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Unicorn v HSBC: good faith returns to Scotland?

Document Cited authorities 1 Cited in Related
Vincent
Date01 September 2018
DOI10.3366/elr.2018.0505
Published date01 September 2018
Pages380-386
Author
INTRODUCTION

There has been a recent spate of cases heard in the courts of England and Wales where the Claimant has relied on the concept of “good faith” in a contractual dispute.1 These would appear to follow in the footsteps of Yam Seng Pte Ltd v International Trade Corp Ltd,2 in which Leggatt J (as he then was) held that a duty of good faith could be implied into a commercial contract governed by English law. Standing that Yam Seng drew on3 the well-known Scottish case of Smith v Bank of Scotland,4 it is fitting that questions of good faith returned to a Scottish court in Unicorn Tower Ltd v HSBC Bank Plc.5

THE FACTS

Unicorn was a company incorporated to facilitate the development of a property in Glasgow. The bank's facility letter appears to have enabled it to review the provision of the facility provided to Unicorn, and indeed to demand its immediate repayment. Seemingly dissatisfied with the way in which the development was progressing, the bank purported to end the facility and sought immediate repayment by letter dated 8 June 2009.

Unicorn's arguments were three-fold. First, that there was a collateral agreement that the facility would continue until the development was complete (not, on the face of it, entirely dissimilar to Royal Bank of Scotland Plc v Carlyle).6 Secondly, that owing to the actions of the bank's employee, the bank was personally barred from terminating the facility. Thirdly, and of particular interest here, that there was an implied term in the contract between Unicorn and the bank that any repayment demand would be exercised in good faith.

Unicorn's approach to the application of good faith was two-fold: first that there is a “principle in Scots Law that parties must act in good faith toward each other in relation to their actings under a mutual contract” and if “this principle has not yet been definitively declared, there are compelling public policy reasons why this should now be done”; and secondly that “[w]hether or not the court chooses to declare a general obligation of good faith in contract under Scots Law”, the court should imply a term into the present contract requiring parties to act in good faith.7

The case called before Lady Wolffe on the defenders' preliminary plea to the relevancy of the pursuers' pleadings. This note will focus on the good faith element of her decision.

 AN IMPLIED DUTY

The implication of terms has of course been subject to a large amount of commentary and judicial scrutiny,8 which will not be repeated here, beyond noting that: (1) it is a “cardinal rule that no term can be implied into a contract if it contradicts an express term”,9 and (2) there are two types of implied terms – those that are imposed on a particular contract to give it business efficacy, and those that are implied into a particular class of relationship, where “the courts have implied the term as a necessary incident of the relationship concerned, unless the parties have expressly excluded it”.10

Lady Wolffe held that an implied term to act in good faith in calling up the loan was “utterly inimical”11 to the express terms of the agreement with the bank, containing as it did terms about the loan being for a fixed period, and capable of being called up on demand by the bank. The proposed implied term fell foul of the “cardinal rule”, and also that it did not satisfy the “tests of necessity or obviousness”.12 The consequence was that Unicorn's case based on the implication of a term failed to meet the requisite threshold and, “with some regret”, Lady Wolffe did not require to consider “whether Scots private law recognises an obligation of good faith”.13

Lady Wolffe concluded by noting that the question of “whether Scots law permits the...

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