Commercial and Tax Law 2020-21
Seminar 3
Principles of Agency
In this seminar, we will explore the nature, sources and functions of commercial law, in particular
focusing on the idea of relational contracts and good faith. We will then examine some of the
fundamental principles applicable to the creation of agency relationships between a principal and
agent in contracting with third parties. By the end of this seminar you should be able to:
Reach a view on the role of good faith in commercial law and defend it.
Apply different forms of agency to a problem question to determine the extent to which a
principal will be bound by the acts of their agent.
1. What are the main sources and functions of commercial law?
Students were encouraged to consider the main sources and functions and illustrate with some
examples.
Key sources include:
1 Contracts
2 Custom and usage – lex mercatoria
3 National legislation (SOGA)
4 European Union law (what impact of Brexit?)
5 International conventions, model laws, uniform rules and uniforms trade terms (e.g.,
UNCISG; GAFTA terms)
Commercial law has a number of functions. These include:
To secure the primacy of contract e.g. freedom of contract and sanctity of contract; ensure
consistent interpretation of contracts; the enforceability of standard form contracts etc. Also to
ensure the protection of the ‘reasonable expectations of business people’ and facilitate commercial
dealing (e.g., by enforcing the terms as written and encouraging the parties to reach comprehensive
agreements).
The allocation of risk in contracts. For example, A enters into a contract for the sale of goods to B.
When should property and risk in the goods pass to B. This is important if B does not pay for the
goods after receiving them or the goods are destroyed after payment but before receipt. Contracts
(and statute) can allocate property and risk.
Other functions are well known e.g. ensuring predictability and certainty in commercial transactions,
enabling parties to plan their affairs without recourse to courts and engage in alternative forms of
dispute resolution. Courts see their role as facilitating commerce rather than regulating it. Courts
regard ensuring competitive markets as a matter for parliament and regulators, rather than them.
Wider issues around this concern how far law should interfere in the workings of business, and how
far certainty in the law should be pursued, at the expense of say justice, fairness and ‘upholding the
reasonable expectations of honest people’. Should party autonomy and certainty in commercial
, matters be upheld at all costs? B2C2 v Quoine is an example of a case that may prompt you to think
about whether courts should pursue a more regulatory or interventionist role in commercial dealing.
2. “There is a strong case for keeping a general principle of good faith out of the common law,
especially in the case of commercial transactions.”
Do you agree or disagree with this statement? Give reasons for your view.
Issues to consider here surround the recent developments in the concept of ‘relational contracts’
and the implied duty of good faith, and a comparison with the traditional individualist and self-
interested ethic of commercial contractors. English law has generally manifested an antipathy to
general duty of good faith (Walford v Miles; in this context discussion of Baird v M&S may be
relevant – M&S broke off a long-term supply relationship with Baird without warning despite a 30
year relationship between the parties. Held that they were entitled to do so, since there was no
long-term contract in place) although the duty is recognised in some specific contexts. More recent
case law (Yam Seng; Bates v PO) has recognised that it might be necessary to imply a duty of good
faith in relational contracts, but difficulties arise over how a relational contract is identified; what
specific duties might be implied; and the relationship between the implied terms and more absolute
contractual rights set out in the contract (such as termination rights). The development has so far
been given a luke-warm reception in appeal courts and has not been scrutinised by the Supreme
Court.
Pro and con of good faith duties:
Pro: good faith duty probably in line with what contractors (as opposed to lawyers) expect; it would
bring English law into line with other rules (such as UNCISG – although this could also be regarded as
a con); the duty would recognise that many commercial contracts don’t fit the adversarial and
individualistic model of contract law. Concerns about uncertainty can be rebutted by pointing out
that parties can exclude the duty from arising by express contract terms and that courts are unlikely
to allow good faith duty to intrude on contractual rights or be used to soften the exercise of
contractual rights (e.g., in case of clearly expressed termination rights).
Useful as a principle in an extreme case of bad faith (e.g., PO v Bates – heavy handed response of PO
to sub-postmasters’ legitimate concerns about accounting software).
Con – courts not particularly receptive to the idea (Compass Group v Mid-Essex NHS Trust); English
law generally allows parties to exploit commercial advantages and bargaining position in a
commercial deal, even if real pressure exerted on the other party (Pakistan International Airlines v
Times Travel); difficulty over identifying the features of a relational contract; difficulties of deciding
what good faith requires. Main fear is that a duty of ‘good faith’ will render law uncertain: what does
it mean; when will it be implied; what behaviour will it require? If parties want a duty of good faith
to govern their agreement then they can contract for it specifically in the contract terms. Will courts
face difficulties interpreting the duty however?
A good faith duty interferes with commercial parties’ ability to act in accordance with their own
interests, and in line with contract terms, especially over matters such as terminating the contractual
relationship (recent Supreme Court decision in Pakistan International Airlines Corp v Times Travel is
a good example of courts allowing parties to act in their own self-interest with regard to the exercise
of contractual rights, notwithstanding the disparity in economic power between the contractors
concerned). Good faith is unlikely to carry any weight in a complex, comprehensive and written
commercial contract between legally advised and economically-matched participants. Law will
Seminar 3
Principles of Agency
In this seminar, we will explore the nature, sources and functions of commercial law, in particular
focusing on the idea of relational contracts and good faith. We will then examine some of the
fundamental principles applicable to the creation of agency relationships between a principal and
agent in contracting with third parties. By the end of this seminar you should be able to:
Reach a view on the role of good faith in commercial law and defend it.
Apply different forms of agency to a problem question to determine the extent to which a
principal will be bound by the acts of their agent.
1. What are the main sources and functions of commercial law?
Students were encouraged to consider the main sources and functions and illustrate with some
examples.
Key sources include:
1 Contracts
2 Custom and usage – lex mercatoria
3 National legislation (SOGA)
4 European Union law (what impact of Brexit?)
5 International conventions, model laws, uniform rules and uniforms trade terms (e.g.,
UNCISG; GAFTA terms)
Commercial law has a number of functions. These include:
To secure the primacy of contract e.g. freedom of contract and sanctity of contract; ensure
consistent interpretation of contracts; the enforceability of standard form contracts etc. Also to
ensure the protection of the ‘reasonable expectations of business people’ and facilitate commercial
dealing (e.g., by enforcing the terms as written and encouraging the parties to reach comprehensive
agreements).
The allocation of risk in contracts. For example, A enters into a contract for the sale of goods to B.
When should property and risk in the goods pass to B. This is important if B does not pay for the
goods after receiving them or the goods are destroyed after payment but before receipt. Contracts
(and statute) can allocate property and risk.
Other functions are well known e.g. ensuring predictability and certainty in commercial transactions,
enabling parties to plan their affairs without recourse to courts and engage in alternative forms of
dispute resolution. Courts see their role as facilitating commerce rather than regulating it. Courts
regard ensuring competitive markets as a matter for parliament and regulators, rather than them.
Wider issues around this concern how far law should interfere in the workings of business, and how
far certainty in the law should be pursued, at the expense of say justice, fairness and ‘upholding the
reasonable expectations of honest people’. Should party autonomy and certainty in commercial
, matters be upheld at all costs? B2C2 v Quoine is an example of a case that may prompt you to think
about whether courts should pursue a more regulatory or interventionist role in commercial dealing.
2. “There is a strong case for keeping a general principle of good faith out of the common law,
especially in the case of commercial transactions.”
Do you agree or disagree with this statement? Give reasons for your view.
Issues to consider here surround the recent developments in the concept of ‘relational contracts’
and the implied duty of good faith, and a comparison with the traditional individualist and self-
interested ethic of commercial contractors. English law has generally manifested an antipathy to
general duty of good faith (Walford v Miles; in this context discussion of Baird v M&S may be
relevant – M&S broke off a long-term supply relationship with Baird without warning despite a 30
year relationship between the parties. Held that they were entitled to do so, since there was no
long-term contract in place) although the duty is recognised in some specific contexts. More recent
case law (Yam Seng; Bates v PO) has recognised that it might be necessary to imply a duty of good
faith in relational contracts, but difficulties arise over how a relational contract is identified; what
specific duties might be implied; and the relationship between the implied terms and more absolute
contractual rights set out in the contract (such as termination rights). The development has so far
been given a luke-warm reception in appeal courts and has not been scrutinised by the Supreme
Court.
Pro and con of good faith duties:
Pro: good faith duty probably in line with what contractors (as opposed to lawyers) expect; it would
bring English law into line with other rules (such as UNCISG – although this could also be regarded as
a con); the duty would recognise that many commercial contracts don’t fit the adversarial and
individualistic model of contract law. Concerns about uncertainty can be rebutted by pointing out
that parties can exclude the duty from arising by express contract terms and that courts are unlikely
to allow good faith duty to intrude on contractual rights or be used to soften the exercise of
contractual rights (e.g., in case of clearly expressed termination rights).
Useful as a principle in an extreme case of bad faith (e.g., PO v Bates – heavy handed response of PO
to sub-postmasters’ legitimate concerns about accounting software).
Con – courts not particularly receptive to the idea (Compass Group v Mid-Essex NHS Trust); English
law generally allows parties to exploit commercial advantages and bargaining position in a
commercial deal, even if real pressure exerted on the other party (Pakistan International Airlines v
Times Travel); difficulty over identifying the features of a relational contract; difficulties of deciding
what good faith requires. Main fear is that a duty of ‘good faith’ will render law uncertain: what does
it mean; when will it be implied; what behaviour will it require? If parties want a duty of good faith
to govern their agreement then they can contract for it specifically in the contract terms. Will courts
face difficulties interpreting the duty however?
A good faith duty interferes with commercial parties’ ability to act in accordance with their own
interests, and in line with contract terms, especially over matters such as terminating the contractual
relationship (recent Supreme Court decision in Pakistan International Airlines Corp v Times Travel is
a good example of courts allowing parties to act in their own self-interest with regard to the exercise
of contractual rights, notwithstanding the disparity in economic power between the contractors
concerned). Good faith is unlikely to carry any weight in a complex, comprehensive and written
commercial contract between legally advised and economically-matched participants. Law will
