Role of Good Faith in Modern Commercial Law

3374 words (13 pages) Essay in Commercial Law

29/07/19 Commercial Law Reference this

Last modified: 29/07/19 Author: Law student

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“Lord Mansfield’s universal proposition [that good faith applied to all contracts and dealings] did not survive. The commercial and mercantile law of England developed in a different direction preferring the benefits of simplicity and certainty which flow from requiring those engaging in commerce to look after their own interests.’
(Lord Hobhouse, 2001).

Critically discuss whether good faith should play a role either as a general principle, organising concept, or source of legal rights and duties in modern commercial law.

In comparison with other common and civil law jurisdictions, in the English commercial law, there is no general obligation for a party to act in good faith, either on contracting, negotiation or even performance. For instance, EU legislation frequently imposes such a duty on contracting parties, whilst in English law, despite the fact that the issue of good faith is of great significance to certain areas, such as employment and insurance,[1] it still remains distant to commercial contracts. As of the latter, the term usually arises in dispute resolution clauses and future performance contracts. Therefore, this essay aims to analyse the role of good faith in modern commercial law.

Good faith as a general principle

Currently, the reasons why the general principle of good faith is not being recognised by English law is in order to avoid uncertainty and to preserve the freedom of the parties. As to the former, the Courts, rather than accepting such a vague term, which would lead to uncertainty as to the validity of the contact, prefer to not offer such a duty that would enable parties to disregard their contracts in the event of a breach of faith or unfairness. There is concern that the adoption of such obligation, would undermine the fundamental goal of contractual certainty.

Also, according to Bingham LJ, the traditional English hostility towards the doctrine of good faith is based on the fact that the Courts are searching for particular solutions to particular issues rather than enforcing such broad principles.[2] It is believed that each party is entitled to its own interests and should act accordingly, as long as the acts meet the objectives of the underlying agreement. This ethos of individualism allows the parties to pursue their commercial and self-interests in negotiating and performing contracts, as long as no term has been breached.[3]

However, despite the negative feeling towards good faith in commercial law and the difficulty to imply terms into contracts, there are cases where the Courts have established the implied duty of good faith. The highlight of this controversy is underlined in the case of Yam Seng Pte v International Trade Corp Ltd[4], which concluded that the Courts should recognise a limited form of good faith as an implied term of a contract. The serving judge of the case, Sir Leggat[5], held that “honesty, fair dealing, loyalty to the parties’ intentions underpin certain relational contracts.”[6] In order for good faith to be established, a certain degree of trust and co-operation is necessary.

Contradictory, Moore-Bick LJ agrees with the belief that good faith should not be recognized as a general principle, due to the lack of support in the authorities and the fear that by adopting such principles would make the Court withdraw the already agreed terms of the parties.[7] Therefore, parties are advised that when they want to challenge such topics, they should refer to the lack of fairness or reasonableness.  

Nonetheless, following the example of the Medirest case[8], where parties wish to add the duty of good faith in their contracts, the Court will give effect to their intentions, without implying  that the Court would construe the clause as imposing upon the parties a general duty of good faith.[9]

Furthermore, good faith as a general principle provides a conduct-related framework for the application of existing legal doctrines[10], while specific legal doctrines could derive from it. Thereupon, in the MSC v Cottonex case[11] the English High Court saw that principle as the basis for the rule that ‘a contractual discretion must be exercised in good faith for the purpose for which it was conferred, and must not be exercised arbitrarily, capriciously or unreasonably (in the sense of irrationally)’.[12] While this requires the consideration of the legitimate contractual interests of each party, it does not mean that a party has to prioritize the interests of the other party[13], as long as it won’t undermine them in bad faith.

Good faith as an organising concept

The English Courts insist that there is no “general organising principle” of good faith since its acceptance would possibly undermine the already agreed express terms of the contract and that the law should develop along established lines[14], hence, the successful implied duty cases are extremely limited. Such decisions indicate that an innocent party will not be able to fulfil their side of the contract, due to a repudiatory breach by the other party, in case further performance is not possible. This is caused due to the frustrating alteration that the breach had on the commercial purpose of the contract. The discomfort to create an overriding principle of good faith is similar to the approach of contract interpretation, where the solution to any possible problem lies at the terms which were agreed by the parties and the interference of the Court should be avoided.

Moreover,Leggatt J tried to define the good faith as a general principle, by referring to the leading authority of the Canadian Supreme Court, Bhasin v Hrynew[15], where it was held that there is an ‘organising principle of good faith in common law that underlies and manifests itself in more specific doctrines governing contractual performance’.[16] However, like the Court said it is not ‘a free-standing rule, but rather a standard that underpins and is manifested in more specific legal doctrines’.[17] Therefore, the general organising concept is not a doctrine governing contractual performance, which means that claims of good faith cannot be based on this principle.[18]

Good faith as a source of legal rights and duties

Despite the general position that an agreement to negotiate in good faith is not enforceable,

the English Courts still see good faith as a source of legal rights and duties. In particular, they have held that specific provisions, which can be described as an agreement to negotiate, could be enforceable. In Petromec Inc v Petroleo Brasileiro SA[19], both parties agreed to negotiate in good faith on the cost of an upgrade to an offshore oil platform. The Court of Appeal decided that this express duty would take place only if this obligation (i) is included in the contractual valid agreement, (ii) is an express obligation and (iii) the matter to be negotiated is capable of objective assessment by a third party. Specifically, the Court found that the abovementioned requirements were fulfilled, hence, the possible result of negotiations could be identified.

Additionally, if a duty of good faith “makes reference to a clearly defined mechanism to discharge the obligation, it does not fail on the grounds of uncertainty of enforceability of any breach.”[20] This measure was enforced at Cable & Wireless Plc v IBM United Kingdom Ltd[21], “where a dispute resolution clause included wording that the parties should resolve their dispute in good faith, while the clause also made specific reference to an alternative dispute resolution process.”[22]

Establishing such a principle, will not necessarily create more duties, as long as the parties do not act upon their contractual duties capriciously. Also, there would be more requests in long-term agreements, due to the close collaboration and the importance of the exchange.[23] Finally, it would be dependent on how the Court will interpret the nature of the general principle of good faith, something that is already done under the piecemeal-approach[24], where the parties are obliged to have ‘fair, honest and genuine discussions aimed at resolving the dispute’.[25] It would be difficult to define the measures that should be taken and whether the parties are compelled to fulfil them, like having personal meetings or exchanging information. 

It should be highlighted, that the drafting of a list with detailed obligations would make it easier for the judiciary to apply good faith. Duties[26], such as:

  • respecting the agreed negotiation framework,
  • respecting the remaining provisions of the contract,
  • having regard to the prior contractual practice between the parties,
  • exchanging the information necessary for the success of the agreement,
  • showing willingness to reach a compromise,
  • avoiding the production of misleading information and
  • avoiding unnecessary delays.

The abovementioned duties could help with the determination of cases that face the issue of good faith. According to the facts of each case, different duties will need to be achieved in order to sustain the purpose of the contract and the interests of the parties, while the Courts will respectively decide whether there has been a breach of good faith or not.

Establishment of the express duty of good faith in commercial law

On the other side, despite the hostility towards good faith, there are propositions about the obligations it would impose if it was established as an express duty in commercial law. According to previous forms of good faith, the term was imposing mainly negative obligations, such as avoiding actions that would frustrate the aim of an agreement[27], prohibiting the deliberate provision of false information and inappropriately logging to other party’s digital systems[28], as well as not hiding material facts from the other party.[29]

Good faith could be used in commercial contracts as it is used to other situations, where Courts apply it as an ad hoc basis in order to combat problems of unfairness, an application that imposes positive rights to the parties. Specifically, it requires respect for the purpose of the contract and its terms, following reasonable standards of fair dealing and acting according to the expectations of the other party. However, this means that the nature of good faith is open to interpretation by the Courts and it depends on the clauses and context of the contracts. Therefore, the clear drafting of obligations of good faith in an agreement plays a significant role. The scope and content of the express duty should explain clearly the requirements needed to fulfil  the obligation, in order to avoid any possibility of future uncertainty.

The English Courts in order to establish the already recognised aspects of honesty, fairness, and reasonableness, would rather use existing doctrines such as the implication of terms, rather than good faith since the latter is not considered to be a free-standing rule of law, but a standard of behaviour. Instead, this principle could be used as the foundation for the development of new rules in relation to good faith, as the possible enactment of a general catch-all provision of civil law jurisdictions[30] such as section 242 of the German Civil Code BGB. [31] Due to the understandable differences between common and civil law, it is expected that the abovementioned might not be the desired change by the English Courts. Rather, it is believed that they would prefer to follow the approach of the Canadian Supreme Court[32], which developed new rules only where they regard the current law as not sufficiently giving effect to the underlying principle of good faith.[33] Notably, it created a general doctrine of honestly in contractual performance, which is similar to the judgement in Yam Seng case, ‘it is hard to envisage any contract which would not reasonably be understood as requiring honesty in its performance’.[34] 

Even then though, there is a risk of overstretching the conceptual limits of the implication in fact[35], hence, the judiciary might prefer to accept only specific good faith duties as long as they rely on the organizing principle of good faith.

Conclusion

English law’s relationship with the doctrine of good faith appears to be changing over time. Admitting that the party autonomy recognises and gives effect to the parties pre-contractual intentions, should not override the fact that a duty to act in good faith promotes honesty and fair dealing, which is seen as a desideratum.[36] The content of this duty is solely based on context, something that changes in every case. Parties are free to either preclude or determine that duty and by careful drafting, any uncertainty can be minimised. [37] Good faith could eventually be used as a general principle, organising concept or source of legal rights and duties in modern commercial law, but this depends on the facts of its case and the willingness of the Courts to expand the legal framework. In spite of that, as seen by the majority of the current case law, due to the ambiguity of the interpretation of good faith, it is suggested that the parties in order to have successful commercial contracts, should draft them with clarity, detail, and precision, so that they can bypass the controversial issue of the good faith.

Bibliography

Cases

  1. Berkeley Community Villages Ltd v Pullen [2007] EWHC 1330
  2. Bhasin v Hrynew [2014] SCC 71
  3. Bristol Groundschool Ltd v Intelligent Data Capture Ltd [2014] EWHC 2145
  4. Cable & Wireless Plc v IBM United Kingdom Ltd [2002] EWHC 2059 (Comm)
  5. Horn v Commercial Acceptances Ltd [2011] EWHC 1757.
  6. Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd [2013] EWCA Civ 200
  7. MSC Mediterranean Shipping Company S.A. v Cottonex Anstalt [2016] EWCA Civ 789
  8. Petromec Inc v Petroleo Brasileiro SA [2005] EWCA Civ 891.
  9. Yam Seng Pte v International Trade Corp Ltd [2013] EWHC 111 (QB)

Legislation

  1. German Civil Code BGB

Books

  1. McKednick, Contract Law, Palgrave Macmillan Law Masters, 9th Edition, 2 June 2011

Journal articles

  1. Klaus Peter Berger, Thomas, Good faith as a ‘general organising principle’ of the common law, Arb. Int’l, 2016, Vol. 32
  2. Klaus Peter Berger, Renegotiation and Adaptation of Investment Contracts: The Role of Contract Drafters and Arbitrators, 2003, 36 Vanderbilt J Trans L 1347, 1365ff. 

Online journals

  1. Ashurst, A leap of faith – the meaning of good faith in commercial contracts, Dispute Resolution Briefing, 9 February 2017
  2. James Hannant, Guildhall Chambers, Good faith in English Contract Law, <http://www.guildhallchambers.co.uk/uploadedFiles/Good_Faith_in_English_Contract_Law.pdf >

[1] James Hannant, Guildhall Chambers, Good faith in English Contract Law, <http://www.guildhallchambers.co.uk/uploadedFiles/Good_Faith_in_English_Contract_Law.pdf >.

[2] McKednick, Contract Law, pp. 221-2, Palgrave Macmillan Law Masters, 9th Edition, 2 June 2011.

[3] Ibid.

[4] [2013] EWHC 111 (QB).

[5] Sir George Andrew Midsomer Leggat.

[6] Ashurst, A leap of faith – the meaning of good faith in commercial contracts, Dispute Resolution Briefing, 9 February 2017. 

[7] MSC Mediterranean Shipping Company S.A. v Cottonex Anstalt [2016] EWCA Civ 789.

[8] Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd [2013] EWCA Civ 200.

[9] James Hannant, Guildhall Chambers, Good faith in English Contract Law, <http://www.guildhallchambers.co.uk/uploadedFiles/Good_Faith_in_English_Contract_Law.pdf >.

[10] Berger, Klaus Peter/Arntz, Thomas, Good faith as a ‘general organising principle’ of the common law, Arb. Int’l, 2016, Vol. 32, pp. 167-178.

[11] MSC Mediterranean Shipping Company S.A. v Cottonex Anstalt [2016] EWCA Civ 789.

[12] Ibid at [97].

[13] Berger, Klaus Peter/Arntz, Thomas, Good faith as a ‘general organising principle’ of the common law, Arb. Int’l, 2016, Vol. 32, pp. 167-178.

[14] MSC Mediterranean Shipping Company S.A. v Cottonex Anstalt [2016] EWCA Civ 789.

[15] [2014] SCC 71.

[16] Ibid at [63].

[17] Ibid at [64].

[18] Berger, Klaus Peter/Arntz, Thomas, Good faith as a ‘general organising principle’ of the common law, Arb. Int’l, 2016, Vol. 32, pp. 167-178.

[19] [2005] EWCA Civ 891.

[20] Ashurst, A leap of faith – the meaning of good faith in commercial contracts, Dispute Resolution Briefing, 9 February 2017. 

[21] [2002] EWHC 2059 (Comm).

[22] Ibid.

[23] Yam Seng Pte v International Trade Corp Ltd [2013] EWHC 111 (QB).

[24] Emirates Trading Agency v Prime Mineral Exports Private Ltd [2014] EWHC 2104 (Comm).

[25] Ibid at [64].

[26] Klaus Peter Berger, Renegotiation and Adaptation of Investment Contracts: The Role of Contract Drafters and Arbitrators, 2003, 36 Vanderbilt J Trans L 1347, 1365ff. 

[27] Berkeley Community Villages Ltd v Pullen [2007] EWHC 1330.

[28] Bristol Groundschool Ltd v Intelligent Data Capture Ltd [2014] EWHC 2145.

[29] Horn v Commercial Acceptances Ltd [2011] EWHC 1757.

[30] Berger, Klaus Peter/Arntz, Thomas, Good faith as a ‘general organising principle’ of the common law, Arb. Int’l, 2016, Vol. 32, pp. 167-178.

[31] Duty of Performance, Performance in good faith.

[32] Bhasin v Hrynew [2014] SCC 71.

[33] Berger, Klaus Peter/Arntz, Thomas, Good faith as a ‘general organising principle’ of the common law, Arb. Int’l, 2016, Vol. 32, pp. 167-178.

[34] Yam Seng Pte v International Trade Corp Ltd [2013] EWHC 111 (QB).

[35] Ibid.

[36] James Hannant, Guildhall Chambers, Good faith in English Contract Law, <http://www.guildhallchambers.co.uk/uploadedFiles/Good_Faith_in_English_Contract_Law.pdf >.

[37] Ibid.

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