In the recent case of Acer Investment Management Ltd and another v Mansion Group Ltd the High Court considered whether a contract gave rise to an implied duty of good faith.
The judgment confirmed the Courts' approach to date which is that parties are not required by law to be honest in commercial dealings, particularly where (a) the dishonesty is not integral to the contract; or (b) the other party does not rely upon that dishonesty.
Acer and another ("Acer"), who market funds to Independent Financial Advisers ("IFAs") on behalf of third parties, were instructed by Mansion to introduce it to a distributor with a view to distributing one of Mansion's funds ("Mansion Fund").
No written agreement was entered into between Acer and Mansion, however there was a draft agreement in circulation which had been negotiated considerably, and which provided that commission would be payable by Mansion to Acer for introductions to third party distributors. Significantly, the draft did not contain an exclusivity clause.
Around the same time Acer entered into an agreement with Blackmore to market one of Blackmore's funds ("Blackmore Fund") - which competed with the Mansion Fund - to third party distributors.
Mansion sought confirmation from Acer that it was not marketing the Blackmore Fund: Acer confirmed that it was not, which was untrue.
Mansion argued that no commission was payable to Acer, as Acer had repudiated the agreement by:
breaching the implied duty of good faith it owed to Mansion - as agent - not to market funds which competed with the Blackmore Fund; and
Acer had lied to Mansion that it had not been marketing a competing fund.
The Court held that commission was payable (as Acer would not have made the introduction otherwise), that Acer did not owe a duty of good faith to Mansion and, if it did, Acer had not breached that duty.
The following factors were considered by the Court in reaching its decision that Acer did not have an implied duty of good faith:
- the relationship was not exclusive;
- the relationship was not long-term;
- neither party had spent significant amounts in reliance on the arrangement;
- the agreement could be terminated on short notice.
Despite having determined that there was no duty of good faith owed, the Court went on to consider whether that duty would have been breached.
Two matters which the Court considered were whether the dishonesty went to the root of the contract and whether it deprived Mansion of substantially the whole of the benefit of the contract. The Court held that the dishonesty did not go to the root of the contract (owing to the relationship in general, including the lack of exclusivity) and it did not deprive Mansion of the benefit of the contract. Indeed, Acer later corrected its false statement (that it was not marketing to a competing fund) and Mansion therefore knew that Acer was marketing the Blackmore Fund.
The implied duty of good faith continues to be very narrowly construed by the English courts. In particular, when deciding whether a duty of good faith is owed in an agency agreement, exclusivity may be a determinative factor.