accepted in relation to such reliance.
analysed as their being a strict legal position with an overlying estoppel or a
collateral warranty as the result should be the same.
18.
Lloyds Bank PLC v Waterhouse [1993] 2 FLR 97 is another case where per Woolf LJ
held a bank could not rely upon the terms of a guarantee which it had
misrepresented and see also the recent case of Thinc Group v Armstrong and
another [2012] EWCA Civ 1227, where it was held at first instance that that the
oral explanation of the agreement amounted to a contractual warranty that
overrode the express terms of the agreement. In the Court of Appeal Rix LJ held,
following AXA Sun Life Services plc v Campbell Martin Ltd, that it was ultimately a
question of construction of the contract taking account of both the oral exchanges
and the writing, so that on the true construction the express written term could not
be relied upon. Thinc Group was a firm of financial advisers that had effectively
paid a capital sum for the goodwill in the defendants' connection with their clients,
so long as they stayed for 3 years, which they represented was the only condition
for the payment. They could not in the circumstances terminate the relationship
without cause before the expiry of the 3 years pursuant to an express term of the
agreement so as to avoid payment.
19.
In Peekay v ANZB on the other hand it was found that, though the nature of the
complex derivative financial product was misrepresented by the Defendant, that
was not causative of the Defendant's purchase. The reasoning in the Court of
Appeal, differing from the judge's conclusion as a matter of inference, was that he,
as an experienced investor had been provided with documents which would have
alerted him to the fact, if he had read them, that he was buying something
different to what had been represented. He therefore signed the documentation,
not because he was relying upon the earlier representations, but simply because his
own assumption was that they were the correct documents, which broke the chain
of causation. Another way that it might have been put, perhaps, was that there
was no relationship of trust and confidence between the claimant and the
defendant, which was not a financial adviser, or, perhaps, he was estopped by his
Page 11 of 16
N.B. While every effort is made to ensure the accuracy of the information given in these notes,
they are not intended to be relied upon as legal advice and no liability will be accepted in relation to such reliance.
own negligent failure to speak out from denying the contract. The documents he
did sign included a representation that he had made his own independent
assessment of whether or not to enter into the transaction.
20.
Turning to the situation where there is no directly relevant representation made, it is
well established that silence in circumstances where a duty to speak arises is
equivalent to a representation by conduct, which brings us back to the limits of the
caveat emptor principle.
Interfoto Library Ltd v. Stiletto Ltd [1989] QB 433 was a case of an extremely
21.
onerous term contained in small print of standard conditions, but without there
being any signed contract. Dillon LJ considered that it was "in my judgment, a
logical development of the common law into modern conditions that it should be
held . . . that, if one condition in a set of printed conditions is particularly onerous
or unusual, the party seeking to enforce it must show that that particular condition
was fairly brought to the attention of the other party" - at 438Hto 439A. He held
that as the condition in that case had not been then it did not form part of the
contract at all.
22.
Bingham LJ pointed out that in "many civil law systems, and perhaps most legal
systems outside the common law world, the law of obligations recognises and
enforces an overriding principle that in making and carrying out contracts parties
should act in good faith. This does not simply mean that they should not deceive
each other, a principle which any legal system must recognise; its effect is perhaps
most aptly conveyed by such metaphorical colloquialisms as 'playing fair,' 'coming
clean' or 'putting one's cards face upwards on the table' " - at 439D5. Further after
an examination of the leading authorities including Parker v South Eastern Ry. Co he
concluded that:
5
See also D-G of Fair Trading v. First National Bank plc [2002] 1 AC 481 at para 17, 494G and para
36 499H to 500A
Page 12 of 16
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they are not intended to be relied upon as legal advice and no liability will be accepted in relation to such reliance.
"The tendency of the English authorities has, I think, been to look at the
nature of the transaction in question and the character of the parties to it; to
consider what notice the party alleged to be bound was given of the
particular condition said to bind him; and to resolve whether in all the
circumstances it is fair to hold him bound by the condition in question. This
may yield a result not very different from the civil law principle of good faith,
at any rate so far as the formation of the contract is concerned." (my
underlining) - at 445B-C
That "to the extent that the conditions so displayed were common form or usual
terms regularly encountered in this business, I do not think the defendants could
successfully contend that they were not incorporated into the contract" but that the
defendants were "to be relieved [of liability] because the defendants did not do
what was necessary to draw this unreasonable and extortionate clause fairly to their
attention." - at 445 E and G.
23.
He perhaps therefore left something of a gap between "usual terms regularly
encountered", which would be included and the sort of "unreasonable and
extortionate clause" as in this case which needed attention drawing to it.
He
further did not make clear whether he came to the conclusion as a question of
construction or estoppel. Though for the reasons already given it may not matter
much6
24.
It has to be said that the courts have shown very considerable resistance to applying
these principles, treating Interfoto as establishing a free standing principle, and
though the question of whether they even apply to contracts in writing has been
6
Whether the court should conclude that it is honest or fair for one party to maintain a particular
construction given the particular circumstances of the other objectively or whether it is strictly a matter
for the court of equity to estop one party from relying on a particular interpretation is a vexed question
- see the differing interpretations of Scott V-C’s judgment in the Court of Appeal in BCCI v. Ali at
paras 30 to 34 in the House of Lords. Contrast per Lord Bingham at paragraphs 19-20, Lord Nicholls
at para 32, who decided the case as a matter of reasonable construction at para 34, and Lord
Hoffman at paras 48- 49.
Page 13 of 16
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they are not intended to be relied upon as legal advice and no liability will be accepted in relation to such reliance.
left open, it seems to only be contemplated in the most extreme circumstances - see
e.g. per HHJ Behrens sitting as a High Court Judge in One World (GB) Ltd v Elite
Mobile Ltd [2012] EWHC 3706 (QB) citing with approval from the review of the
authorities in Do-Buy 925 Ltd v National Westminster [2010] EWHC 2862 and Kaye
v Nu Skin UK Ltd [2010] 2 All ER (Comm) 832, [2011] 1 Lloyd's Rep 40; [2012]
EWCA Civ 1069.
25.
The hostility towards the principle appears to principally stem from the perceived
lack of certainty that might accompany a greater application of the principle. There
is however an obvious danger in failing to acknowledge a reality that people for the
most part conduct their business on trust, even in the commercial world, rather
than approaching all transactions with suspicion and at arm's length. That is that
such an approach might encourage the powerful or cunning to slip unusual or
unreasonable terms into printed conditions, resulting in a break down in the
necessary trust in society that makes such dealings possible and an increasing
necessity for transactions to be regulated. It also tends to give an advantage to the
dominant party.
26.
In any event considerable inroads have already been made into this area by
legislation and regulation including UCTA and the Unfair Terms in Consumer
Contracts Regulations among many others.
27.
One obvious answer to the certainty issue is that any person can achieve certainty
by dealing openly and on reasonable terms, and, if necessary, ensuring that his
counterparty knows what they are agreeing to and has had the opportunity to take
any necessary advice.
28.
It does however appear that the tide may be on the turn. In an important judgment
in Yam Seng Pte Ltd v. International Trade Corporation Ltd [2013] EWHC 111
Legatt J has conducted an extensive review of the law in relation to the implication
of a duty of good faith in the execution of existing contractual relations.
He
observed that there did not appear to be any case in which the issue of whether
Page 14 of 16
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they are not intended to be relied upon as legal advice and no liability will be accepted in relation to such reliance.
English law should recognise a general duty to perform contracts in good faith had
been fully considered - para [120].
Further that the reasons for English law's
hostility to duties of good faith appeared to be threefold: firstly the reason cited by
Bingham LJ in Interfoto that the law tended to develop incrementally; secondly that
the law is said to embody an ethos of individualism, whereby parties are free to
pursue their own self-interest not only in negotiating but in performing contracts;
and thirdly the fear of creating too much uncertainty - para [123]. English law was
however becoming increasingly isolated in its refusal to recognise a general duty of
good faith, not only as against civil law systems, but also other common law
jurisdictions including Scotland - paras [124] - [130]. That there was no objection in
principle to the implication of such a term and; that the House of Lords had already
recognised that commerce takes place against a background expectation of
honesty: per Lord Bingham in HIH Casualty v Chase Manhattan Bank [2003] 1 All
ER (Comm) 349 at para 15 "Parties entering not a commercial contract . . . will
assume the honesty and good faith of the other, absent such an assumption they
would not deal" (echoing the language of Baggallay LJ said in Parker v South
Eastern Ry. Co in 1877) ; the extent of such obligation would no doubt depend on
the circumstances and the nature of the relationship between the parties,
particularly if the relationship was one of mutual trust and confidence; that good
faith was not limited to honesty, but would include other recognised standards of
commercial dealing that would not necessarily be categorised as dishonest but
"improper" "commercially unacceptable" or "unconscionable"; that such standard
would be objective in a similar sense to the approach to dishonesty outlined by Lord
Nicholls in Royal Brunei Airlines v Tan [1995] 2 AC 378 at pp 389-390 and could be
established by a process of objective construction - paras [131] -[144].
29.
Seen in this way there was nothing novel in his view, which was reflected in a
number of lines of authority including, he suggests, the Interfoto case - para 145.
30.
In further observations that the fear that recognising a duty of good faith would
generate excessive uncertainty was unjustified - para [152] and respectfully that
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N.B. While every effort is made to ensure the accuracy of the information given in these notes,
they are not intended to be relied upon as legal advice and no liability will be accepted in relation to such reliance.
traditional English hostility towards a doctrine of good faith (in the performance of
contracts) was misplaced - para [153].
31.
Plainly these observations are not directly referable to pre-contactual negotiations,
but much of the logic applies equally to such situation.
32.
Taking in particular the second reason given for English law's traditional hostility;
that parties are free to pursue their own self-interest. The important word is "free",
which is used in the same sense as in free market. A party is only free to pursue his
own interests if he is not being taken unfair advantage of by another. A truly free
market, as indeed understood by the Victorian judges, is one where parties enter
into consensual transactions of their own free will, or in continental language
without constraint. If a party is trusted to effectively write the contract for both
parties, then in effect he exercises a power on behalf of both parties, he also
exercises a power that is open to abuse. Such abuse has traditionally not been
tolerated by the courts, indeed not to do so per Lord Cockburn CJ in 1867 would
damage this country's reputation for fair dealing and lead "to innovations of a
dangerous and monstrous character".
Guy Adams
12th June 2013
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