Historically, good faith principle is implemented, it would

Historically,
it has been established that there is no good faith obligation in English law. Bingham
LJ has reasserted this by stating “English law has committed itself to no such
overriding principle but has developed piecemeal solutions in response to
demonstrated problems of unfairness.’ 1 Examples of these piecemeals solutions include “exemption clauses,
ability to strike down unconscionable bargains” etc. However, over the last few
years, it has been proposed that good faith should be an implemented principle
into contracts by judges such as Leggatt LJ2, as it will supposedly promote
honesty and co-operation between parties. Following from this, it is also
argued that if the good faith principle is implemented, it would indicate an
advancement in the English Law in alignment with other civil and common jurisdictions
such as Canadian Law3 and French and German
civil codes4.
On the other hand, it could be suggested that English commercial law would be
taking away from its strong holding pillars of both party autonomy and
certainty/predictability5. The better view is that
English Law should not accept a broad obligation of good faith but rather
continue with its developed piecemeal solutions in situations such as a joint
venture or partnership.

 

What
is good faith?

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When
considering whether good faith should be implemented as a principle or not, it
is important to understand what it actually means. Unfortunately, this is not
defined as easily as preferred. In the common law, judges have tried to give
their versions on what this phrase is6, it could then be said to
have a subjective definition as each have their own perspectives. Bingham LJ
defined this as ”playing fair’, ‘coming clean’ or ‘putting one’s cards face
upwards on the table.’ It is in essence a principle of fair open dealing …7 Whilst Morgan J constructed that it was
the “obligation to observe
reasonable commercial standards of fair dealing in accordance with the
parties’ actions which related to the Agreement and also requiring
faithfulness to the agreed common purpose and consistency with the justified
expectations of the First Claimant”.8 Although defined in statutes9, it is merely influential
but not binding, for example in the UNIDROIT Principles of International
Commercial Contracts it states that ”(1) Each party must act in accordance with good
faith and fair dealing in international trade. (2) The parties may not exclude or limit this duty.’10 (Not
necessary)

Conclusively meaning that good faith deals with
both honesty and trustworthiness, whereby the other party’s interests are considered
even at the detriment of the party’s owns. It can then be said that good faith
goes against the general reason as to why commercial contracts are created in
the first place; which is to generate the highest amount of profits whilst working
within the terms of the contract. Arguably, another view is good faith would
possibly undermine the party’s aim to make profit as they will be hindered by
their concern for the other party.

In the English commercial law, there are however some
instances and exceptions where English Law does recognise good faith.

Good
faith in negotiations

In
the law relating to the duty to negotiate in good faith, when two parties are
negotiating/agreeing to agree prior to the final formation of the contract there
is NO obligation of good faith. This was clarified in Walford v Miles11.
It could be argued that as it was not a contract formed with any terms and
conditions, it could not be enforced12. The parties should be
acting within their own interests pre-contractually. The purpose of this is to
enhance party autonomy and individualism13. Following as it was a HL
decision, it set precedent for the rest of case law, thus reasserting that
there was no ‘good faith’ principle. Although, resistance to the principle in
this context it has caused problems with 3rd parties as they would
be unsure as to where they stand in the agreement. An alike situation arose in Petromec Inc v Petroleo Brasileiro SA
Petrobas (No.3)14,
but it was distinguished from Walford
v Miles as Petromec was a ready
formed contract. The difference was made clear as there was an included express
term/promise to negotiate in good faith in the actual contract. Longmore LJ set
out that just because it may be difficult for courts to understand the express
term, they should not fray away from enforcing it, as the term has been
included for a particular reason, which is so that it can be acted upon15. Longmore LJ also
distinguished Petromec from Walford in his judgment by stating that Petomec “is not a bare agreement to
negotiate. It is not irrelevant that it is an express obligation which
is part of a complex agreement drafted by City of London solicitors…It would
be a strong thing to declare unenforceable a clause into which the parties
have deliberately and expressly entered. I have already observed that it is
of comparatively narrow scope. To decide that it has “no legal content” to use
Lord Ackner’s phrase in Walford would be for the law
deliberately to defeat the reasonable expectations of honest men…’.16 Notwithstanding that even
if it is expressly stated, it might still not be unenforced by the courts if the
term does not relate to a specific issue but to a much broader one17 thus showing the
inconsistencies in the English law.

A
similar situation arose in Emirates
Trading Agency LLC v Prime Mineral Exports Private Ltd, whereby there was
an express contractual promise to negotiate in good faith before going to
arbitration to resolve a dispute, the issue was whether this was enforceable. Teare
J held that it was. 18 Showing that when both parties have
provided a way to settle a particular matter in the contract, the courts will
seek to uphold and give effect to this term, and the courts would “not to throw its hands in the air and refuse
to do so because the parties have not made its task easy.  To hold that a clause is too uncertain to be
enforceable is a last resort”19. Arguably, the courts may
be crossing the boundaries with trying to give effect to too vague terms, as
they could then be rewriting parties’ contracts which may not be what they
initially intended, thus creating more uncertainty in the English commercial law.
Evidently, why the good faith principle should not be implemented.

 

Good
faith to consider other party’s interest

Some
contractual relationships by their nature require that honesty and trust are
very important, e.g. fiduciary contracts, such are seen between a solicitor and
their client, in partnerships, certain joint ventures, insurance contracts etc.20

 

Express
promises/terms as to act in Good faith

The
parties will be required to act with the utmost good faith towards one another,
meaning their actions will be both reasonable and prudent at all times. Where
parties go out of their way to expressly include a term into a contract, the courts
will give effect to it. This indicates both certainty as the parties would have
an idea of the outcome of the case if litigation should arise, as well as party
autonomy as they are free to include the good faith term or not.21 However when the exercise
of unqualified contractual rights is unlikely to be subject to such obligations
and good faith clauses drafted in the contemplation of specific purposes are
unlikely to be construed as imposing a general duty on parties.22 This again exemplifies
the paradoxical Good faith.

 

Implied
terms of Good faith

Certain
contracts have implied good faith obligations, i.e. employment contracts,
certain joint business ventures23. The greatest development
in this area is in Yam Seng v International
Trade Corp Ltd, whereby Leggatt LJ considered implied faith in detail and
stated, “in refusing…to recognise any such general obligation of good faith,
English law would appear to be swimming against the tide’. He
concluded with the statement that English law was not at the stage to accept
good faith in all contracts as implied by the law but should be implied on
parties presumed intention. He then further argued that such situations where
good faith could be implied should be ‘relational’ contracts24, which are supposedly
long term. Arguably all commercial contracts could be said to be long term? Therefore,
if every party appeals for breach of good faith, this could then open the flood
gates.

In Mid Essex Hospital Services NHS Trust v
Compass Group UK and Ireland Ltd (t/a Medirest), the CA rejected Leggat J’s
judgment in Yam Seng’s in being that
there should be an implied obligation of good faith. Mid Essex’s principle says
good faith will only be implied as a term in fact if it is required.25 Leggatt LJ again
suggested that there was a need for an element of good faith by comparing
English law to Canadian law, supportively in Paragon Finance v Nash, he also states that good faith shouldn’t
just apply to express terms but should be a broader principle. However, the CA
disagreed with him yet again in the finding of need to refer to good faith,26. Nonetheless, the courts
could be said to be writing the contracts for the parties rather than
respecting that the contract in itself is king if they do begin implying.

 

Conclusion

The
English Law is constantly caught between the side of there being a doctrine of
good faith or not through its inconsistent case law. On one hand, it could be
argued that it would be beneficial as the English Law will now be on the same
level on other jurisdictions and would not be “swimming against the tide”
anymore, furthermore to that, it ensures that both parties are honest and
trusting with another. On the other, I respectfully suggest that the English
Law still stands for what it is known for; certainty and party autonomy.
Additionally, if parties really do want this principle, it should then be expressly
stated in the contracts so as to avoid unnecessary litigation.