Commercial Law is a Variable Subject

“It is generally said that English law, unlike civil law systems, does not recognise a general duty of “good faith” in the sense of “fair dealing” between contracting parties.”

Would you agree? Should it? Critically discuss in the light of the commercial law you have studied.

Introduction

Commercial law is a variable subject, which is difficult if not impossible, to define. It is rightly said by Professor Goode at page 1205 of his authoritative text on this topic,

“The absence of anything resembling a commercial code makes this question harder to answer than might be imagined. If by commercial law we mean a relatively self-contained, integrated body of principles and rules peculiar to commercial transaction, then we are constrained to say that this is not to be found in England”. Professor Robert Bradgate has tried to define ‘Commercial law’ as the law relating to commercial activity, especially transactions concerned with the supply of goods and services and the financing thereof. Even, Professor Goode defines, ‘commercial law as the totality of the law’s response to the needs and practices of the mercantile community’. He is of opinion that, unlike many civil law systems, English law has no codified principles in the subject of commercial law. Commercial law is based on certain principles procured from various fields of jurisprudence, which are certainty and predictability, respect for party autonomy, recognition of the customs, practices of the mercantile community and flexibility so as to adapt the varying practices. In order to broaden the scope of commercial law and place security for consumer transactions, there is a general requirement of ‘good faith’ introduced by the EC Directives dealing with commercial agency and unfair terms in consumer contracts. Except for English Courts, other Commonwealth jurisdictions and United States Uniform Commercial Code have accepted the concept of good faith in relation to commercial law. (Bradgate, 2000)

Lord Mansfield’s Interpretation Of “Good Faith”

Lord Manfield stated in the judgement of the leading case Carter v Boehm (1766), “The governing principle is applicable to all contracts and dealings. 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 his believing the contrary. But either party may be innocently silent as to grounds open to both to exercise their judgement upon”. However, this principle of good faith was never recognized and was over-ridden by the laissez faire individualism of the nineteenth century. English lawyers are accustomed to say, “We do not have a principle of good faith in English law”. (Harrison, 1997)

It was believed by Lord Manfield that the parties to contract should act bona fide while dealing with each other. His interpretation of good faith was that this principle does not allow a party to hide any true facts relating to the contract or transaction with other party. It entices the spirit of contract in favour of both parties. But this principle was never recognised in the statutes of English law, irrelevant of cases based on it.

In Interfoto Library Ltd v Stiletto Ltd [1989] 1 Q.B. 433,489, Bingham L.J. stated that, “English law has, characteristically, committed itself to no such overriding principle (as that of ‘fair and open dealing’) but has developed piecemeal solutions in response to demonstrated problems of unfairness”. It can be deduced from his statement that English Courts analysis with reference the concept of good faith from case to case. This analysis is based on the nature of the transaction in question, facts of the case and the character of the parties to the transaction. The outcome of this analysis is not very different from the principle of good faith in dealing with consumer contracts. (O’Connor, 1994)

In this article, the author had given the evidence of the fact that English Legislation had never made any efforts to formulate any provision for good faith into their legal system. So, the last resort in such situation can be refering precedents on such principle or the interpretation of judicial courts itself. The English Judiciary has dealth with the good principle depending upon certain factors and true facts relating to the case. It is challenging when courts have to interpret a subject which possesses weak foundation of absence from statutes. Such a failure contributes to uncertainty within the national legal system, which creates menace to the economy.

Different Civil Law Systems Embracing The Doctrine Of Good Faith

As compared to English law system, other jurisdictions like France, Germany and United States of America, have explicitly recognised the doctrine of good faith. They are as follows:

French Legal system dealing with the doctrine of good faith:

Article 1134 of the French Civil Code states,

“Agreements lawfully entered into take the place of the law for those who have made them. They may be revoked only by mutual consent, or for causes authorized by law. They must be performed in good faith”. (Civil Code, 2004)

Unlike English law, French legislation has enshrined the doctrine of good faith in the statute itself. To add to this, judicial decisions have clarified this concept by placing some rules relating to the performane of contractual obligations and to the party’s obligation before the formation of contract. This principle is particularly applied to contracts between private entity and a public body, which governed by public law. During World War 1, the case of ‘Gaz De Bordeaux’ recognized this doctrine of good faith, which bounds the parties to the obligation created during formation of contract, but even resolved to modify terms in the light of changing circumstances. The civil courts declined this approach in the ‘Cambronne’ case, thus giving more importance to focus on agreed terms and sanctity of a contract. The flexibility of ‘good faith’ principle can be marked in the intent of the framers of French Civil Code, which creates an obligation towards the parties to the contract to disclose the information even prior to the formation of contract. The French jurisprudence indicates two key points with regards to the concept of ‘good faith’, which are as follows:

• notwithstanding the exact words of Article 1134, the obligation of good faith subsist during the formation of contract;
• it perceives a duty of the party to disclose all materials facts regarding the contract even prior to its formation.

In current scenario, the courts apply the doctrine of good faith depending upon the nature of contract being considered. Precisely, the courts have adopted different theories to tackle the application of this doctrine, in order to safeguard the sanctity of contract. (Groves, 1999)

The Approach Of German Law For The Doctrine Of ‘Good Faith’

It can be said that German law system has taken positive approach towards the doctrine of ‘good faith’. This doctrine is inserted in sections 157 and 242 of the German Civil Code, which states:

“Contracts shall be interpreted according to the requirements of good faith, ordinary usage being taken into consideration”. (Section 157 of German Civil Code)

“The debtor is bound to perform according to the requirements of good faith, ordinary usage being taken into consideration”. (Section 242 of German Civil Code).

The principle of ‘good faith’ has wider application from performance to contractual obligations under the German legal system. When French courts declined to embrace the doctrine of good faith on the justified grounds of alteration of long-term contract, German Courts adopted this principle due to changing circumstances after the World War. It is inserted in the code to create positive duty of co-operation from one party to another, thus safeguarding the rights of parties to contract. This doctrine provides a basis for decisions and rules of law with reference to the duty of good faith under the German judiciary. (Groves, 1999)

The Application Of The Doctrine Of Good Faith Under American Law

The German Code had created a huge impact on the application of the doctrine of good faith under American law. This doctrine is included in the provisions of Uniform Commercial Code (“UCC”) in United States. Section 1-203 of UCC provides that:

“Every contract or duty within this Act imposes an obligation of good faith for its performance or enforcement”.

Section 1-201(9) of the UCC defines ‘good faith’ as “honesty in fact in the conduct or transaction concerned”.

The application of the principle of good faith is not limited to the performance of contract but also extends to their enforcement. The current view of the American courts concentrates on the strict adherence to the literal wording of the contract. Easterbrook J. in a case of 1990 said that:

“Where the contract is silent, principles of good faith…fill the gap. They do not block the use of terms that actually appear in contract… any attempt to add overlay of ‘just cause’ …to the exercise of contractual privilege would reduce commercial certainty and breed costly litigation”.

Finally, it seems that the approach of American law is quite similar to German than French Code. (Groves, 1999)

According to the commentaries of the commission of the European Community on the subject of Eurpean Contract law, there are two principles to be considered in the creation of a contract, duties to be performed and enforced by the parties under a contract, and similarly in the exercise of a party’s rights under the contract; “good faith” and “fair dealing”. Article 6:102 reads as “Good fatith and fair dealing are an important factor when implied terms of a contract are to be determined. (Lando, 2000)

From the above analysis of practice of good faith, it can be comprehended that many jurisdictions of Europe except UK and America have embraced the principle of good faith by inserting it into their respective code with the intention of promoting the concept of “fair dealing” between contracing parties. Even the Commission on the European Contract Law has considered these principles as important and efficient factor while considering contractual obligations in Europe. The French Legal system considered that the duty og good faith should be practiced irrelevant of any enactments or amendments. It is to be undertsood by the contracting parties that the duty of good faith applies to them without enforcing law. In spite of this enactments in different national states and the Commission of European Contract Law, UK has still continued with their age old theory of dealing the duty of good faith and thus imposing burden on the judicial courts to interpret it. This reckless attitude of UK Government has led to many complexities and uncertainty within Europe.

Criticism For English Approach

Unlike French or German law, English law has no equivalent concept of good faith and obligation of loyalty or cooperation between the parties to the contract. The English legal system does not obligate a party to deal with a contract in good faith on the conviction of English courts that this concept is contrary to the principle of negotiation. This ruling of English courts has been criticized by various legislations, as this doctrine is considered to be essential in current commercial sector. The absence of provision for good faith in UK legislation has given rise to complexities and uncertainty within Europe. (Robin, 2005)

The concept of good faith is not recognized as a statutory principle in English contract law. It can be manifested that this doctrine was never rooted in English common law. The lack of statutory recognition does not imply that English scholars are unfamiliar with the principle of good faith. In recent times, the need to introduce the concept of good faith in English contract law has evolved, but still remains unfulfilled. The subject of good faith in contract law remains untouched by the courts, whereas this concept in agency law has received its judicial application in the Graham Page decision. (Saintier, 1998)

The above observations propel me to agree to the statement that English law, unlike civil law systems, does not recognise a general duty of “good faith” in the sense of “fair dealing” between contracting parties.

In early 1990′, the House of Lords reaffirmed the English approach prevailing since 1975 judgement in “Courtney & Fairbairn Ltd v Tolaini Bros (Hotels) Ltd”, which does not recognize good faith in the statutory laws of UK. It was considered by them at first instance in Walford v Miles that the agreement between the parties takes the form of “lock-out” agreement which restricts the parties over their performance and execution of contract. It was regarded as a negative statement. But later, the findings of House of lords proved that this lock-out agreement lacks two vital points to be enforced. They are fixed duration of that agreement or in absence of first requirement, authorizing other party to negotiate with third parties. The House of lords were of the opinion that the duty to negotiate in good faith does not have practical application and is not suitable for English law. His decision was liberal enough to allow the parties to withdraw from the negotiations, irrelevant of time and appropiate reason. This decsion was greatly influenced by the uncertainity in UK prevailing from last few decades in relation to the ignorance to recognizing the duty to negotiate in good faith. (Cooper, 1992)

Conclusion

The above analysis of the duty of good faith from different aspects demand the explicit recognistion for this principle to wipe out the uncertainty prevailing in Europe. In absence of recognition to duty of good faith in UK legal system, the English Courts urge to insert a provision of good faith and fair dealing into the UK statutes to control the contractual scandals and litigations arising from it. English law should adopt better approach towards the duty of good faith in order to harmonize with common law rules. Due to increasing uncertainty and ambiguity in UK legislation, the need has occured to harmonize the commercial laws at international level which suits the modern commercial world.

After scutinizing the past and current situation, it is my conclusion that unlike civil law systems, English law does not recognise a general duty of “good faith” in the sense of “fair dealing” between contracting parties. In my opinion, the English legal system should realize from the approach of other civil law systems and re-consider the duty of good faith to avoid many complexities and uncertainty existing in their system.

Bibliography

Bradgate, R (2000). Commercial Law. 3rd ed. London, Edinburgh, Dublin: Butterworths. 3-4.

Civil Code. (2004). Civil Code. Available: http://195.83.177.9/upl/pdf/code_22.pdf. Last accessed 7 February 2010

Cooper, P. G. (1992). Promises to negotiate in good faith: are they enforceable? International Company and Commercial Law Review , 2-3.

Groves, K. (1999). The doctrine of good faith in four legal systems. Construction Law Journal , 1-4.

Harrison, R (1997). Good Faith in Sales . London: Sweet & Maxwell Ltd.. 3-4.

Lando, O (2000). Principles of European Contract Law . The Hague: Kluwer Law International. 113.

O’Connor, J. (1994). Good faith in English law. International & Comparative Law Quarterly (Publication Review) , 1.

Robin, G. (2005). The principle of good faith in international contracts. International Business Law Journal , 5.

Saintier, S. (1998). Good faith: Commercial Agents Regulations 1993. Company Lawyer , 4.