When parties enter into contractual relations with each other, can they assume that they each have  an implied duty of good faith to the other? The answer in Malaysia has repeatedly been an unequivocal no unless it involves specific relational contracts¹ or is statutorily imposed². In all other situations, parties would need to include the duty of good faith as an express term of the contract if they want their dealings with each other under the contract to be inter alia fair, honest and transparent.
 
Malaysian’s position on good faith is consistent with the position taken by the common law in England described by Bingham LJ in Interfoto Picture Library v Stiletto Visual Programmes Ltd [1989] QB 433 as follows:
However, as will be explained below, the Malaysian Federal Court seems to have laid the foundation to permit the incremental development of good faith as an implied obligation of a contract in the recent case of Lai Fee & Anor v Wong Yu Vee & Ors [2023] 3 MLJ 503.
 
The state of the common law
 
There are several Malaysian High Court and Court of Appeal decisions which have followed the common law position in the UK that there is no implied contractual duty of good faith³. The main rationale for this seems rooted in principle that parties should be free to negotiate and perform contracts on their own terms and the concern over the creation of contractual uncertainty. In Yam Seng Pte Ltd (a company registered in Singapore) v International Trade Corporation Ltd [2013] EWHC 111, the English High Court identified the reasons for English common law’s reluctance to embrace a duty of good faith in contract in the following passage:

[123] Three main reasons have been given for what Professor McKendrick has called the “traditional English hostility” towards a doctrine of good faith: see McKendrick, Contract Law (9th ed) pp 221-2. The first is the one referred to by Bingham LJ in the passage quoted above: that the preferred method of English law is to proceed incrementally by fashioning particular solutions in response to particular problems rather than by enforcing broad overarching principles. A second reason is that English law is said to embody an ethos of individualism, whereby the parties are free to pursue their own self-interest not only in negotiating but also in performing contracts provided they do not act in breach of a term of the contract. The third main reason given is a fear that recognising a general requirement of good faith in the performance of contracts would create too much uncertainty. There is concern that the content of the obligation would be vague and subjective and that its adoption would undermine the goal of contractual certainty to which English law has always attached great weight.”

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On the other hand, unlike the UK, the courts in the common law jurisdictions of Canada and Australia have moved in the direction of implying the duty of good faith into contracts. By common law world standards, the Canadian Supreme Court in particular has taken a rather liberal approach by recognising the “organising principle of good faith” as a new common law duty.⁴ It has recognised good faith as requiring parties to:

In Australia, following the decision of the New South Wales Court of Appeal in Renard Constructions (ME) Pty v Minister for Public Works (1992) 44 NSWLR 349, the courts have started to recognise the implied duty of good faith when the performance of the contract requires it⁷. However this does not translate into a general “organising principle” to be implied in all commercial contracts⁸, as is the case in Canada. At its core, the principle of good faith in Australia is connected to the standard of honest conduct between the contractual parties.⁹ The Australian Courts have through case law, recognised the duty as having the following qualities:

The Lai Fee Case
 
As mentioned earlier, the Malaysian position has been in line with the view of the English courts. However, in Lai Fee, the Federal Court seemingly opened the door to the development of good faith as an implied obligation of the contractual parties. In this case, the defendants had, inter alia, used a dormant company to purchase a timber logging business from the plaintiffs and persuaded the plaintiffs to transfer their rights to the business to the defendants (and not to the dormant company) even though the full purchase price had not been paid to the plaintiffs.
 
In the circumstances of the case, the Federal Court found that the defendants had fraudulently induced the plaintiffs to enter into the contract with a dormant company in order to insulate themselves from personal liability for the balance purchase price, and had effectively taken advantage of the plaintiffs who had acted honestly and in the good faith expectation that the defendants would comply with their obligations. Hence, the plaintiffs were found to be entitled to set aside the contract. While the decision concerned a duty of good faith in the creation of contracts, it also found that the duty to act in good faith is arguably an indispensable requirement of the contract. The relevant passages of the judgment are as follows:

[62] It is arguable that vitiating factors such as coercion, fraud, misrepresentation or undue influence denotes the absence of good faith. It may also be argued that the duty to act in good faith is therefore a sine qua non in every contract, the absence of which renders the contract voidable at the option of the innocent party.   …   [66] In the light of the foregoing, we are of the considered view that the sentiments expressed above are not inconsonant with the general tenor of the Contracts Act. Parties entering into a contract whilst accepting the risks and omissions in the preceding negotiations will assume the honesty and good faith of the other. As such, contracts that are entered into are presumed to be valid and enforceable. …   [67] The fact that the Contracts Act starts on the footing that a contract is valid and enforceable underscores the premise that parties to a contract are not expected to arrange their affairs on the basis that other people may commit fraud. Indeed, parties who are engaged in negotiations for the purposes of entering into a commercial contract conduct themselves on the expectation of honesty, good faith and fair dealing. That expectation is essential to commerce which depends critically on trust. …”   …   [70] ...We are of the view that the principle that the law does not expect people to arrange their affairs on the basis that others may commit fraud is representative of the position of Malaysian law. This principle is consonant with the Contracts Act which underlines the importance of free consent in a contract. Free consent is an integral part of the process of negotiations preceding the contract; and this underscores the duty of good faith in the creation of a contract, i.e., the duty to act honestly.”

 
Conclusion
 
While the Federal Court in Lai Fee did not go so far as to find that there is a general “organising principle of good faith” or determine that there was an implied duty of good faith in contract, it did for the first time accept that there was an implied duty of good faith during the negotiations phase and its grounds of judgment potentially lays the foundation to the implication of good faith in the performance of the contract in future cases before the Malaysian courts.
 
While it is unlikely (and not recommended) that the Malaysian Courts will be so adventurous as to quickly recognise good faith as a new common law principle, there is arguably a new tool at its disposal which it can carefully use to achieve justice and fairness where the facts of the case demand it. The Canadian and Australian experience has also shown that the subjectiveness of “good faith” as a concept can be overcome by identifying its specific qualities through incremental case law development. Hence, there is little impediment to implying the qualities of good faith into contracts. This is especially as the Federal Court has recognised that the law needs to align with the practical reality that honest parties to a contract do not expect that they need to “arrange their affairs on the basis that others may commit fraud” or for that matter, act in bad faith.
 
Article by Siva Kumar Kanagasabai (Partner) of the Dispute Resolution Practice of Skrine.¹⁴
 
 

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