Implied variation/term of good faith
ILKERLER OTOMOTIV v PERKINS ENGINES (CA) [2017]
A claim that a variation to one part of a contract had amended another part was dismissed by the Court of Appeal which also refused to imply a term of good faith when one party was terminating a contract without cause.
Facts:
- In 2000 Perkins (“P”) and Ilkerler Otomotiv (“IO”) entered into a distribution agreement which had various rights of termination including:
- if P was dissatisfied with IO's performance (Article 19.3); and
- for convenience - the agreement was to continue for an initial period of three years and thereafter until terminated on at least six months’ prior written notice (Article 2.3).
- In 2012 P gave notice of its intention to terminate for convenience under Article 2.3 even though the reason for terminating was its dissatisfaction with IO's performance.
- IO disputed the effectiveness of the notice and argued that:
- as P had been dissatisfied with IO's performance, P should have given it the opportunity to take remedial action under Article 19.3 rather than terminating for convenience under Article 2.3;
- the right to terminate under Article 2.3 had been impliedly varied so that it could not be given to take effect sooner than the end of 2015 due to the parties having agreed a long-term business plan which required IO to make significant long-term investments in its business; and
- P was in breach of an implied term of good faith or fair dealing by giving notice to terminate when it did.
- The High Court (“HC”) found in favour of P and ruled that the termination notice was effective. It said that after the first three years, P could use either termination provision (Article 2.3 or 19.3), that there had been no implied variation to Article 2.3 and it rejected the suggestion that a term of good faith or fair dealing should be implied. In any event, there was no evidence of conduct that lacked good faith or any dishonesty on the part of P.
- IO appealed.
Decision:
- The Court of Appeal (“CA”) dismissed the appeal and IO’s arguments, agreeing with the HC and deciding that the termination notice was valid.
- With respect to the implied variation, it said the proposition that when making a change to one part of the agreement, the parties must have intended to amend the termination provisions without addressing the subject, “lacked any commercial reality”. The CA commented that in the absence of a request for an alteration to the provisions governing termination on notice, it was impossible to conclude that there had been such a variation.
- It was decided that there was no implied duty that a party had to warn the other that it was thinking about exercising a right to terminate simply on notice. Nor was there any implied obligation to give the reasons why such a course of action was being considered or to allow the other party an opportunity to argue its case before the notice was actually served.
Points to note:
- As part of its arguments, IO had tried to rely on the outcome in the case of Yam Seng v ITC [2013], in which it was held that a term of good faith could be implied into so-called ‘relational’ contracts. However, the judge said that the reasoning which supported a duty of communication and co-operation being implied in relation to the performance of a contract, as in Yam Seng, was quite different from implying such a term in relation to the termination of a contract and would take the issue “into a different realm altogether”.
- This reinforces the judgment in Monde Petroleum SA v Westernzagros [2016] (scroll down this link to find the case). In Monde it was found that there is no implied term in a commercial contract that a party has to terminate the contract in good faith and that an express contractual right to terminate may be exercised irrespective of the terminating party's reasons for doing so.
- Also, in Globe Motors v Lucas Varity (CA) [2016], the Court emphasised that not all long-term, ‘relational’, contracts will qualify to have a duty of good faith implied.
- These decisions all go to support the Courts’ continued position which is to view implied duties of good faith with great suspicion.
- When amending agreements (whether in writing, orally or by conduct), be careful to check whether the agreed variation will have any consequential effects on other parts of the contract and, if necessary, expressly vary all relevant aspects of the contract rather than seeking to rely upon a change being implied.