Manchester United perfume anyone? Contractual obligation of good faith and measure of loss in deceit

13.02.2013 

David Lascelles
 

On 1 February 2013, Leggatt J gave judgment in a dispute relating to a distribution agreement to market Man U branded fragrances.   

Readers will be surprised to hear that the fragrances were not a hit.  

The Defendant had granted the Claimant the exclusive licence to distribute the products in parts of the Middle East, Asia, Australasia and Africa.   When the parties’ relationship turned sour, the Claimant terminated the agreement and brought the instant claim alleging that it had been entitled to terminate the agreement and seeking damages for breach of contract and for misrepresentation. 

The decision is Yam Seng Pte Limited v International Trade Corporation Limited [2013] EWHC 111 (QB) and is reported here

The decision is interesting for three main reasons:

Firstly, Leggatt J held that there was an implied duty of good faith including a duty to act honestly in performing the contract.  Indeed he goes so far as to say “[a]s a matter of construction it is hard to envisage any contract which would not reasonably be understood as requiring honesty in its performance”.   His analysis, especially at paras 134 and following, is potentially very useful for a party seeking to escape a commercial contract (or claim damages for breach thereof) where the other side’s conduct has been “improper”, “commercially unacceptable” or “unconscionable”.

Secondly, Leggatt J considered the relevance of an alternative transaction for the purposes of assessing damages in deceit.  The claim was actually based upon section 2(1) Misrepresentation Act 1967, but Leggatt J (following the Court of Appeal in Royscot Trust v Rogerson [1991] 2 QB 297) held that the rules applicable in cases of fraudulent misrepresentation apply by analogy. 

Under those rules, although the matter has been the subject of much debate, the orthodox view had tended to be that a defendant cannot seek to reduce the damages payable by adducing evidence of what transaction would have taken place but for its fraud (c.f. the position of the innocent party where such evidence has previously been admitted).   Indeed (as Leggatt J noted) Chitty and Clerk & Lindsell each suggest that such evidence of an alternative transaction is irrelevant. 

However Leggatt J’s view was that “in circumstances where it is established that the claimant can recover a profit that would have been obtained from entering into some other transaction, it must in principle be … relevant to take account of any loss.” 

Leggatt J then summarised the applicable principles at paragraph 217.    

Thirdly, it is clear from the judgment that in various respects each of the parties had failed to adduce sufficient evidence on loss to support its case.  The result was that:

(1)    The Claimant’s claim for loss of profits for breach of contract failed.

(2)    The Claimant’s claim for wasted expenditure for breach of contract succeeded: - the Defendant had failed to adduce evidence to show (in effect) that the Claimant’s losses under this head were in fact for a bad bargain so as to displace or reduce this measure of loss.

(3)    The Defendant had not put forward sufficient material to allow the Court to determine what losses would have been suffered by virtue of the Claimant entering into the contract in any event (albeit at a later date).  Therefore the Claimant’s damages for misrepresentation were not reduced on this basis.