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No duty of good faith in non-exclusive agency agreement

29 December 2014

In Acer Investment Management Ltd & anr v Mansion Group Ltd [2014] EWHC 3011 (QB) the English High Court was once again asked to address the question whether a particular contract – in this case, a simple agency agreement – gave rise to an implied duty of good faith. Giving the argument fairly short shrift, Laing J has answered in the negative. The case is – tentatively – a further illustration of the generally narrow and robust approach the English court takes to this issue and emphasises that there is no general duty of good faith in commercial contracts under English law.

The dispute in this case involved claims for unpaid commission and damages arising out of the alleged breach of an implied duty of good faith in an agency agreement.

Acer Investment Management Ltd (Acer) and Quantum Investment Management Solutions (Quantum) (together, the claimants) are distributors of financial products to independent financial advisers (IFAs). The two claimants were set up by Matthew Welsh and Paul Hilton, two former members of the UBS Wealth Management team. The defendant, The Mansion Group Ltd (Mansion), sets up and sells funds, including the Mansion Student Accommodation Fund (the MSAF). For the purpose of marketing the MSAF, the claimants introduced Mansion to an overseas distributor (GWMS).

Both parties understood that the claimants expected to be paid for the introduction to GWMS, but there were considerable negotiations over the appropriate level of commission and exchanges of several drafts to that end. At a meeting on 31 October 2011, it was claimed by Acer and Quantum that terms were agreed. Those terms were contained in a draft agreement, circulated by email to Mansion for signature on the same day. It was a matter of dispute whether this gave rise to a binding contract. Laing J held that they did (the Agreement).

There was no exclusivity in the Agreement – Acer and Quantum were at liberty to market funds other than the MSAF.

Around the same time, the claimants were introduced to Blackmore, with whom they signed a distribution agreement in November 2011 relating to a fund investing in hotels (Blackmore fund). The Blackmore fund competed with the MSAF. Mansion made clear that it did not want the claimants to market the Blackmore fund to IFAs – although Mansion had no contractual right to make that demand under the Agreement. The claimants confirmed to Mansion that they had not been marketing the Blackmore fund – a statement that was later, in court, admitted to be a lie.

The following issues arose for determination by the court in relation to the marketing of the Blackmore fund:

  • Was it an implied term of the Agreement that the claimants owed a duty of good faith to Mansion (whether as a fiduciary or as incidental to the Agreement being a “relational” contract)?
  • If so, did the claimants breach that term and repudiate the Agreement by lying about the fact that they had been marketing the Blackmore fund?

Was there an implied duty of good faith (and if not, why not)?

In arguing that the claimants owed a duty of good faith, Mansion advanced two alternative arguments: (i) that the claimants owed fiduciary obligations as agents (including the duty of good faith), and (ii) that in any event, the Agreement was a “relational contract” in the style of Yam Seng Pte Ltd v ITC Ltd [2013] EWHC 111.

Laing J noted as “instructive” the fact that in Yam Seng, the breach of the implied term of good faith arose out of a deliberate lie about a key aspect of the parties’ relationship. Nevertheless, the judge dismissed both of Mansion’s alternative arguments – that Acer was a fiduciary agent or that it owed a general duty of good faith – because they were “not grounded in the commercial reality of the relationship between the parties, or in the express terms [of the Agreement]”.

Laing J accepted as “humbug” the suggestion that the parties were in a “relational contract” of the type envisaged in Yam Seng. The judge agreed that the claimants were “just selling” – “salesmen selling the funds”, without the “to-ing and fro-ing of information exchange”. Laing J was also guided towards this decision by the following facts:

  • the relationship was not regarded by the parties as exclusive;
  • there were no obligations or commitments one would expect in a “relational contract”;
  • the relationship was not longterm;
  • either party could terminate on reasonably short notice (the period was unspecified in the judgment); and
  • neither party was required to spend significant sums in reliance on the continuation of the relationship.

Laing J further concluded that even if she was wrong and Acer was a fiduciary, then the express terms of the Agreement would have excluded the implication of any associated fiduciary obligation of good faith.

Was the duty of good faith breached?

Laing J nonetheless proceeded to consider the question of repudiatory breach (in the event of being wrong about there being no implied duty of good faith on either ground) – in other words, did Matthew Welsh’s dishonesty “go to the root of the contract”, or did it “deprive the innocent party of substantially the whole benefit of the contract”?

Laing J found that it did not. In deciding that the lie was about a subject that was “not even peripheral to the contract” (because Acer was under no obligation of exclusivity), Laing J also considered the following two factors as relevant to her conclusion:

  • the parties’ Agreement was not “a moral code which required the Claimants to tell the truth to Mansion at all times”; and
  • the lie was corrected (albeit not wholeheartedly) and Mansion in any event knew that Acer was marketing the Blackmore fund (so Mansion did not rely on the lie).

Laing J adopted as the relevant test for determining whether a good faith obligation had been breached the minimum requirement of “honesty”, at the same time noting that what good faith requires is in each case sensitive to context.

Comment

The decision in Acer v Mansion provides some useful guidance in a number of areas on the question of “good faith” in English contract law.

First, while the case is evidence that parties increasingly rely on Yam Seng for the argument that a duty of good faith should be implied (in particular, where there has been some dishonesty between the parties), it also underscores the scrutiny to which the English court will generally subject that argument.

In Acer v Mansion, Laing J gave the argument fairly short shrift and was in no way critical of the claimants’ assertion of “humbug” in relation to the contention that the Agreement was “relational” within the meaning of Yam Seng.

To the author’s knowledge, there is only one other case to date – Bristol Groundschool Ltd v Intelligent Data Capture Ltd & ors [2014] EWHC 2145 (Ch) (on which we have commented previously, see Litigation Review, September 2014) – in which the English court has implied a duty of good faith into a commercial contract on the basis that it was “relational” in nature.1

Elsewhere and consistent with the notion that any implied duty of good faith is to be construed narrowly, the English court has been restrictive and robust in its approach (as it was in Acer) – for example, refusing to imply an obligation of good faith into a nascent joint venture relationship in Hamsard 3147 Ltd v Boots UK Ltd [2013] EWHC 3251 (Pat). Similarly, in TSG Building Service PLC v South Anglia Housing Ltd  [2013] EWHC 1151 (TCC), Akenhead J referred (perhaps euphemistically) to the judgment in Yam Seng as ”extremely illuminating and interesting” but concluded that it gave rise to no “principle … of general application to all commercial contracts”. He also confirmed that any implied duty cannot go beyond or circumscribe the parties’ express agreement.

Second, the case provides some useful – albeit fairly briefly stated – guidance on the factors that will be relevant to the consideration of whether a particular contract is “relational”.  In an agency or similar relationship, “exclusivity” may well be determinative. The duration of the relationship and the ease with which parties can extract themselves from that relationship will also be relevant.

Third, the decision again underscores that “honesty’ is the core requirement of an obligation of good faith (as in Yam Seng and Bristol Groundschool) – but is again restrictive in its application of that principle.

Honesty was cited in Yam Seng as one of a number of “core expectation[s]” or “core value(s)” at the heart of the duty of good faith. This core requirement was briefly acknowledged by Laing J. However, the judge went on to make clear that in ordinary commercial dealings, parties are not generally required to be honest, in particular if: (a) the subject matter of the dishonesty is of “peripheral’ importance to the parties’ relationship (ie it does not go to the root of the contract), and (b) the other party did not rely on the dishonest statement to its detriment.

Finally, and in light of all these observations, Acer v Mansion is a further useful illustration of the importance of specifying with precision the parties’ expectations of each other in any long-term relationship (which may be viewed as “relational”). As the English court has now repeatedly made clear (consistent with the principles in the Privy Council’s decision in Attorney General of Belize v Belize Telecom [2009] UKPC 10), a duty of good faith will not be implied where it would contradict, circumscribe or go beyond the parties’ express agreement.

1 A duty of good faith was also implied in the case of Emirates Trading Agency LLC v Prime Mineral Exports Private Ltd [2014] EWHC 2104 (Comm). However, the term in that case was implied into an obligation to “first seek to resolve the dispute or claim by friendly discussion” before resorting to arbitration – an obligation that was held to be binding and to carry with it an implied obligation to do so in good faith. See Litigation Review Aug/Sept 2014 for an article on this decision.