Duty of good faith not implied in agency agreement
ACER INVESTMENT MANAGEMENT v MANSION GROUP [2014]
This case involved the question of whether a duty of good faith should be implied into a non-exclusive agency agreement. On the face of it an agency type agreement ought to be a prime candidate for a duty of good faith but in this particular case the Court said the answer was ‘no’. This provides additional evidence that the Courts are reluctant to imply such a duty unless certain characteristics exist.
Background:
An overriding duty of ‘good faith’ between contracting parties is a concept imposed by law in many continental European jurisdictions but not one which is generally implied under English law (at least not in those terms). The English Courts have accepted the application of ‘good faith’ principles in certain so-called ‘relational’ contracts which require a high degree of co-operation based on mutual trust and confidence, such as joint ventures and long-term distributorships.
Facts:
- Acer (A) is a distributor of financial products to independent financial advisers (IFAs). Mansion (M) sets up and sells funds, including a fund that invests in student accommodation (MSAF). The terms agreed between the parties under which A could sell shares in the MSAF were set out in a draft agreement, which it was held gave rise to a binding contract (Agreement). There was no exclusivity in the Agreement and A was free to market funds other than the MSAF to IFAs.
- A also entered into a distribution contract with Blackmore relating to a fund which to a degree competed with the MSAF in that it also invested in property. M made it clear to A that it did not want A to market the Blackmore fund to IFAs even though it had no contractual right to prevent this. A told M that it had not been marketing the Blackmore fund; a statement that was later revealed in Court to be a lie.
- M argued that there was an implied term in the Agreement that A owed it a duty of good faith and that this duty had been breached by A telling the lie.
Decision:
- M submitted two alternative arguments, namely that:
- A owed it ‘fiduciary’ obligations as an agent (ie there were circumstances which gave rise to a relationship of trust and confidence - similar to an employment relationship or partnership -including a duty of good faith); and/or
- the Agreement was a ‘relational’ contract as referred to in Yam Seng Pte v ITC [2013], in respect of which a duty of good faith was implied.
- The Court dismissed both arguments. The judge said that the submissions by M were, “not grounded in the commercial reality of the relationship between the parties, or in the express terms … agreed”.
- In relation to whether there was a ‘relational’ contract, the judge commented, “It is simply not that sort of agreement. It is nothing like an employer and employee agreement...[A was] just selling”.
- This reasoning was reinforced by the fact that:
- neither party saw this as an exclusive relationship;
- the sorts of obligations and commitments that would be expected in a ‘relational’ contract were absent - it was not a long-term relationship as either party could end it by giving a relatively short period of notice; and
- neither party was required to spend significant sums in reliance on the continuation of the relationship.
- In these circumstances the Court held that there was no scope for the implication of a term of good faith.
If there had been a duty of good faith, was it breached?
- The Court went on to consider the position if it was incorrect and a duty of good faith should have been implied. Was the duty breached by A’s dishonesty in telling the lie? If yes, was the breach of such a serious nature as to entitle M to terminate the Agreement under the common law (as opposed to under the express terms of the contract)?
- The Court said that the lie A told was “not even peripheral to the contract” but was about activities which A was perfectly entitled to carry out without breaching the terms of the Agreement. It was not an exclusive arrangement and hence A could market whichever funds it chose to IFAs - whether A was marketing the Blackmore fund or not was none of M's business. By way of contrast, in Yam Seng, there was a deliberate lie about a key aspect of the contractual relationship (the domestic retail price of products in Singapore, which was one of the territories covered by the parties' contract). Moreover, A’s lie was later corrected and M knew that A was marketing the Blackmore fund so it did not rely on the lie.
- This meant that even if the Court was wrong about not implying a requirement of good faith, there was no breach.
Points to note:
- The outcome of the case is perhaps somewhat surprising but very much dependent upon its own facts. After some sporadic enthusiasm the Courts now seem to have reverted to their traditional dislike of implying overriding duties of good faith. Relevant to the characterisation of a ‘relational’ contract seem to be whether the relationship is exclusive and/or of a long-term nature, what level of ongoing cooperation is required between the parties and what investments each party makes in reliance upon the relationship. A duty of good faith will not be implied where it would contradict, circumscribe or go beyond the parties’ express agreement. For the foreseeable future, as a general rule it therefore remains unwise to rely upon a duty of good faith being implied, at least under English law.
- The Court reiterated some useful points in relation to the test for the implication of terms in a contract, the leading authority for which is Attorney General of Belize and Belize Telecom [2009]:
- the Court has no power to improve the contract in question nor to make it fairer and more reasonable;
- instead, the Court is concerned to see whether the proposed implied term would spell out what the contract actually means;
- the issue of implying terms usually arises when the agreement does not provide for what is to happen when some event occurs. The most usual inference is that nothing is to happen, because if the parties had intended something to happen, they would have said so.
- As in the Yam Seng case, the judge said that what an implied term of good faith requires is “sensitive to context”.