Contract Law Analysis Paper Example

Introduction Unlike other civil law legal systems, such as the German one and the American one, United Kingdom’s (UK) and Hong Kong’s (HK) do not recognize the approach of general principle of good faith in contract law, as illustrated in Walford v Miles1. Yet, good faith should be promoted in UK and HK because one should value fairness in the whole course of dealing, from the point of pre-contractual negotiations till the discharge of he contracts. This essay aims at showing the merits of a good faith doctrine and possible implications on the UK and HK legal system so as to ensure fairness throughout the contractual relations A general principle of good faith A general principle of good faith can be applied to negotiation and performance of contracts.

‘Good faith’ in the law of contract presumes that both parties in a contract should deal with each other honestly and fairly. It is defined in the US legislature that ‘good faith’ equals to ‘factual honesty’2. In Interfoto Picture Library v Stiletto Visual Programmes Ltd3, Bingham L. J. affirmed that ‘good faith’ is essential to a fair and open dealing and therefore by acting in good faith, a higher degree of business efficacy will be the results. Unfair dealings will be effectively deterred upon adopting the doctrine of good faith and contractual parties will be more ‘protected’.

The current position in UK and HK Nevertheless, English law currently holds a negative view towards the concept of good faith. In Walford v Miles4, the court rejected to impose a duty of good faith in agreement to negotiate, with reasons being two-fold, the freedom of contract and the uncertainties brought about by doctrine of good faith. First and foremost, the freedom of contract means that each party is entitled to decide who he would contract to and which terms to contract he would decide.

Erefore, they can exercise their autonomy to pursue their utmost interest without any interference. The imposition of good faith would prohibit one advancing his interest. Moreover, it is hard for the court to determine whether one of the parties acted in good faith because proving good faith would require the court to look into the states of minds of the parties. Whether there is a proper reason is vague. Therefore, Lord Ackner considered it as ‘unworkable in practice’5. Reasons to impose a good faith doctrine in UK and HK 1 [1992] 2 A. C. 128.

2 The US Uniform Commercial Obligation Code (2012) Art 1 Part 2 §1-203 3 [1989] QB 433 (CA) 439 4 [1992] 2 A. C. 128 5 Walford v Miles [1992] 2 A. C. 128 i. Fairness outweighs Freedom of contract ‘Good faith’, in another word, promotes fairness in each dealing. Nowadays, the bargaining power between parties are often unequal, and some of them may act irresponsibly in negotiations and at the performance stage. For example, in Walford case, though the plaintiff has prepared a ‘comfort letter’, stipulating that he had endeavored to enter a contract with the defendant, the latter was still able to enter into a contract with a third party6.

This case illustrates that although the defendant was irresponsible, the plaintiff couldn’t claim damages for his efforts since the English court did not recognise agreement to negotiate. Therefore, by adopting a good faith doctrine, parties have to bargain and establish contractual terms honestly and fairly in terms of negotiation and performance of contracts. The interests in every trade would be balanced and protect both sellers and buyers from immoral terms. No one can cease trades without valid grounds or promising the buyer to sell him certain product but then go back on the promise.

In sharp contrast, opponents asserts that the imposition of ‘good faith’ would undermine freedom of contract. Such statement is supported by the House of Lords in Walford because parties are in adversarial position in negotiation7. Moreover, some may assert that the classical contractual theory suggests that freedom of contract enables both parties to possess the power to decide whether to contract or establish the terms of bargains8, and the imposition of ‘good faith’ would thus be contrary to this theory.

However, though freedom of contract is of paramount importance, contract without fairness would be immoral. The significance of contract lies in the foreseeability of parties’ actions in a deal; and the role of contract law is therefore evolved to regulate contractual relationships. In fact, the fairness brought about by the doctrine of good faith gives rise to a higher extent of business efficacy as the foreseeability of actions between parties is ensured.

AN EXAMPLE OF BAD FAITH IS CITED IN THE DOCTRINE OF GOOD FAITH IN CONTRACT LAW: A (NEARLY) EMPTY VESSEL, WHICH ILLUSTRATES THAT IF A CONTRACTOR ‘OPENLY ABUSES HIS BARGAINING POWER TO COERCE AN INCREASE IN CONTRACT PRICE’, A GOOD FAITH DOCTRINE CAN REFRAIN SUCH ABUSIVE bargaining power and protect the interest of the purchasers9. THEREFORE, A GOOD FAITH DOCTRINE CAN PROTECT THE INTEREST OF BOTH PARTIES AND PREVENT THE EXISTENCE OF UNFAIR BARGAINS.

FURTHERMORE, ‘ALTHOUGH MEN ARE LEGALLY FREE TO CONTRACT, THEY ARE NOT ECONOMICALLY OR SOCIALLY 6 [1992] 2 A. C. 128 7 [1992] 2 A. C. 128 8 Freedom of Contract and Fundamental Fairness for individual Parties: The Tug of War Continues, Carolyn Edwards, P. 654 9 The Doctrine of Good Faith in Contract Law: A (Nearly) Empty Vessel.

Emily Houh, University of Cincinnati College of Law, P. 12 free’10. It is unacceptable for parties to deal arbitrarily in a contract WITHOUT CONSIDERING ANOTHER PARTY’S ECONOMIC AND SOCIAL EFFORTS. FROM THE ABOVE CASE, IT CAN BE INFERRED THAT THE COURT ALSO RECOGNIZES THAT DIFFERENT CONTRACTUAL PARTIES BEAR A CERTAIN EXTENT OF SOCIAL AND ECONOMIC RESPONSIBILITIES. HENCE, WHEN FREEDOM OF CONTRACT AND FAIRNESS ARE IN CONFLICTS, FAIRNESS OUGHT TO PREVAIL. A DUTY OF GOOD FAITH CAN REGULATE ARBITRARY FREEDOM AND INSTILL A MORAL OBLIGATION IN THE LAW OF CONTRACT IN UK AND HK.

DURKHEIM MENTIONED that ‘liberty itself is the product of regulation. ’11 Although regulation MAY INFRINGE THE PARTIES’ FREEDOM, FAIRNESS IS AN UNIVERSAL VALUE THAT EVERY SOCIETY STRIVE TO UPHOLD IN DIFFERENT COURSES OF DEALINGS. THE PURPOSE OF CONTRACT LAW IS TO PREVENT TRANSACTIONS IN OUR SOCIETY DIVERTING FROM THE REASONABLE EXPECTATIONS OF PEOPLE. IT IS PROVED THAT THE COURT ALSO RECOGNIZE THE POSITION OF FAIRNESS AS AN EXPECTATION OF THE SOCIETY. CONSEQUENTLY, CONTRACTUAL RELATIONS OUGHT TO BE FAIR BOTH LEGALLY AND SOCIALLY. ii. Certainty of a good faith doctrine Bingham L. J.

in Walford upheld that good faith would be uncertain since it is hard for the Court to decide whether one acts in good faith12, as mentioned above. Nevertheless, such uncertainty is flawed. Not only have American and Brazilian legal system imposed a good faith doctrine for many years, internationally, The Vienna Convention on Contract for the International Sales of Goods (CISG) also adopt the doctrine of good faith. There are two models suggested in, one is more subjective and the other one is more objective. By adopting the more objective parameter, a reasonable standards of fair dealing would be imposed, which is more certain.

What’s more worth noticing is that English judges has started to establish a more certain criterion for a general principle of good faith. In a recent case, Director General of Fair Trading v First National Bank plc13, an objective test is suggested by Lord Bingham that whether consumers were unfairly taken advantages of when there is a significant imbalance between parties. Moreover, Lord Steyn supported the adoption of a doctrine of good faith because businessmen and people of the Underground would adopt a duty of good faith and stated that the uncertainty of good faith is because of the subjective test.

Hence, carrying out a more objective test can set a certain standard for fair dealing and performance of the contract. 10 The Regulation of Fairness and Duty of Good Faith in English Contract Law: A Relational Contract Theory Assessment, Rosalee S Dorfman, P. 7 11 12 [1992] 2 A. C. 128 13 [2001] UKHL 52, [17] Therefore, if the courts in UK and HK adopt such objective parameter to regulate ‘good faith’, it will be easier for them to deal with unfair dealing certainly. Conclusion All in all, even though English law has ‘developed piecemeal solutions in response to demonstrated problems of unfairness’14, unfair dealings still arise.

The courts in UK and HK should adopt a general principle of good faith because fairness valued by the society outweighs freedom of contract; and a doctrine of good faith would be certain if the courts adopt an objective standard. Moreover, recently, the English law has been starting to accept a duty of good faith, which is illustrated in Yam Seng Pte Ltd v international Trade Corporation Ltd15. In order to enable the law of contract to be fair, an objective standard when entering a contract should be imposed. 14 Interfoto Picture Library v Stiletto Visual Programmes Ltd [1989] QB 433 (CA) 439.