English law and other jurisdictions

To what extent is the principle of good faith in contract law a basis for convergence between English law and other jurisdictions? Is convergence desirable? To begin it is necessary to define both good faith and convergence as they apply to legal theory.

Good faith has a wide variety of legal definitions (an issue that will be touched on later, as it is problematic to compare a concept with no universally accepted definition), ranging from the more abstract found in statute,“honesty in fact and the observance of reasonable commercial standards of fair dealing”[1] to attempts to practically clarify the term in case law, “avoid cynical resort to the black letter of the law; observe reasonable commercial standards of fair dealing; be faithful to the agreed purpose of the agreement; and act consistently with the justified expectations of the other party”[2].

The concept of convergence theory postulates that one consequence of globalisation is that industrialised states will begin to converge socially and economically, and this results in a desire for laws to converge to facilitate international trade[3]. This essay will examine the principle of good faith in a number of European common and civil law jurisdictions to assess its development and the extent it could form the basis for convergence, before considering if such convergence is desirable. Good faith in Common Law jurisdictions

The existence of an general principle of good faith in English contract law is somewhat questionable, as the old common law maxim ‘caveat emptor’ demonstrates. Historically it has been rejected for three core reasons; that the self-interest fundamental to a commercial contract is diametrically opposed to the idea of good faith, that good faith is too much of a subjective concept to be enforceable and lastly that it is not the way of the courts to develop the law with comprehensive principles, it is preferential for them to do so incrementally[4].

In practice the lack of acceptance of a principle of good faith can be seen in the case of Walford v Miles, where Lord Ackner dismissed it as “unworkable in practice as it is inherently inconsistent with the position of a negotiating party. It is here that the uncertainty lies”[5].

This blanket lack of recognition may have begun to fragment more recently, with Justice Leggatt commenting obiter in Yam Seng Pte Ltd v International Trade Corporation Ltd that a continual refusal to recognise the need for good faith was tantamount to “swimming against the tide”[6] and that the “traditional English hostility towards a doctrine of good faith in the performance of contracts, to the extent that it still persists, is misplaced”[7].

Two subsequent cases have taken his opinion into consideration when deciding if a general duty to act in good faith existed[8], however both emphasised that good faith was dependant on the context of the contract, suggesting that an overarching principle of good faith is still not a fully fledged principle in English law. Good faith in Civil Law jurisdictions

The approach taken regarding contract law in the majority of continental Europe is shown in the axiom ‘pacta sunt servanda’, as unlike the majority of common law jurisdictions there is a tendency for civil jurisdictions to overtly recognise the principle of good faith due to their derivations from Roman law and the ecclesiastical courts of the 11-13th centuries.

The idea of good faith is codified into the German Civil Code (Burgerliches Gesetzbuch) article 242, which states the need to take the doctrine into consideration when performing the contract and article 311, which emphasises a duty to negotiate with due care (culpa in contrahendo). Despite the abstract nature of the ideal it has become a ‘general clause’ and something of a backbone of German law, forming the foundation of many doctrines and employed to avoid inequitable outcomes in cases.

It is also noted to have several distinct functions with the system, serving as an instrument of clarification, a guideline for behaviour and as a defence in cases of mistaken belief[9]. As with Germany there is an explicit mention of the general responsibility to act in good faith in French law, located in the obligations section of the Civil Code Article 1134 “les conventions doivent etre executees de bonne foi”[10] and Article 1135 “la convention oblige a toutes suites que l’equite donne a l’obligation d’apres sa nature”[11].

It has been noted that whilst the French commitment to good faith appears fortified by doctrine, it is diluted somewhat by the judicial distrust of equitable remedies (valeurs d’equite) and the inability of the courts and statutory instruments to make a differentiation between subjective and objective good faith as is seen in the German system[12]. A basis for convergence between English law and other jurisdictions?

The first evident issue that arose from the countries discussed was that there appears to be a clear divide between common and civil law jurisdictions when it comes to the centrality of good faith. This is in line with LeGrand’s writings on the matter, as he suggests that any convergence will be minor and unable to prevail over the disparities inherent in differing legal cultures[13]. Arguably the strongest force of convergence between the countries discussed should be their membership of the European Union, as creating shared standards across an internal market allows for more efficient trade.

The concept of good faith was included in the EU Unfair Terms in Consumer Contracts Directive 1993[14] and subsequently infiltrated English contract law through the Unfair Terms in Consumer Contracts Regulations 1999[15], which gave effect to the directive. That this does not appear to have successfully integrated the concept in British law gives support to Teubner’s theory that it is not possible to transfer legal concepts between cultures, as they serve as an irritant to the host legal system[16].

Both theories suggest that good faith would not provide particularly strong grounds for convergence as it has not become an accepted part of English contract law, however when the law is examined in more detail it appears that there may have long been an English equivalent of good faith developed through case law, where the supremacy of contractual sanctity is placed below the desire for a fair outcome.

There are many examples of English courts interfering with contracts to achieve a fairer outcome, such as for fraud, misrepresentation or mistake, and of recognising a duty to bargain in good faith when parties have a fiduciary relationship and inequality of bargaining power[17]. The law also prevents parties from employing confidential information gained via negotiation to their advantage, on the rule that, “the broad principle of equity that he who has received information in confidence shall not take unfair advantage of it,[18]” all of which correlate with a notion of good faith.

Additionally equitable remedies available for breach of contract protect those that reasonably rely to their disadvantage on the false promises of others by imposing a duty of care[19] or to decree the performance of a contractual duty if the remedy of damages if not sufficient[20]. Developments such as refusing to enforce penalty clauses agreed by both parties to a contract are also notable.

This general lack of enforceability can be traced back to 1720[21] and was recently reaffirmed by the Supreme Court in the joint cases of Cavendish Square Holding BV v Talal El Makdessi and Parking Eye Limited v Beavis (2015), where Lord Neuberger commented that there was an “imbalance in the parties rights. But it did not arise contrary to the requirement of good faith”[22] and went on to conclude such clauses could only be enforced if they were not, “out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation” [23].

The idea that a penalty could only be enforceable if it was a term a reasonable person would have agreed to is interesting, as the definition of such; “a hypothetical person in society who exercises average care, skill, and judgment in conduct”[24] doesn't appear to be too different from the ideal of operating in good faith. It is a possibility that linguistic differences may hide parallels, and that English contract law has been buffered by a form of good faith all along, albeit a discretional one contained in fragmented bodies of law.