Implied Good Faith


The law will not imply an obligation of good faith into a contract. If the parties want each other to act in good faith, and so in excess of the usual contractual obligation of performing their stated obligations, then they must say so in the contract. On default of this, the court will not intervene in a commercial contract to do the drafting for them by inserting a good faith obligation: see Hospital Products Ltd v United States Surgical Corpn (1984) 156 CLR 41, HCtA.  However, for certain contracts the law makes an exception and does imply an obligation of good faith – such as employment, and partnership contracts, or where one party is subject to a fiduciary obligation.

A general amelioration of the strictness of the “no implied good faith” rule is now appearing in a variety of situations. For international documents of payment, such as the Letter of Credit and the Performance Bond, there seems to be a change on the way.  Some courts and commentators indicate that this would be totally improper as the ‘autonomy” principle associated with these documents is such that only the narrowest grounds exist for refusal to honour the obligation of payment.

Significantly this development is more noticeable in certain Asian jurisdictions that follow on from similar footprints in Australia and New Zealand in past years.

A Letter of Credit is payable to the beneficiary of the Letter when he (a) delivers the documents listed in the contract for the sale of the goods, in good time in accordance with the terms of that contract, (2) the documents comply with the requirements, and (3) there is no actual fraud on his part. A Performance Bond is payable when presented; it is uncommonly subject to conditions; unless the beneficiary is guilty of actual fraud, payment must be made.

In both of these cases, proof of fraud  - on the part of the beneficiary - is virtually impossible within the usual time-frame for which payment is required. The relevant fraud is usual “actual fraud”.  This probably means that the actions of the beneficiary have all the hallmarks of fraud, and that fraud exists, rather than that it is merely suspected. Further, international trade requires certainty. Any suggestion, that a payment obligation could be scrutinsed by a court to determine whether or not the payee acted conscionably, would hamper international trade.

The fear of losing, or the need to comply as others expect, can cause the loss of business. The new Companies Ordinance (Cap 622), amendments to the Trustee Ordinance, and to the Perpetuities and Accumulations Ordinance, and constant up-grading of the Securities and Futures Ordinance are designed to enhance our status as a global market place, and financial centre. Allowing the vagaries of “conscience” to intervene in transactions, which hithertofore we considered sacrosanct and immutable, could create nervousness in the global marketplace.

The reputation of the bank is at risk if it refuses to pay; the protection gained by adherence to the principles of international trade is also at risk. These principles require speedy payment, without argument  except within the terms of non-compliance with the tendering of listed documents and the absence of fraud. The UCP 600 demands timely payment. The bank can be on safer grounds for refusal to pay, where there is a discrepancy in the agreed terms for payment.

But the bank must ensure it is not a fault in refusing. If the beneficiary knows he has no right to payment – the so-called “abusive calling – the bank can advise its customer to seek an injunction to prevent the bank payment. If one only had time!

If the customer can point to payment not in conformity of its mandate to the bank, loss must fall on the bank. To counter this the bank will usually have obtained a counter-indemnity from its customer, thereby having a primary right to payment regardless of the surrounding circumstances. Thus it is really the customer who needs some protection.

Can that protection come from the imposition of “good faith”?

The Australian courts in considering these and similar documents have the benefit of the Trade Practices Act 1974 (as amended) with the reference to unconscionability entitling court intervention:  see sections 51AA and 51AC. The Unconscionable Contracts Ordinance follows the guidelines in section 51AC in determining whether clauses in a contract are unconscionable. However, the ordinance applies only to consumer transactions. The TPA is boarder allowing commercial parties to seek relief; see Olex Focas v Skodaexport [1998] VSC 380.

In Singapore also unconscionability can be a trigger to relief protecting non-payment of a Performance Bond. In BS Mount Sophie Pte Ltd v Join-Aim Pte Ltd [2012] SGCA 12 unconscionability was considered in a “nuanced way” to prevent abusive calling of a construction Performance Bond. The Court of Appeal required a balance between the nature of the Performance Bond [treated as cash for many years] and unconscionability. So a strong prima facie case is required. Obviously something a bank cannot judge on presentation of the Letter of Credit or Performance Bond where time is almost “of the essence”. To unconscionability is added “good faith”; and see HSBC v Toshin [2012] SGCA 48.

In Yam Seng Pte Ltd v International Trade Corporation (2013) All ER (D) 227, the Court (QB) in considering behaviour on the part of one party which caused the other to terminate the contract, said that

In refusing to recognize any such obligation of good faith, this jurisdiction would appear to be swimming against the tide.

I doubt that English law has reached the stage … where it is ready to recognize a requirement of good faith as a duty implied by law, even as a default rule, into all commercial contracts. Nevertheless, there seems to me to be no difficulty, following the established methodology of English law for the implication of terms in fact, in implying such a duty in any ordinary commercial contract based on the presumed intention of the parties”.

These cases are not alone.

What will the future bring in relation to good faith, and the autonomy principle?

But – see also those following a strict interpretation of what the earlier authorities decided – not what “new law” may expect: se eg Toomey v Eagle Star Insurance Co Ltd [1994] 1 Lloyd’s Law rep 516.

© Sihombing Law Mentors 2014