Certainty returns around the principle of acting in good faith

Posted 09/07/2013

Readers may be aware of some recent decisions in the High Court on the issue of whether there is some kind of inherent duty placed on parties to a contract to act in good faith towards each other. The case of Yam Seng Pte Limited v International Trade Corporation Limited was featured in a recent edition of the BFA Newsletter, for example. In this case the High Court held that there can be contracts in which the duty is implied and this led to speculation as to whether franchisors’ hands would be tied somewhat when first granting or renewing franchises, and on interpreting some provisions in the franchise agreement.

You will be pleased to hear that, despite this speculation, a later decision of the Court of Appeal in Mid Essex Hospital Services NHS Trust v Compass Group UK & Ireland Limited, has made it clear that there is no general doctrine of good faith in English contract law.

Slightly paradoxically, within the same paragraph in the judgment the Court says that ‘although a duty of good faith is implied by law as an incident of certain categories of contract’ and relies on the Yam Seng case to say this, the very next sentence reads: ‘if the parties wish to impose such a duty they must do so expressly’. These sentences appear to contradict each other, and as such it might be suggested that this is as close as the Court of Appeal will get to saying that they disagree with a decision on the law given by the High Court.

What all this means for franchisors is that there is no general duty to act in good faith amongst contracting parties, which is the traditional position; and that this duty has to be created expressly in the franchise agreement somehow. This is not to say, of course, that franchisors can now rush out and start to take a harder line with their network; but it does mean that the fears originally raised within the industry can subside.
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