Before we begin to discuss the role of good faith in modern commercial law, we must first look at what good faith means and its history. Good faith first came around by Lord Mansfield who introduced the doctrine in the case of Carter v Bohemn . He stated ’’good faith forbids either party by concealing what he privately knows, to draw the other into a bargain, from his ignorance of that fact and believing the contrary’’’ .There has been a long-standing debate about whether good faith should be recognised as a source of legal right which is usually met with great scepticism and hostility. These negative reactions are generally due to the fact that the doctrine of good faith carries risks of uncertainty by allowing fair dealings to intervene with the sovereignty of contracts.
English courts have traditionally denied adopting good faith in contracts however this would be a very simplistic way of looking at it. In fact, good faith operates as an implied term within the UK in contractual dealings. As LJ Bingham stated in the case of Interfoto Picture Library v Stiletto Visual Programmes Ltd , English courts have developed a ‘’piecemeal solution’’ to issues of unfairness. This general duty of good faith is recognised by courts in Australia, Canada and Singapore and is often described as promoting honesty, loyalty, fairness and reasonableness . In European law, Article 1.106 of Land Commission’s Principles of European Contract law explains that principles of good faith is that parties should act ’’in accordance with good faith and fair dealings’’ which is one of the reasons why good faith in contracts is sometimes recognised as a general principle.
In order to establish whether good faith plays a role or not in modern commercial law, this essay will first look at the opposing view by looking at cases which have recognised good faith and how the doctrine has developed. It will then evaluate the cases which have overturned those decisions and will discuss why we don’t need good faith. We will have concluded with why the principle of good faith might not be relevant in the modern commercial law.
Recognition of Good Faith through Case Law
There is a clear development of good faith being applied through honesty and fair dealings which is predominantly supported by case law. The case of Yam Seng is revolutionary to the recognition of good faith. Justice Leggatt presented such a milestone judgement in Yam Seng which demonstrated a new standard of good faith being developed in English commercial contract law. LJ Leggatt argued that with the doctrine of good faith now being recognised internationally, English law would be ’’swimming against the tide’’ if it did also recognise it. English law currently only recognises the doctrine of good faith through a number of different ways such as implied terms, honesty and cooperation. Leggatt J identified regular applications of the good faith which included cooperation, duties of honesty and duties of disclosure. The High Court endorses Leggatt J’s approach in the case of Bristol Groundschool Ltd v Intelligent Data Capture Ltd . The judges concluded that the contract held an implied term of good faith which bound the parties to act honestly. These cases seemingly demonstrate the new role of good faith in modern commercial law. The argument that good faith would restrict freedom of contract to pursue own interests would be quashed in this regard as a duty to act in good faith would be established by both parties in agreement.
Further to this, legislation such as the Unfair Terms in Consumer Contracts Regulations demonstrate good faith as a recognised general principle . This legislation assesses terms in consumer contracts to establish whether they are unfair in direct relation to the requirement of good faith. As demonstrated above, the doctrine of good faith is not completely alien to commercial contract law. Following Yam Seng, in the high court case of Emirates Trading Justice Teare went on to praise and approve LJ Leggatt’s judgement in Yam Seng, describing it as ’’masterly’’.
Good faith has been established in many cases under implied terms or other principles. So far, the courts have recognised good faith on the basis of parties’ intentions rather than a principle of legal rights and duties. The Canadian case of Dynamic Transport Ltd v OK Detailing Ltd , Dickson J stated in his decision that the ’’vendor is under a duty to act in good faith and to take all reasonable steps to complete the sale’’.
Similarly, Canadian courts have taken the same route as Yam Seng by awarding a landmark decision in the case of Bhasin v Hrynew . The courts recognised that there is a general organising principle of good faith within Canadian common law which therefore requires parties to act honestly in their contractual agreements.
Many would argue that good faith does not have a clear definition. However, this is untrue as many judges and authors have attempted to define good faith. For example, in the case of Interfoto Library , Bingham LJ defined good faith as ’playing fair’ or ’coming clean’ and ’putting one’s cards face upwards on the table’. Further to Bingham LJ’s definition, an author named O’Connor J.F also proposed the following definition;
’’The principle of good faith…is 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’’
As demonstrated above, English courts seem to readily apply good faith in contracts through various methods, as recently as 2013 from Yam Seng. Clearly, these good faith duties which have promoted loyalty and honesty, have not caused any disruption or uncertainty to the cases it had been applied to. There is an argument as to why good faith does and should exist as the above demonstrates this.
Why good faith is not required
Despite this somewhat development, the courts are still divided upon whether good faith should be applied as a general principle. A general principle is to provide conduct related framework which would serve as a basis for specific legal doctrine. The courts held their traditional views when Lord Justice Jackson referred to Yam Seng and stated that ‘’there is no general doctrine of good faith’’ .
The main arguments opposing good faith is the lack of clarity that it carries. This uncertainty has been attributed as a prominent reason why good faith is not recognised in countries like the UK and Australia. Good faith cannot be used as a legal right or duty because its definition is so broad and complex, it could mean different things to different people. In Australian courts, Justice Wright stated ‘’good faith is incapable of abstract definition’’ in the case of Asia Pacific Resources Pty Ltd v Forestry Tasmania . Good faith could also form as a general principle, or as an organising principle or a source of legal right and duties as the question states. These different legal categories impose different types of expectations and obligations which can cause further confusion.
Bingham LJ’s definition of good faith had been criticised by Michael Bridge who has written a paper on the Anglo-Canadian Contract law and whether it needs a doctrine of good faith. He argued that good faith is actually an imperfect translation of what our ethical standards in relation to legal ideology and rules, would be . Further to that, Brownsword et al has added more complexity to the definition as he states that good faith can be viewed in a subjective sense where it requires honesty in fact, however it can also be interpreted in an objective standard which would require compliance with fair dealings . This clear indication that even the simple aspect of defining good faith is interpreted in many different ways displays how it can create confusion and chaos if it was to be applied as a legal right and duty. Sealy and Hooley put it this way ’’the concept seems impossible to define with any degree of precision’’’ . It is evident that people do not think alike, thus where the law is unpredictable and is left in the hands of judges to ’’act on their own idiosyncratic views of fair dealings’’ then this would undoubtedly weaken the certainty of commercial transactions.
Although we had demonstrated above the significant decision that was made in Yam Seng was revolutionary to the recognition of good faith, it was actually overturned in the case of MSC Mediterranean Shipping Company S.A v Cottonex Anstalt . Lord Justice Moore-Bick noted ’’recognition of a general duty of good faith would be a significant step in the development of our law of contract with potentially far-reaching consequences’’ . He has indicated that establishing a general principle of good faith would undermine the terms the parties of the contract have reached. It may also open floodgates to claims that would also undermine express terms agreed. The judgement made in MSC is evident that there is no general principles of good faith and it curtails the line of authority that was established in Yam Seng. Similarly, in the case of Walford v Miles the court did not accept that there is a general doctrine of good faith within English law. The law has simply developed piecemeal solutions as Bingham LJ had stated indicating that rather than good faith, equity intervenes to strike down unconscionable bargains. The Australian courts decided to refuse a recognised obligation to act in good faith in the case of Commonwealth Bank of Australia v Barker . The High court unanimously concluded that there is no automatic duty of trust and confidence to be applied. They believed it would beyond the court’s legitimate authority.
There are a few more reasons as to why good faith is not necessary and/or has already been established in different methods. Firstly, there are a number of adequate common law, statutory and equitable remedies which already exist to deal with unconscionable bargains. For example, Article 14.5 of the London Court of International Arbitration (LCIA) Arbitration Rules states that parties shall at all times ’’do everything necessary in good faith for the fair, efficient and expeditious conduct of arbitration’’ . Also, Dispute tribunals provide a cheap alternative way to hearing cases of those victims of bad faith. It does not require legal representation and will decide cases individually.
Secondly, we cannot interfere with intrinsic contractual doctrines that may be weakened by good faith as it holds so many different definitions. Courts are supposed to respect and enforce parties’ decisions however this cannot be done if imposing a requirement of good faith might go against the parties control of their contracting agreements. Hon Sir Robert Goff supported this by stating that the courts ’’are there to help businessmen not to hinder them; we are there to give effect to their transactions, not to frustrate them’’ . Further to this, judicial virtue of impartiality would be lost if judges were to decide who may have the benefit of the good faith doctrine; especially as it is not a clear doctrine. Lord Devlin concludes it will ’’limit impartiality and the appearance of it [which] are supreme judicial virtues’’ .
Another way to see if the cases that had recognised a duty of good faith had actually made an impact to the law, is by looking at cases that have followed since those judgements were passed. The Canadian case of Bhasin v Hrynew is a good example of how limited it’s impact was. Bhasin has added very little to the law surrounding good faith. An example of this is the case of Addison Chevrolet Buick GMC Ltd v. General Motors of Canada Ltd which came 2 years after Bhasin. The court found that no duty to have existed. The judges studied the case of Bhasin and concluded that is ’’no authority’’ and furthermore the doctrine of good faith is ’’not the source of contractual obligations but a guide to the application of them’’. This is clear evidence that cases such as Bhasin and Yam Seng with recognised duties of good faith have been far and rare. This is clear especially after studying the cases that followed, such as MSC which was after Yam Seng, where the courts had overturned the decision in Yam Seng.
There is undoubtedly a strong argument and history demonstrating the little impact good faith has had thus far. Our society is now filled with businessmen competing against each other aggressively. It would be unreasonable to think that contracting parties should bring their secret of success to the table simply because there is a doctrine of good faith which requires them to. What happens to the freedom of contract?
It is concerning that chancery judges who were the originators of good faith, show no dedication in implementing it as a legal source of rights and duties . If they do not want to take it further, then why should anyone else be inclined to do so? There must be a strong enough reason to disregard the role of good faith in contractual agreements. As the question stated above, English law prefers the ’’benefits of simplicity and certainty’’.