It’s business, it isn’t personal. 

But where is the line of what is, and what is not acceptable behaviour in an agency or distributorship agreement?

The term ‘good faith’ is bandied about a lot, however, what does it actually mean in law? The answer: It’s a bit of a grey area.

Introducing an exhaustive definition for ‘good faith’ risks causing more problems than it would solve, as one size does not fit all. Therefore, there is no general principle of good faith between parties contracting under English law, which is probably the right call, especially when English law likes certainty.

Instead, the law has developed gradually in the words of one judge as ”piecemeal solutions in response to demonstrated problems of unfairness”.

The very fact-specific nature of good faith obligations makes it an ever-movable feast, and one that perhaps won’t be of much help to others when they might find themselves in a potential breach of the good faith scenario.

Despite this, the courts are willing to make findings of good faith obligations –  fairness is plainly in the interests of all parties to any contract, particularly in ‘relational’ contracts. 

As a result, it is important for principals and agents and suppliers and distributors to bear in mind that there are some very general principles established by the courts that can help guide a party as to whether good faith arises and, if it does, whether it has been breached.

Express duty

An express duty of good faith is, essentially, a duty to act honestly. Precisely what this means is dependent on its context.  Like all express duties, clear drafting is (strongly!) recommended; the more ambiguous the wording, the less likely the clause will be enforceable.  

Although it is often taken to mean a duty not to engage in conduct considered to be bad faith, what bad faith means can vary.  Unsurprisingly, judges have historically been cautious to interpret anything beyond what is written in the contract. This includes not extending the application of good faith expressly attached to one specific obligation in a contract, to cover the whole agreement.

It follows that it is a high bar to breach an express duty of good faith. Outside of fraudulent behaviour, a party would need to demonstrate commercially unacceptable conduct. What is commercially unacceptable will very much depend on the facts and the evidence which can be produced.

Relational contracts: distributorship agreements

The concept of an implied duty of good faith was brought to the fore in a judgment given in 2013 concerning a distributorship agreement when the judge was prepared to recognise such an implied duty, but only where the contract had no commercial or practical coherence without it.

The judge decided that this is only likely to arise under “relational” contracts: a limited class of contract in which the effect is based upon the trust between the parties. 

What is key is that distributorship agreements envisage a long-term (often exclusive) commercial arrangement, which are founded on common goals, mutual trust and confidence.

For there to be a finding of a breach of good faith, the court first needs to establish that there is indeed an implied duty of good faith.  In turn this requires the well-established test for implied terms to be satisfied:

  • is the implied duty necessary to give business efficacy to the contract?
  • can it be shown that without the term, the contract would lack commercial or practical coherence? In other words, is the action complained of commercially unacceptable?

If the court establishes there is such an implied term, the next question is, has that term been breached.  At this point we are then back into the territory of establishing either

(a) dishonesty / fraud, in which case you will almost certainly be home on a bad faith finding; or

(b) commercially unacceptable conduct. 

The latter will always depend on the facts, but a practice that flies contrary to the spirit of a relational contract is likely to assist in a finding of bad faith. 

Relational contracts: Commercial Agents

A commercial agency agreement is another good example of a relational contract. 

Not only do principals and commercial agents benefit from the common law position outlined above, they derive further rights and obligations from the Commercial Agents Regulations.

The Regulations impose a duty on both agent and principal to act dutifully and in good faith. Although neither “good faith” nor “dutifully” is defined in the Regulations, there has been discussion in case law which provides helpful guidance.

Agent’s Duties

It has been decided that:

  • good faith has the same meaning as under the Unfair Terms in Consumer Contracts Regulations, which provides for fair and open dealing.
  • to act dutifully means to act loyally.

In practice, however, the Regulations do not appear to take matters any further than the position under common law.

Principal’s Duties

A principal also must act dutifully and in good faith towards the agent. However, in addition, the Regulations require a principal to:

  • provide the agent with the necessary documentation relating to the goods concerned and information necessary for the performance of the agency contract (for example, technical information and market information on experience with the product in other territories);
  • inform the agent within a reasonable period of its acceptance or refusal of any commercial transaction negotiated or concluded by the agent, and of any non-performance by it of any transaction arranged by the agent; and
  • give the agent advance notice of any anticipated significant fall in demand for the products in the territory (in practice, this may be difficult if it is the agent who has the local knowledge of the market).

So, the statutory obligations imposed upon the principal in the context of good faith does go beyond that which is provided under common law.

It is also worth noting that the Regulations prohibit the principal and agent from contracting out of their duties under the Regulations.


There is always merit in drafting good faith obligations into your agency or distributorship agreement, but give careful thought as to which obligation(s) you want it to attach and what good faith means in the context of your commercial relationship with your counterpart.

Finally, as with all contractual drafting, ensure the scope and meaning is clear. The clearer the drafting, the less likely you will end up in a fight about it later.   


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