p. 61915. Good faith
- Mindy Chen-WishartMindy Chen-WishartDean and Professor in the Law of Contract, Oxford University Law Faculty, Fellow of Merton College, Oxford, and Professor of Law (fractional), National University of Singapore
Abstract
English law does not currently recognise a duty of good faith, but whether it should in the specific context of contractual performance, or in contract generally, has attracted increasing discussion in case law and commentaries. In addition, good faith informs a diverse range of legal doctrines and principles. This chapter discusses: (1) the meaning of good faith; (2) the pros and cons of recognising good faith; (3) three different models of good faith; (4) the nature of good faith; (5) the taxonomy of good faith in current contract law; and (6) the difference that recognition of good faith might make to various aspects of the law.
‘You must act in good faith’
Much has been said about good faith but mostly at a high level of generality that makes the concept difficult to pin down. There is no clear consensus on what good faith means. This chapter aims to explore the meaning of good faith, identify its demands, map its variables, and assess the desirability of openly recognising a general doctrine of good faith.
15.1 The meaning of ‘good faith’
As Lord Bingham observed, even jurisdictions openly recognising the duty ‘have no common concept of fairness or good faith’ (DGFT v First National Bank (2001)). At its narrowest, it could be viewed as simply synonymous with the absence of bad faith. p. 620↵In Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd (2001), Lord Scott stated in the insurance context, that: ‘Unless the assured has acted in bad faith, he cannot … be in breach of a duty of good faith, utmost or otherwise’. However, this formulation simply begs the question of why certain conduct is regulated. It is conclusory rather than explanatory.
To give good faith minimum independent content, the starting point must be the recognition that good faith is a demand of interpersonal dealing that, in the contractual context, translates into some limit on self-interested conduct, and, logically, some regard for the interests of the other party. In ‘Good Faith in English Contract Law: A Humble “3 by 4” Approach’, Victoria Dixon and I attempt to explain and taxonomise the structure and content of good faith. We describe it as an attitude (a stance or a mindset) that contract parties are required to assume when they participate in the activity of contracting.2 This attitude is manifested in demands of:
Respect for the legitimate interests of the other party as an equal, expressed as:
honesty, and
fair dealing, and
Respect for the contract made, expressed as:
fidelity to the contractual purpose.
This view is supported by or entirely consistent with the following:
Leggatt J identified (i)–(iii) above under the rubric of good faith in Yam Seng.
Commonly accepted legal standards at common law such as ‘reasonableness’, ‘unconscionability’, ‘fairness’, ‘equity’, and ‘justice’ which are motivated by good faith concerns. Steyn LJ said that (First Energy (UK) Ltd v Hungarian International Bank Ltd (1993)):
A theme that runs through our law of contract is that the reasonable expectations of honest men must be protected. It is not a rule or a principle of law. It is the objective which has been and still is the principal moulding force of our law of contract. It affords no licence to a judge to depart from binding precedent. On the other hand, if the prima facie solution to a problem runs counter to the reasonable expectations of honest men, this criterion sometimes requires a rigorous re-examination of the problem to ascertain whether the law does indeed compel demonstrable unfairness.
Section 62(4) of the Consumer Rights Act 2015 (CRA) invalidates unfair non-core term in the sense, inter alia, of contravention of good faith. CRA gives effect to the EC Directive on Unfair Terms in Consumer Contracts (93/13/EEC), and recital 16 there refers to dealing ‘fairly and equitably’ with the consumer ‘whose legitimate interests [the trader] has to take into account’.
Good faith is said to require: ‘“playing fair”, “coming clean”, or “putting one’s cards face upwards on the table”. It is in essence a principle of fair open dealing’ (Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd (1989)); it looks to ‘good p. 621standards of commercial morality and practice’ (Director General of Fair Trading v First National Bank plc (2001)).
The American Uniform Commercial Code defines good faith as ‘honesty in fact and the observance of reasonable commercial standards of fair dealing’.
The Supreme Court of Canada held that good faith requires parties to perform their contracts ‘honestly and reasonably and not capriciously or arbitrarily’; this requires them to give appropriate consideration to the legitimate interests of the other party (Bhasin v Hrynew (2014)).
Finn argues that good faith, while ‘permitting a party to act self-interestedly, nonetheless qualifies this by requiring that party, in his decision and action, to have regard to the other party’s legitimate interests’ (‘The Fiduciary Principle’ in T G Youdan (ed), Equity, Fiduciaries and Trusts (Carswell, 1989) 1, 4).
The concept of good faith as a restraint on self-interest and regard for the counterparty’s interests and for the contract made (expressed as (i) honesty, (ii) fair dealing, and (iii) fidelity to the contractual purpose) are, in turn, manifested by existing doctrines that can be understood by the category of contractual relationships to which they apply. This is discussed further in 15.3.
Before that, it is useful to consider:
the arguments for and against English law recognising a general duty of good faith;
the nature and role of good faith; and
its demands in specific contractual relationships.
It is to these that we now turn.
15.2 Should English law recognise a general doctrine of good faith?
English contract law recognises no general good faith requirement. Should it?
15.2.1 The arguments in favour of recognising good faith
(i) We already have it: the discussion at 15.4 incontrovertibly illustrates the many and varied ways English contract law restrains a party’s self-interest and requires regard to be paid to the legitimate interests of the counterparty. English contract law has ‘been speaking prose without knowing it’. As Stapleton notes, once these are recognized as motivated by good faith, it is evident that good faith plays a ‘widespread and profoundly important role’ in our private law (in ‘Good Faith in Private Law’ (1992) 52 CLP 1). The central question is not whether we should introduce it, for we already have it. Rather, it is what good faith should demand in particular circumstances.
(ii) Transparency and coherent development: openly recognising good faith as the unifying principle underlying many specific contract rules and doctrines, currently dealt with under many different headings, would improve the transparency and coherence of p. 622the law. It only makes explicit what is implicit. It would also facilitate greater coherence and consistency in the law by identifying inconsistencies or gaps amongst the ‘islands of intervention’ calling for re-examination and facilitating the recognition of new rules and doctrines to address problems of unfairness present and future.
(iii) Good faith recognised in other jurisdictions: good faith is recognised by most systems of law—including those of:
civil law systems such as Germany, France, Italy, China, and Japan;
common law systems such as the US, Canada, and Australia;
hybrid or mixed legal system such as Scottish law;
EU contract law, eg the Principles of European Contract Law (PECL), the European Draft Common Frame of Reference, and the Common European Sales Law (CESL); and
international instruments such as the UN Convention on International Sale of Goods (CISG) and the UNIDROIT Principles of International Commercial Contracts (PICC).
Indeed, good faith was expressly incorporated into English law via the EU Directive on Unfair Terms in Consumer Contracts (implemented via CRA 2015). The impact of CRA, which invalidates non-core terms in consumer contracts that are unfair in the sense that, ‘contrary to the requirement of good faith’, they ‘cause a significant imbalance in the parties’ rights and obligations arising under the contract’, will continue post-Brexit.
(iv) Good faith protects the autonomy-enhancing institution of contract: contracts require legal recognition and enforcement by courts. This can be justified for enhancing individual autonomy, but it does not require the state to respect the parties’ apparent intentions in an unqualified way (ie always and absolutely):
First, contract power needs to be restrained to preserve the maximum scope of freedom for all participants, consistent with the Kantian injunction that persons are ends in themselves with an absolute dignity which must be respected; they must be treated not only as a means of attaining one’s own ends, but also as ends which one should simultaneously serve. Thus, the state must spell out what it means for participants to treat others on the basis of equal respect for the other’s autonomy;
Not all choices are worthy of support simply by virtue of being freely chosen.
Significant inequality of bargaining power may raise concerns about the adverse results of playing the contract game for the weaker party. Contractual freedom in a capitalist system primarily means the opportunity to use property ownership in the market as a means of power over others.3 The more powerful in the market can set the terms of the transaction in their favour. But, the stronger party should not be allowed to ‘push the weak to the wall’ (Lloyds Bank v Bundy (1974)). Even boxing has weight p. 623classifications (14 in amateur and 18 in professional) to avoid unfair contests between wildly different sized participants and the predictable damage done to the smaller.
The state should also promote contracting in a way that is consistent with widely held notions of social justice. Accordingly, good faith duties represent the state’s refusal to assist with unworthy conduct. Shiffrin4 speaks of the law’s avoidance of complicity with exploitation; Dalton5 refers to the restraint on self-interest necessitated by norms of decency and equality.
The law should also ensure parties’ minimal welfare in appropriate circumstances (hence, eg, the avoidance of unconscionable bargains and the invalidity of exemptions of liability for negligently caused personal injury or death).
Contract law rules must uphold the integrity of the institution (the game) of contract by protecting it from abuse; the parties can change some of these rules by agreement, but other rules are mandatory—contract law prescribes some irreducible minimums, eg no duress and no fraud. Without such restrictions, the contract relation risks becoming the locus of exploitation or manipulation. Contract law then risks colluding with such exploitation and thus eroding the institution of contract itself. In truth, adherence to certain minimum standards of contractual behaviour is a condition of playing the contract game and entitlement to the support of the law to enforce contracts.
We may also justify good faith as something that parties would choose behind John Rawls’ ‘veil of ignorance’ (see A Theory of Justice (Belknap Press of Harvard University Press, 1971)). As mere mortals who lack omniscience, are driven by changing passions and desires, have limited processing capacity, and cannot plan for every conceivable contingency, pragmatic and self-interested parties would agree that participants in the contract game should act in good faith. Restraining the freedom to engage in opportunistic and exploitative conduct protects the institution of contract and makes contracting parties more secure and so more willing to enter contracts.
15.2.2 The arguments against recognising good faith
(i) Interference with freedom of contract and inconsistency with individualistic ethic:
Moore-Bick LJ observed that: ‘There is … a real danger that if a general principle of good faith were established it would be invoked as often to undermine as to support the terms in which the parties have reached agreement’ (MSC Mediterranean Shipping Co SA v Cottonex Anstalt (2016)).
Good faith, insofar as it requires restraint on self-interest, ‘cuts against the essentially individualistic ethic of English contract law’ (R Brownsword, Contract Law: Themes for the Twenty-First Century (2nd edn, OUP, 2006) 114).
Freedom is already amply restrained: limits on freedom of contract are so ubiquitous that we can fail to notice them. In addition to those instanced at 15.5, there are large swathes of legislative protection afforded to the general public (eg health and safety, food safety, licensing of medical practitioners), and to specific groups (eg consumers, tenants, and employees) usually by prohibiting, controlling, or mandating certain terms and by imposing certain procedural safeguards (eg requiring advice prior to the contract or ‘cooling off’ periods during which parties can cancel the contract).
By giving contracting parties greater security against the risk of opportunism and exploitation, imposing good faith duties may make parties more willing to embark on otherwise risky ventures, ie it could enhance, rather than restrict, freedom via contracting.
The language of ‘interference’ with contractual freedom overlooks the fact that legal enforcement is itself a form of state ‘interference’ in favour of one party and against the other.
(ii) For Parliament, not the courts: the concern here is one of legitimacy, that courts are going beyond their proper function through judicial law-making as unelected officials.6 The argument is that Parliament has provided a certain degree of protection7 for consumers, employees, and tenants amongst others; it is not the courts’ place to go further.
Counterpoint
The role of common law courts includes restating and developing the law. As Lady Mary Arden of the UK Supreme Court commented when discussing the ‘role of the independent judiciary’ (‘Coming to Terms with Good Faith’ in Common Law and Modern Society: Keeping Pace with Change (OUP, 2016) at 63):
It is crucial for judges to seek to develop the law in line with evolving commercial and social need. It is part of their responsibility to have a vision of the law as a dynamic, not a static, set of principles and rules, to see the big picture and overall trends, and to have a sharp eye for what is coming over the horizon rather than simply that which has served us well in the past.
Many urgent matters vie for parliamentary time (terrorism, crime, and so on); it is unsurprising that the details of contract law can take a low priority. But courts can take the lead given by Parliament:
Lord Bingham MR said, in relation to UCTA, that ‘the common law could, if the letter of the statute does not apply, treat the clear intention of the legislature expressed in the p. 625statute as a platform for invalidating or restricting the operation of an oppressive clause’ (Timeload Ltd v British Telecommunications plc (1995)).
Likewise, Beatson observes that ‘there are examples of statutory regimes which express a policy from which a principle can be derived being used analogically in developing the common law’ (‘The Role of Statute in the Development of Common Law Doctrine’ (2001) 117 LQR 247, 299).
(iii) Uncertainty: although good faith, at a minimum, includes honesty, its precise content is unclear. A general principle of good faith would therefore create uncertainty in the law.
Counterpoint
The importance and achievability of legal certainty is often overstated. Certainty cannot be an end in itself; a rule that invalidates the contracts of people below a certain height would be relatively certain, but not fair or indeed useful.
English law regularly gives effect to other broad standards with a ‘moral’ flavour that appear equally uncertain, eg ‘fairness’, ‘reasonableness’, ‘unconscionability’, ‘substantial’, ‘radical’, ‘satisfactory’, and ‘foreseeable’. These open-textured standards, like ‘good faith’, are necessary for the legal system to nuance its response to the particular circumstances of transactions.
Even commercial parties, who are ostensibly the most concerned about legal certainty, recognise the desirability of deploying quantitatively uncertain terms such as obligations to ‘cooperate’, to use ‘best endeavours’ or ‘reasonable endeavours’, or even to ‘act in good faith’. In Yam Seng, Leggatt J. observed that good faith involves ‘no more uncertainty than is inherent in the process of contractual interpretation’.
(iv) It would make the common law less attractive as the law governing contracts internationally: many choose English contract law to govern their contracts although neither party comes from the UK. In part, this is due to the perception that it is more certain, since it need not grapple with good faith.
Counterpoint
If we otherwise accept the legitimacy of good faith duties, we have to question whether it should be rejected just because the (stronger) party who is in the position to choose the governing law would prefer English law because that party could then avoid its good faith duties to the other party. Civil justice is not primarily a commodity designed to appeal to its consumers. Rather, law is a public and social good that should reflect society’s ethical values.
(v)p. 626 Common law’s preference for cautious incrementalism of existing doctrines, over the recognition of a general broad principle. English law eschews broad principles in favour of cautious incrementalism; ‘[t]he preferred approach … is to avoid any commitment to overarching principles’ (Lord Hope in R (on the application of European Roma Rights Centre) v Immigration Officer, Prague Airport (2004)). Hence, Paul Davies argues that good faith is ‘too novel and potentially too disruptive to become a default rule (at least in one big leap, and at least in the commercial context)’ (‘The Basis of Contractual Duties of Good Faith’ [2019] Journal of Commonwealth Law 1).
Pause for reflection
This is not so much an argument against good faith as an argument about the way in which good faith should be implemented. It is an important point. Some versions may indeed be incompatible with the common law approach, but others may not be. Consider the familiar neighbour principle in negligence law: prior to Donoghue v Stevenson (1932), ‘most eminent lawyers thought that there were a number of separate torts involving negligence, each with its own rules, and they were most unwilling to add more’. Lord Atkin’s famous articulation of the underlying neighbour principle resonates with the good faith principle.
But, note that the neighbour principle does not operate as a direct cause of action, nor does it apply directly to all cases that may fall within its parameters. Rather, it has facilitated cautious incremental development through reasoning by analogy with existing authorities. An analogous good faith requirement would thus not be foreign to the modus operandi of the common law.
15.3 Three potential ‘speeds’ of good faith
In arguing for or against the recognition of good faith in English contract law, commentators and judges have often talked at cross-purposes. The aim of this section is to disentangle three distinct models of good faith and express a preference for the third version.
15.3.1 Good faith as an independent cause of action: the ‘charging bull’
The most radical version is to introduce good faith into English contract law as an independent and direct cause of action. This version of good faith is often assumed by good faith naysayers when they cast good faith as a ‘contagious disease of alien origin’, or the proverbial ‘bull in the China shop’ marauding unrestrained through the carefully curated china shop of English contract law (M Bridge, ‘Doubting Good Faith’ (2005) 11 NZBLQ 430). The analogy would be to bring a direct action on the neighbour principle, ie to take reasonable care to avoid acts and omissions which it is reasonably foreseeable will injure your neighbour.
But, morality and law are not coterminous and attempts to treat the neighbour principle as laying down a general rule for negligence liability have rightly been criticised.
The potential difficulties of this approach are evident from the experience of those jurisdictions that come closest to implementing it. Israeli contract law p. 627requires parties to ‘act in … good faith’ in negotiating a contract, and ‘an obligation or a right arising out of a contract must be fulfilled or exercised … in good faith’. Applying this law directly has ‘totally changed the contractual map’ by replacing ‘rigid, rational and clear’ laws expressive of an ‘individualistic-capitalist outlook’ with ‘flexible and less clear-cut’ rules which express ‘an altruistic-moral view’ (G Shalev, ‘Forty Years of Contract Law’ (1990) 24 Israel L Rev 657). This has generated an unacceptable degree of uncertainty.8
This approach is wholly unsuitable for English law because it:
poses an undue threat to contractual freedom, and contractual certainty; and
contradicts the common law’s aversion to general principles and preference for cautious incrementalism.
Even the US Uniform Commercial Code, § 1-304, which imposes a mandatory duty of good faith in performance, explicitly states that it does ‘not create a separate duty … which can be independently breached’.
15.3.2 Good faith that expands existing and generates new obligations: the ‘relentless woodpecker’
A less radical version of good faith casts it as the assertive creative inspiration behind other obligations and defences. On this model, good faith is like the ‘relentless woodpecker’ that aggressively pecks away to make non-conforming parts of contract law align with good faith.
This version of good faith can contribute to a greater consistency in the law by exerting pressure on incompatible rules. In doing so, the pace of legal change would be accelerated.
The analogy with the neighbour principle would be if it operated to expand existing categories of negligence liability to bring them into line with the neighbour principle.
The closest model is Article 242 of the German Civil Code (BGB) which requires parties to perform their contractual obligations in good faith. The courts have applied this to:
expand the scope of existing doctrines, eg the duty of disclosure; and
create new doctrines, eg pre-contractual liability, and the doctrines of impracticability of purpose and change of ‘contractual basis’.
However, as Guenter Teubner observes, continental lawyers have dealt with good faith in a way that is ‘abstract, open-ended, principle-oriented, but at the same time strongly systematised and dogmatised’; this is ‘at odds with the more rule-oriented, technical, concrete but loosely systematised common law style of legal reasoning’.9
p. 628 The relentless woodpecker:
is still a step too far—or too fast;
would require good faith to be implied in law to be clearly manifested—this has been rejected by English law; and
more fundamentally, would shut out other policies or principles that courts currently weigh in the balance (like contractual freedom, certainty, and avoidance of waste), if good faith were given such priority.
15.3.3 Good faith as an explanatory, organisational, and legitimising principle: the ‘measured tortoise’
This version of good faith does not aspire to any overtly creative role in contract law. It merely reveals the nature of many existing, and apparently disparate, contract law rules as manifestations of good faith. Rules like:
the limits imposed on the exercise of discretionary powers conferred by the contract (eg when banks are empowered to vary the interest rate on loans, they cannot do so arbitrarily, capriciously, or wholly unreasonably (10.6.1.3)); or
the requirement of reasonable notice to make onerous or unusual terms in unsigned documents binding (the ‘red hand’ rule, 10.3.3.2).
This version does not necessitate any immediate additions or changes to the parties’ obligations or defences; there is no pressure for courts to actively change the law. It merely offers a restatement of the existing law by making its implicit ethical content explicit.
This version of good faith is highly persuasive:
It has been adopted in the common law jurisdictions of Canada (Bhasin v Hrynew (2014)) and Australia (Paciocco v Australia and New Zealand Banking Group Ltd (2015)). Lord Hope noted that, in mixed systems like Scotland and South Africa, ‘[g]ood faith … is generally an underlying principle of an explanatory and legitimating—rather than an active or creative—nature’ (R (on the application of European Roma Rights Centre) v Immigration Officer, Prague Airport (2004)).
By providing a framework for understanding the current ‘piecemeal approach to unfairness’, this humble version of good faith can reduce rather than increase uncertainty.
It demands no further limits on contractual freedom.
It is entirely consistent with the common law’s incremental approach and should be acceptable to the judiciary.
On this approach, there is no revolution; but there will undoubtedly be evolution. One view of Leggatt J’s judgment in Yam Seng is precisely that it merely draws together a number of different threads running through the case law and derives a principle, cautiously expressed, but capable in time of broader application, via the familiar common law incrementalism. That is the genius of the common law.
15.4p. 629 The nature of good faith
We will examine five features of good faith, namely that it:
must be assumed to be externally imposed, although it is possible to characterise it as internally assumed by the parties;
leaves ample scope for freedom and self-interest;
varies with the social and legal culture;
is episodic and consistent with common law incrementalism; and
is expressed through existing legal doctrines, the application of which varies with the type of contract in question.
15.4.1 Is good faith internally assumed by the parties or externally imposed?
Good faith as an internal obligation voluntarily assumed by the parties under the terms of their contract is the dominant view in case law10 and the literature which present good faith as an implied-in-fact term.11 Hence:
In Yam Seng itself, good faith was a term implied in fact into the contract based on the parties’ presumed intentions relying on the normal rules for implication of terms (10.6.1).
In Bates v Post Office (2017), Fraser J thought that ‘there is no general duty of good faith in all commercial contracts, but … such a duty could be implied into some contracts, where it was in accordance with the presumed intention of the parties’.
In ‘Good Faith in the Performance of a Contract in English Law’,12 Ewan McKendrick notes that in the post-Yam Seng cases ‘good faith has not been perceived as an external standard which is imposed by the law on the parties’ but rather ‘it reflects the parties’ intention, and its meaning is very much derived from its context’.
A logical consequence of this internal view is that good faith can be expressly excluded in a contract. Thus, in Yam Seng, Leggatt J said that ‘it is open to the parties to modify the scope of the duty by the express terms of their contract and, in principle at least, to exclude it altogether’, although he thought it in practice ‘hardly conceivable that contracting parties would attempt expressly to exclude the core requirement to act honestly’ (and see Bates v Post Office, Essex CC v UBB Waste (2020), Glove Motors Inc v TRW Varity Electric Steering Ltd (2016)).
p. 630↵The alternative view is that good faith is externally imposed since it is constitutive of the activity of contracting and therefore cannot be excluded by the parties:
Cromwell J expressed this view in the Canadian Supreme Court case of Bhasin v Hrynew (2014) in doubting that the duty of honesty, a requirement of good faith, can be excluded since it is ‘a general doctrine of contract law that imposes as a contractual duty a minimum standard of honest performance’.
Five years after Yam Seng, Leggatt J in Al Nehayan v Kent (2018), said that he would have been prepared to imply a term in law ‘on the basis that the nature of the contract … implicitly requires (in the absence of contrary intention) treating it as involving an obligation of good faith’. This is much closer to the external view of good faith.
Counterpoint
Logically, the good faith attitude is externally imposed—this follows from:
the justifications for good faith as necessary to protect the institution of contract (15.2.1); and
the three attitudes of honesty, fair dealing, and fidelity to the contractual purpose being constitutive of the contract game (15.1).
That is, good faith is mandatory; it attaches whether the parties agree to it or not. To enter a contract is to do so with the attitude of good faith.
On this conception of good faith, parties cannot exclude good faith. To do so is, at best, evidence of:
the type of contract involved; and therefore
the intensity of the good faith attitude required (see 15 5).
Paradoxically, the good faith attitude, while mandatory, is also intelligible as being internally assumed by the contract parties. This is the dominant view in case law,13 and the literature which present good faith as an implied-in-fact term.14
An analogy can be drawn to the mandatory nature of the objective interpretation of a party’s intentions; even if this deviates from the parties’ actual intentions, we still treat the objective intention as being ‘voluntary’.
Likewise, the good faith attitude is simply part of what it means to freely enter into a contract. To make a contract just is to ‘voluntarily’ adopt the attitudes of honesty, fair dealing, and fidelity to the contractual purpose, objectively interpreted.
15.4.2 Good faith leaves ample scope for freedom and self-interest
In general, good faith is an attitude towards whatever contractual exchange is agreed by the parties, however unevenly or unfairly balanced in terms of the headline price p. 631↵or main subject matter (Gold Group Properties Ltd v BDW Trading Ltd (2010)); Russell v Cartwright (2020):
courts cannot make the exchange fairer or more even;
good faith ‘does not require either party to give up a freely negotiated advantages’;
except that parties are assumed to approach each other with the attitude of good faith.
15.4.3 Good faith varies with the social and legal culture
Some examples suffice to illustrate this aspect of good faith:
In HSBC Institutional Trust Services (Singapore) Ltd (Trustee of Starhill Global Real Estate Investment Trust) v Toshin Development Singapore Pte Ltd (2012), the Singapore Court of Appeal stated in upholding an express duty to negotiate a rent review in good faith that:
[W]e think that such ‘negotiate in good faith’ clauses are in the public interest as they promote the consensual disposition of any potential disputes. We note, for instance, that it is fairly common practice for Asian businesses to include similar clauses in their commercial contracts … We think that the ‘friendly negotiations’ and ‘confer in good faith’ clauses … are consistent with our cultural value of promoting consensus whenever possible. Clearly, it is in the wider public interest in Singapore as well to promote such an approach towards resolving differences.
The Korean Supreme Court found actionable non-disclosures where the sellers of condominiums failed to disclose the existence of a nearby waste-disposal facility or a cemetery (Supreme Court Decision 2004Da48515 dated 12 October 2006; Supreme Court Decision 2005Da5812, 5829, 5836 dated 1 June 2007).
In Taiwan, a seller of property must disclose if someone was killed or committed suicide in the property being sold.15
In England, the judicial assumption that the commercial culture is based on arm’s-length dealing means that certain deliberate, self-interested, uncooperative behaviour will not be regulated under English law, whereas it might well be on the continent. It is not that the required good faith attitude is different, but that the socio-legal interpretation of whether it applies to a fact situation may well differ (J Stapleton, ‘Good Faith in Private Law’ (1992) 52 CLP 1).
15.4.4 Good faith is episodic and consistent with common law incrementalism
Not all acts or omissions that can be described as dishonesty, unfair dealing, or infidelity to the contractual purpose are sanctioned. Likewise, the neighbour principle has not imposed negligence liability whenever carelessness results in foreseeable harm to one’s neighbours.
p. 632↵The common law’s characteristic modus operandi is:
the careful examination of the facts;
the weighing of all relevant policies and principles;
the selection and application of rules;
determination of applicable standards;
the fashioning of the appropriate remedial response; and
going no further than is necessary to decide the particular case before the court.
15.4.5 Good faith manifest in existing legal doctrines
As discussed in the next section, good faith as an attitude finds expression through existing legal doctrines. The intensity of the good faith attitude required varies with the contract type.
15.5 The taxonomy of good faith
In Yam Seng, Leggatt J recognised that ‘the content of the duty is heavily dependent on context and is established through a process of construction of the contract’. The failure to recognise this has generated great confusion in the discussion of good faith. Good faith is not a static notion that sets down requirements applicable to all contracts. Consequently, much of the opposition to good faith is, in truth, a rejection of the particular manifestation of good faith contended for by one of the parties in the particular circumstances of the case. It is not a rejection of good faith per se. The question is not ‘whither good faith?’, but ‘what does good faith demand in the circumstances?’
The three good faith attitudes of honesty, fair dealing, and fidelity to the contractual purpose are manifest in existing contract law doctrines. As Lord Bingham observes: ‘At one level they are concerned with a question of pure contractual analysis…. At another level they are concerned with a somewhat different question, [what] it would in all the circumstances be fair (or reasonable) to’ require (Interfoto v Stiletto). These good faith-related doctrines relate to every stage in the life of a contract, when determining:
whether a contract has been made;
whether an apparent contract has been vitiated;
what its contents are and what it means; and
the appropriate remedy for breach.
The application of the three attitudes of good faith varies with the broad type of contract in question. In M Chen-Wishart and V Dixon, ‘Good Faith in English Contract Law: A Humble “3 by 4” Approach’ in P Miller and J Oberdiek (eds), Oxford p. 633↵Studies in Private Law Theory: Volume 1 (OUP, 2020) 187, we divide contracts into four broad types:
(1) Arm’s-length contracts |
‘We each look after ourselves.’ |
(2) Symbiotic contracts |
‘The contract requires me to rely on you.’ |
(3) Contracts involving a recognised vulnerability |
(i) ‘I put trust and confidence in you’ or (ii) ‘Our bargaining power is markedly unequal.’ |
(4) Fiduciary relationship |
‘You must look after my interests.’ |
Broadly speaking, arm’s-length contracts (class 1) attract a ‘base level’ of the three good faith attitudes—manifested in existing contract law doctrines. These are quite substantial, as we will see. This base level is augmented by additional requirements calibrated to the nature of the contract: we will see an increasing intensity in the three good faith attitudes manifest in existing doctrines. However, ultimately these contract types represent identifiable points on a broad spectrum of contracts along which good faith requirements increase in intensity, rather than discrete and separate categories. Diagram 15A illustrates the general structure.
Diagram 15A The taxonomy of good faith
15.5.1 Arm’s-length contracts
The ideal arm’s-length contract is: individually negotiated, between commercial parties, involves a discrete transaction rather than a long-term relationship, and provides for all eventualities. Each of these factors is a matter of degree, but the closer a contract comes to the paradigmatic case, the less intense is the good faith attitude required, eg commercial sales or loans, banking contracts, an aircraft maintenance contract that requires minimal ongoing cooperation (Cathay Pacific Airways Ltd v p. 634↵Lufthansa Technik AG (2020)), even a distributorship agreement that lacks exclusivity and commitment (Acer Investment Management Ltd v Mansion Group Ltd (2014)).
Even in arm’s-length contracts, the three attitudes of good faith can be seen through existing contract law doctrines. A few examples will suffice.
Fair dealing: this can be seen in the law on:
the objective test of intentions (2.1);
promissory estoppel (3.2);
UCTA invalidating unreasonable standard terms that give one party the discretion to give no, partial, or substantially different performance from that reasonably expected by the protected party (11.5.4.4); and
many of the bars to the award of specific performance (14.2).
15.5.2 Symbiotic (relational) contracts
‘Symbiotic’ contracts are characterised by the parties’ interdependence in achieving the contractual purpose. These are the contracts described as ‘relational’, in Yam Seng and subsequent cases, which are said to attract good faith obligations. But, since all contracts establish relationships, the ‘relational’ label is unhelpful. Rather, the terminology of symbiotic contracts comes closer to describing contracts that are:
interdependent, in that the joint contractual purpose (or the business model) necessitates trust and confidence by one party in the other (or by each of the other);
not ‘zero-sum’ games—the parties must cooperate to maximise the joint profits, eg joint ventures, franchises, long-term distributorships; and
difficult or impossible to provide for all eventualities so that adjustments may be necessary to adapt to ongoing changes in circumstances.
In Bates v Post Office (2019), Fraser J identified nine characteristics in a ‘non-exhaustive’ list of factors tending to a contract being ‘relational’, although he did not view points (2)–(9) as being ‘determinative’, the inquiry being fact-dependent:
the absence of express terms preventing a duty of good faith being implied (as discussed in 15.4.1);
the contract is intended to be long-term;
commitment by the parties to collaborating in performance of the contract;
the spirit and objective of the venture cannot be expressed exhaustively in a written contract;
the parties repose trust and confidence in each other (without a fiduciary relationship);
the contract involves a high degree of communication, cooperation, and predictable performance based on mutual trust and confidence, and expectations of loyalty;
there might be a significant (financial) investment by one party (or both) in the venture; and
the relationship might also be an exclusive one.
The following exemplify ‘relational’ contracts:
In Bates v Post Office itself, all these features were present in the contract between the Post Office and its sub-postmasters.
In Yam Seng, a long-term exclusive distributorship agreement was classified as relational.
In Al Nehayan v Kent (2018), a joint venture agreement to acquire and run hotels together was considered ‘a classic instance of a relational contract’.
In Essex CC v UBB Waste (2020), a 25-year £800 million private finance initiative contract between the parties to design, construct, finance, commission, operate, and maintain a waste-treatment plant was considered ‘a paradigm example of a relational contract’.
By contrast, the following contracts were not considered to be relational:
Hamsard 3147 v Boots UK Ltd (2013), involving a short-term supply contract with no obligation to order stock.
National Private Air Transport Service Co v Windrose Aviation Co (2016), where there was no requirement to cooperate.
15.5.2.1 What additional good faith attitudes are required in symbiotic contracts?
Symbiotic contracts simply would not make sense if the parties could treat each other as if they were at arm’s length. Their features justify the imposition of intensified attitudes of good faith, often expressed as expectation of loyalty, integrity, ongoing communication, and cooperation from the trusted party; these are necessary to give the contract ‘business efficacy’. Any duty of good faith must ‘be shaped by the overall agreement, understanding or arrangement between the parties’, so the precise requirements depend on the precise facts. However, in symbiotic contracts, the requirement of:
(i) Honesty: can be seen in positive duties of disclosure and information-sharing consistent with the contractual purpose (5.1.3) that clearly go beyond those required in arm’s-length contracts.
In Yam Seng, the claimant invested significant resources, incurred significant costs, and put its reputation on the line in reliance on the defendant performing its part of their distributorship arrangements. In return, it was p. 636entitled to the defendant’s honesty, effective communication, and cooperation. Leggatt J would have been prepared to find some ‘positive obligations of disclosure’ in the distributorship agreement.
(ii) Fair dealing: this would prevent a party from exploiting the contract for her own benefit in disregard of the other party’s legitimate interests.
In Bristol Groundschool Ltd v Intelligent Data Capture Ltd (2014), the parties’ collaboration required IDC to give BG access to its IT systems. This imposed an implied duty on BG not to access it to obtain confidential information for its own purposes; a party who exploits the contractual relationship in a way that would be regarded as ‘commercially unacceptable by reasonable and honest people’ would breach its obligations.
In Al Nehayan v Kent (2018), the conduct of a joint venture party in agreeing or entering into negotiations to sell their interest to a third party covertly, without informing their partner, was considered ‘furtive or opportunistic conduct’ inconsistent with good faith.
However, fair dealing, even in symbiotic contracts, does not require parties to promote the other party’s interests over their own. It does not require either party to give up ‘a contractual benefit that had been expressly negotiated’ (Essex CC v UBB Waste (Essex) Ltd (2020)). The parties are ‘still entitled to pursue their own interests’ (Russell v Cartwright (2020)).
(iii) Respect for the contractual purpose: this would prevent parties from obstructing the proper performance of the contract, and require that both parties obtain the anticipated benefits of the contract:
In Yam Seng, a term was implied into the distributorship agreement for products to be sold at an airport duty free shop that the defendant would not prejudice the claimant’s sales by offering the same products for a lower price in the same territories.
In Al Nehayan v Kent (2018), the parties’ business interests were interlinked, they saw themselves commercially if not legally as partners and their business relationship was ‘formed and conducted on the basis of a personal friendship and involved much greater mutual trust than is inherent in an ordinary contractual bargain between shareholders’. These factors precluded covert negotiations by one party to dispose of its interest or exploitation by it of its shareholder position to obtain a financial benefit for itself at the other’s expense.
15.5.3 Contracts involving recognised inequality of bargaining power
Some contracts involve parties recognised in law as having unequal bargaining power such that one is particularly vulnerable to the other’s advantage-taking (albeit by lawful conduct). Her vulnerability may stem from her:
particular relationship of trust and confidence with the other party; or
belonging to a class recognised as having inferior bargaining power, eg consumers, tenants, employees, non-commercial guarantors, and various types of incapacitated or impaired persons.
p. 637↵Here, the required good faith attitudes are further intensified. The requirement of:
(i) Honesty: may require specific disclosures to protect the vulnerable party’s general interests (rather than just to ensure that the contract operates as expected), eg under the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013.
(ii) Fair dealing: may require the stronger party to refrain from certain lawful conduct, and recommend or even ensure that the vulnerable party gets independent legal advice (undue influence and unconscionable bargain, see Chapter 9); and
(iii) Respect for the contractual purpose: may guarantee the vulnerable party’s reasonable expectations via, eg, implied-in-law terms that may not, furthermore, be exempted and so are mandatory (eg under the Consumer Rights Act 2015, 10.6.2.1; Employment Rights Act 1996; Landlord and Tenant Acts 1985 and 1987).
15.5.4 Contracts involving a fiduciary relationship
A contract generates a fiduciary relationship between the parties where one party has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence.
In very broad terms, the law imposes stringent duties on the fiduciary to act solely for the beneficiary’s interest. While these are often viewed as being distinct from good faith, they are, in truth, simply further along the spectrum, demanding a higher standard or intensity of honesty, fair dealing, and fidelity to the contractual purpose, which is to act in the beneficiary’s interest. Broadly speaking, the fiduciary must act solely for the benefit of the beneficiary and entirely disregard her personal advantage. The essential idea is that a person in such a position is not permitted to use her position for her own private advantage but is required to act unselfishly in what she perceives to be the best interests of her principal. The various obligations of a fiduciary merely reflect different aspects of the core duties of loyalty and fidelity. Breach of fiduciary obligation, therefore, connotes disloyalty or infidelity.
(i) The fiduciary’s obligation to act with the utmost honesty entails onerous obligations of disclosure. The precise disclosure required depends on the precise nature of the relationship.
(ii) Fair dealing may be seen as manifest in the ‘no conflict’ rule, which means that a fiduciary must not, without the beneficiary’s consent, place herself in a position where her interests or duties to another party conflict, or potentially may conflict, with her duty to the beneficiary. Further, fiduciaries may not delegate their powers in order to advance their own or a third party’s interests. These duties cannot be excluded by agreement.
(iii) Fidelity to the contractual purpose may be seen as manifest in the ‘no profit’ rule, which prevents the fiduciary from making any personal profits from her position to the extent not expressly authorised by the beneficiary. She must account to the beneficiary for any such profit, irrespective of whether there has been any active wrongdoing by the fiduciary.
The key areas and core topics in this chapter are summarised in an easy-to-use list, ideal for revision purposes, on the online resources.
Questions
‘One of the main obstacles to the recognition of good faith is that there is no agreement as to what it means and what it would require.’ Discuss.
Should English law recognise a duty of good faith in contract law?
To what extent do you agree with the following statement?
In many civil law systems, and perhaps in most legal systems outside the common law world, the law of obligations recognises and enforces an overriding principle that in making and carrying out contracts parties should act in good faith. This does not simply mean that they should not deceive each other, a principle which any legal system must recognise; its effect is perhaps most aptly conveyed by such metaphorical colloquialisms as ‘playing fair’, ‘coming clean’ or ‘putting one’s cards face upwards on the table’. It is in essence a principle of fair and open dealing…. English law has, characteristically, committed itself to no such overriding principle but has developed piecemeal solutions in response to demonstrated problems of unfairness…. Many examples could be given…. [These] may yield a result not very different from the civil law principle of good faith.
(Bingham LJ in Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd (1989))
For hints on how to answer these questions, please see the online resources.
Key Further Reading
Notes
2 M Chen-Wishart and V Dixon, ‘Good Faith in English Contract Law: A Humble “3 by 4” Approach’ in P Miller and J Oberdiek (eds), Oxford Studies in Private Law Theory (OUP, 2020), 187.
3 M Weber in G Roth and C Wittich (eds), Economy and Society (University of California Press, 1978), ii, 730; Collins, 225.
4 S Shiffrin, ‘Paternalism, Unconscionability, and Accommodation’ (2000) 29 Philosophy and Public Affairs 203.
5 C Dalton, ‘An Essay in the Deconstruction of Contract Doctrine’ (1985) 94 Yale LJ 997, 1024–38.
6 National Westminster Bank plc v Morgan (1985) 708; Pao On v Lau Yiu Long (1980) 634. S Whittaker, ‘Good Faith, Implied Terms and Commercial Contracts’ (2013) 129 LQR 463.
7 Eg Consumer Rights Act 2015; Consumer Credit Act 1974; Rent Acts; Sex Discrimination Act 1975, s 6(1)(c); Disability Discrimination Act 1995, ss 4, 5, 12, 19.
8 N Cohen, ‘From the Common Law to the Civil Law: The Experience of Israel’ in J Cartwright and M Hesselink (eds), Precontractual Liability in European Private Law (Cambridge University Press, 2009).
9 G Teubner, ‘Legal Irritants: Good Faith in British Law or How Unifying Law Ends up in New Divergences’ (1998) 61 MLR 11.
10 Eg Yam Sen, and Globe Motors Inc v TRW Lucas Varity Electric Steering Ltd (2016).
11 Eg J Steyn, ‘The Role of Good Faith and Fair Dealing in Contract: A Hair-Shirt Philosophy’ [1991] Denning LJ 131; D Campbell, ‘Good Faith and the Ubiquity of the “Relational” Contract’ (2014) 77 MLR 475; P S Davies, ‘The Basis of Contractual Duties of Good Faith’ [2019] Journal of Commonwealth Law 1.
12 E McKendrick, ‘Good Faith in the Performance of a Contract in English Law’ in L DiMatteo and M Hogg (eds), Comparative Contract Law: British and American Perspectives (OUP, 2016) 196.
13 Eg Yam Sen, and Globe Motors Inc v TRW Lucas Varity Electric Steering Ltd (2016).
14 Eg J Steyn, ‘The Role of Good Faith and Fair Dealing in Contract: A Hair-Shirt Philosophy’ [1991] Denning LJ 131; E McKendrick, ‘Good Faith in the Performance of a Contract in English Law’ in L DiMatteo and M Hogg (eds), Comparative Contract Law: British and American Perspectives (OUP, 2016) 196; D Campbell, ‘Good Faith and the Ubiquity of the “Relational” Contract’ (2014) 77 MLR 475.
15 Wu Ying-Chieh, ‘Contract Formation in Taiwan’ in M Chen-Wishart, S Vogenauer, and A Loke (eds), Studies in the Contract Laws of Asia II: Formation of Contract and Parties (OUP, 2018) 310, 325.
