Good Faith In A Comparative Perspective

The purpose of this paper is to go over the principle of good faith so very known in European contract law, briefly explaining why it is so important for the conclusion of all contracts as well as for the society as a whole.

A definition of the concept is always essential to understand the issue so both good faith and bad faith terms will be explained.

Nevertheless, since the law is not uniform and harmonised along the different countries we will stop at the main differences concerning this principle of good faith, specially between civil law and common law countries.

Some of the aspects we will go through in this paper are: firstly, the application of the good faith principle and secondly, we will try to answer the question of whether or not there is a general duty of good faith in law.

To finish with, we will make a short assessment of the topic on international law (international conventions, instruments and lex mercatoria).

Good faith essential for contracts and society

Every contract needs to enter into force and be performed according to this so-called principle of good faith.

The contrary would just suppose an inconvenient when closing any given deal. Think about negotiations, agreements and performances that parties need to do. If good faith does not play a significant role here, this would mean for instance: multiple procedures, being skeptical about the contract and therefore, questioning every single point of law; not to mention avoidable and unnecessary proceedings and appeals; at the same time, inevitable high costs and unreasonable and unjustified delays.

Nevertheless, this practice of good faith does not attain just the parties involved, but also judges, arbitrators, attorneys…who could put, on purpose or accidentally, this fair proceedings at stake.

Notwithstanding this fact, good faith goes further along contracts but to the society as a whole, in which the day-to-day relations should be performed in good faith.

As once Aristotle pointed out: “If good faith is been taken away, all intercourse among men ceases to exist”. Consequently, social intercourse calls for good faith.

Concept

a) Good faith

Good faith is an intangible, abstract and sometimes blurry concept without technical or statutory definition.

Western civilizations have enjoyed this concept for thousands of years (some even say that it is one of the basic concepts of civilized societies).

Yet this dates back to the ancient Greeks who recognised something alike the good faith principle as: a social norm universally known and accepted ruling the relationships of its citizens. But were the Romans who incorporated this as a basis for legal action that is, a set of legal rules defining one or more obligations in ordinary commercial transactions. It was soon to be enforced in informal consensual contracts during that time.

This abstract good faith principle, can also be found under the Latin term of “Bona fides”.

It could be described as: The observance of honest spirit in business relations and the avoidance of any endeavour to betray in assuming and performing obligations deriving from a contract; or which is the same:

“A prospect of each of the parties to a contract that the other will honestly and reasonably perform his duties under the contract in a way that is satisfactory for the trade community”. Thus, requires parties to act in such a way (honestly) as they would anticipate the other party to perform.

It is therefore, “giving information or doing transactions frankly and without an intentional purpose to defraud the other part”.

However, we should bear in mind that good faith does not necessarily refer to these transactions, information or efforts made without negligence.

But good faith has also been related with the legal rules linked with honesty, fairness and reasonableness. J.F. O´Connor explains good faith as follows:

“A fundamental principle derived from the rule pacta sunt servanda, and other legal rules, distinctively and directly related to honesty, fairness and

reasonableness, the application of which is determined at a particular time

by the standards of honesty, fairness and reasonableness prevailing in the

community which are considered appropriate for formulation in new or

revised legal rules”.

It is important to mention that this honest conduct that must be carried out also affects third parties who may be implicated or afterward involved. Thus, good faith is required during negotiations and once the agreement is reached because also then parties are to perform their obligations and enforce their rights fairly and honestly.

b) Bad faith

Bad faith can take place when one party without reasonable justification acts as to the contract in such a way that the result would end up with the nullification of the objective, or to cause significant harm to the other adversely to the expectations and goals set in the first place.

Or which is the same, dishonesty or fraud in any given transaction. A person who deceives or misleads another intentionally, with the purpose of gaining some sort of advantage with it.

Some examples could be cited: The representative of a company who is negotiating with say the union workers and at the same time having no intention to really compromise; An insurer making use of language and reasoning which are intentionally misleading so as to deny a claim; a prosecutor who argues and defend a legal position knowing it is false.

In Latin we can recognize this term also as : “mala fides”.

Application of good faith

We will go over the application of the principle very concisely.

Here, we basically have to distinguish between different situations:

First of all, where a contract exists the application of the principle has to take place at both the formation and performance of the contract (at the negotiations and the actual enforcement).

In French law, for instance, at the formation of contracts, the freedom of contract principle is thus, limited by the good faith principle.

While in the performance part, there are two major applications of the good faith principle which are: Duty of Loyalty and the Duty of Cooperation.

In another European country as it is Italy, their code also highlights the importance of such principle: art.1366 “Contract must be interpreted in good faith”; art.1375 “Contract must be executed in good faith”; art.1175

“Debtor and creditor must behave according to good faith and fair dealing rules” and finally, article 1337 provides that “parties must behave in good faith during the pre-contractual bargaining and contract drafting”.

But what happens when there is no referred contract? In such a case of absence of any sign of agreement, bad faith may turn into remedies in delict or tort, but not in contract, since the liability came up from an extra-contractual obligation.

Is there a general duty of good faith in law?

As we have seen so far, in civil law regimes the obligation of the good faith principle applies both in the formation and during the performance of the contract so therefore, we could say it has an “expansive approach”.

While common law regime, has a less broad scope of the term only applying it to the performance of the contract (mostly recognized by statute only).

Since civil law pictures it as a relationship between two parties, obligation of good faith appears during negotiations and even before this relationship is even formed (different to an offset of a contract in common law which requires: offer, acceptance and consideration).

Say a person is pretending to be negotiating but at the end of the day, does not have any real intention in closing such deal because he or she might just want to obtain information from the other party, which may be used later with another purpose and thus, breaks off suddenly the negotiations. This, in civil law results in extra-contractual liability and the more advanced the relationship is when breaking off, the easier is to establish such responsibility.

In other words, one should not breach the alliance of trust with persons whom he or she negotiates and then effectively contracts with.

Despite all its past, in the 20th century good faith started to gain a relative importance in common law, although limited in scope (only making reference to the performance of the contract). Notwithstanding the fact that there is still opposition in common law jurisdictions as to the doctrine of good faith.

The main reason for this could find its basis on the English attitude to see the law as a “self-standing domain” different from politics or business.

Common lawyers´ concern relies on the fact that, specially in pre-contractual bargaining, it would result on decisions made upon subjective standards of morality and fairness and therefore, giving raise to uncertainty.

Breach of good faith duties happens, so the English courts are proposing solutions to the party claiming a break off, but nevertheless, they prefer to do it without referring to a general principle, which seemingly appears to be creating problems as to legal outcomes.

Hence, good faith has frequently had to enter the common law in some hidden or “disguised” form, and this is just what it has been done.

Experts say that even if English lawyers do not call it good faith, they consider as important the need for legal doctrines which seek to moderate the intentional pursuit of self-interest in situations where the sense of right and wrong is involved.

Good faith in the common law and the civil law regimes

The common law in England has never recognized the good faith principle. Nevertheless, due to the many issues derived from unfairness has been developing in small stages, several solutions for such situations.

Amongst the various “piecemeal solutions” Courts have made use of to limit this injustice of contracts stand out: the common rules on mistake and misinterpretation, objective interpretation of the contract, duress, implied terms, waiver and estoppel and so on.

All these mechanisms are all substitutes of the good faith principle or remedies that try in a way or other to approximate to the general principle.

Yet today, it is not so recognized in the U.K, leaving out some statutes or regulations and always as we said, disguised. Even though they resort to this not to fall under the good faith principle in many cases they accomplish the same result.

Growing interest has been placed in the obligation of good faith as far as contractual performance is concerned. Lord Steyn raised the idea (reasonable expectation of people) meanwhile claiming that no good faith principle was needed in common law.

This could mean the closest attempt of common law to the civil concept of good faith.

Not judging the desirability or necessity of English jurists to seriously consider such principle as the good faith, what is undoubted is that they are little by little, being forced to “accommodate” to it mainly because of the introduction of some EU Directives in the UK that require so.

Nevertheless, as time passes by some other motives would be raised such as uniformity, integrity, to contribute to further international harmonisation and to protect in a better way the involvement of the parties and its interests in the dealings.

Conclusion

Through this paper I tried to make clear that the good faith principle could be without doubts regarded as a very open norm. It is firstly said to be a norm, also regarded as a basic principle, a rule, a duty, an unwritten law. So there we have the answer basically, it is so abstract since the definitions that the authors use are far from unitary.

This concept should be specified in order to be applied. Every case is different and the judge cannot just rely in what is apparently more equitable for him, he has to determine it according to objective parameters.

As it is evident, this operation of concretization is not uniform in all countries.

In Germany and the Netherlands they build up a system through an inductive approach reacting to court decisions whereas Italy and French legal systems play a more deductive role wondering what the concept should really entitle.

As far as Europe is concerned, this principle of good faith has had an overriding success with its higher boost during the 20th century.

The principle of good faith should not make common and civil lawyers be divided. From one point of view, common lawyers should not fear the principle since it does not differ too much to what the English acknowledge as equity.

On the other hand, civil lawyers should not persist as much in introducing the good faith term into a European private law code as they experience that the courts do so.

If a code for Europe was to be introduced it might be more effective to provide directly with what the courts may interpret, supplement and correct.

In the interest of tradition there will be those that will go for the good faith word but taking account common lawyers hostility (regardless groundless) towards it, the term “equity” could be considered as a half way meeting point ever since its part of both common and civil law traditions.

8. Literature

www.heinonline.com

www.ssrn.com

J.F. O´Connor: “ Good faith in English law”

www.westlaw.com



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