Court of Appeal rejects implied term of good faith and fair dealing in distributor agreement

24/03/17

In a judgment handed down yesterday, the Court of Appeal dismissed an appeal against a decision of the Commercial Court in which Knowles J granted reverse summary judgment and dismissed a substantial claim for damages arising out of the termination of a long-term distributor agreement.

The claimant, Ilkerler, contended that the defendant, Perkins, was precluded from terminating the distributor agreement on six months’ notice (as Perkins had sought to do under Article 2.3).

Ilkerler argued (among other things) that the distributor agreement had been impliedly varied by conduct such that Perkins was precluded from terminating prior to the end of 2015 and that the termination was also in breach of an implied duty of good faith and fair dealing. 

The Court of Appeal (Longmore L.J. and Briggs L.J.) dismissed each of Ilkerler’s claims.

In relation to the variation issue, Longmore L.J. held that the test for determining whether there had been an implied variation of an existing contract by conduct was the same as that for determining whether there was an implied contract: the conduct relied on had to be inconsistent with the absence of a variation and consistent only with the variation contended for. The fact that the parties had done something more than, or something different from, what they were already bound to do under their existing contractual arrangements was insufficient: The Aramis [1989] 1 Lloyds Rep 213; and The Gudermes [1993] 1 Lloyds Rep 311 considered.

In relation to the good faith issue, Ilkerler sought to rely on the well-known decision of Leggatt J in Yam Seng Pte Limited v International Trade Corporation Limited [2013] 1 All E.R. (Comm) 1321. Longmore L.J. described the decision in Yam Seng as “interesting and informative”, but concluded that it did not support the implication of the terms for which Ilkerler contended. In particular, he pointed out that, in Yam Seng, Leggatt J had been dealing with the implication of a duty of good faith in relation to the performance of contractual obligations (where the interests of the parties might be aligned and where they might be expected to work together and cooperate). He had not been concerned with the exercise of rights of termination (where the interests of the parties will invariably be in conflict), which were “in a different realm altogether."

The judgment is here.