Good Faith and Law of Equity

The doctrine of Good faith owes its origin to the law of equity and can be traced to the Court of Chancery’s decision in the case of Carter v Bohemn [1] where Lord Mansfield introduced good faith. In his words Lord Mansfield stated that “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”.

In the words of Sealey & Hooley, “the concept seems impossible to define with any degree of precision”. [2] This is evidenced in section 61(3) of the Sales of Goods Act (SGA) where it defined good faith as “honestly, whether it is done negligently or not”. Case Laws have not done any better. See the case of Director General of Fair Trading v First National Bank Plc [3] where Lord Bingham stated “The member states [of the European Union] have no common concept of fairness or good faith”. Goode’s attempt at a clarification of the SGA definition has not done any better at remedying the situation. It falls short of standard for an author of his repute and has rather made the situation even more complicated. Let me however make this clear this is no attempt to put the author down as his immense contribution to the commercial aspect of law cannot be overemphasized however this is an academic work which seeks to critically discuss. This is my opinion and it is subject to criticism. Back to the issue of discussion in his attempt at a clarification of the word ‘honesty’ as evidenced in the SGA, Goode stated “…a person who genuinely believes his conduct is morally justified is not dishonest unless he is also aware that it would be so regarded by reasonable and honest people” [4] . A definition of a word is intended to give meaning to that word; it will however create more confusion in the mind of an ignorant person, who needs more clarity to have a repetition of the same word in a definition. Let me paint a scenario. Now I am confused as to what honesty means and then a definition which intends to clarify my confusion uses that same word ‘dishonest’ and ‘honest’. How does that help me understand the term ‘honestly’? With my understanding of the English language, a definition should not include the word it intends to define. Whether the word or the opposite. Secondly the issue of dishonestly, what is dishonest for one person might not be dishonest for another. Who then are reasonable and honest people, what criteria do we use in determining them, do we apply the reasonable man’s test, ok if we did apply that to the reasonable …people part of the definition, what is the criteria for a honest man? This are all loopholes in the definition however as this is not the issue for the discussion I shall proceed.

The General duty of good faith has its prominence in civil law jurisdictions like Germany, France, and Italy. With the United State a common law jurisdiction also included in the list of legal system that recognises the principles or duty of good faith. Section 1-203 0f the Uniform Commercial Code (UCC) of the United States makes it mandatory for contracting parties to incorporate the principle of fairness in the performance and enforcement of contractual agreements. The UCC defines good faith as “honesty in fact in the conduct or transaction concerned”. See section 1-201(k) of the UCC. Article 1337 of the Italian Civil Code also has a similar provision where it provides that the parties to a contractual agreement must conduct themselves according to good faith. Article 1134 para. 3 of the French civil code also makes it obligatory for contracting parties to have contractual agreements founded on good faith.

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’ but how true is this statement? In the case of Sanders Bros v Maclean & co [5] Bowen LJ in passing his judgment had this to say “Credit not distrust is the basis of commercial dealing; mercantile genius consists principally in knowing whom to trust and with whom to deal, and commercial intercourse and communication is no more based on the supposition of fraud than it is on the supposition of forgery.”

One may ask has decisions and statement like this made any difference to the English law perception on good faith? I do not think so because it is evidenced in the case of Walford v Miles [6] that the English law knows no general doctrine of Good faith. [7] The question one should therefore ask is why is this so? I shall try to answer that as we go further but what is the real situation under the English law with regards the doctrine of good faith? The case of Interfoto Picture Library Ltd v Stiletto Visual Programs Ltd [8] summarises it all. In this case the plaintiff who runs photographic transparency had delivered to the defendants 47 transparencies in a bag but it so happened that the defendants did not open the bag and could not have known of the terms and conditions attached to the delivery one of which was the holding fees chargeable if the transparencies were retained for a period longer than 14 days. The plaintiff company subsequently sent a bill of £3,783.50 of which the defendant refused to pay the sum claiming the fees was too exorbitant, the machine had not been the one requested and more importantly there had been no notice. In passing his judgment Bingham LJ stated

“In many civil law systems and perhaps in most legal systems outside the common

law world, the law of obligation 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 most aptly conveyed by such metaphorical

colloquialisms as ‘playing fair’, ‘coming clean’ or ‘putting one’s card face upward 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…Thus equity has intervened to strike down unconscionable bargains.

Parliament has stepped in to regulate the imposition of exemption clauses…”

Do I need say more? I find it quite amusing and difficult to believe that modern day businessmen will buy into the idea that all information should be brought to the table for fair dealing. We live in a society where competition amongst businessmen and companies has become the order of the day, will it then be reasonable business practice for contracting parties to table the secret of their success because good faith or fair dealing (as its mostly called in English law) requires that contracting parties should come clean and should without information from the other party? Take for instance Coca cola and Pepsi have been contracted to provide refreshments for the 2014 world cup taking place in Brazil. At a point the three parties will meet, that is, the organisers, representatives from Coca cola, representative from Pepsi, should Coca cola who are known to have protected the secret recipe for their product then go to reveal such because the principle of good faith requires that? I do not think so. Good faith will probably have worked in the eighteenth and nineteenth century but I strongly doubt its success in modern day commercial transaction.

The English law will more often than not apply the common law principles to commercial transaction than apply the doctrine of equity of which one is good faith. But this is justifiable as I shall be pointing out in the course of this essay, who wants a legal principle that has no certainty? I for one do not, as a legal practitioner I should be able to predict the outcome of decisions. Should the law be ever changing because equity at most time leaves decision at the discretion of the Judge and we all know no two persons think alike? However the relevance of good faith cannot be totally ignored as its immense contribution in priority dispute must be commended.

The majority do not see any reason why the general duty of good faith should be of any relevance between contracting parties, this was rightly pointed out by R M Goode in the article ‘Commercial Law in the next millennium’ [9] where he pointed out that the principle of good faith should not be meddled in the affair of commercial transactions. It is quite amazing that even the Chancery Judges show no enthusiasm in advocating for the recognition of the principle of good faith in commercial transaction [Harrison, R, 1997]. One may then wonder if the originators of the principle of good faith are not keen on seeing it take a more prominent position in English law why should any other person then be bothered. Should this be evidence that its recognition might not make any difference as such? I leave you to be the judge.

The lack of recognition of the general duty of good faith in fair dealings has been attributed to different factors. Some blame it on the industrial revolution, some on the Judicature Act 1873 & 1874 (merger of common law and equity), the list is endless. The Freshfields Brukhaus Daringer, 2006 had this to say about the reluctance “…English courts have also been unwilling to enforce contractual provisions requiring parties to negotiate in good faith,… they consider that they are unable to effectively police such agreement as they cannot properly determine whether a contracting party, subjectively had a good reason for terminating the negotiation.” The issue of fair dealing (good faith) in most situations is subjective. See the case of Paragon Finance v Staunton; Paragon Finance v Nash [10] where the court held that because evidence had been given that Paragon was in financial difficulties of its own the implied term in credit agreement could not apply. To some that is not justifiable while to some other the court had acted in order. That is one of much confusion that comes with the principle of good faith. That aside, one of the factors that however stand out from the reasons for lack of recognition is the merging of common law and the law of equity. It is a well known fact that equity only comes in to mitigate the hardship of common law, hardly are decisions ever decided on equity without first going through common law principles. This places equity at the backstage with common law taking centre stage more often than not [Harrison, 1997]. [11]

On the non recognition of the general duty of good faith Goode, 1998 had this to say about the situation “….it is high time English law adopted a general principle of good faith and cast off its historical shackles”. This statement received criticisms from Judges and commentators alike but one may stop and ask how realistic is this statement in present day commercial transaction? Goode himself answered the question [see R M Commercial Law in the next millennium: The Hamlyn Lecture [1998] pg 19-20] where he casted doubts as to the feasibility of the general duty of good faith. He pointed out that there was need to keep “…general duty of faith out of commercial law”. By its uncertain nature, could good faith be the architect of its own problem?

The uncertainty of the general duty of good faith has been attributed as one of the most prominent reasons why the doctrine has remained at the backstage. Uncertainty is a word used when situation are not predictable. Commercial transaction relies on certainty. The general duty of good faith which is one of the outcomes of equity comes with it the non predictability associated with most if not all doctrines of equity. Where the law is not predictable, that is, the courts do not work with precedents there is a very high tendency for the judicial system to be abused and it will weaken the certainty that comes with commercial transactions. [Brownsword, 2000 : pg 940] highlighted this by stating “such a vague principle invites judges to act on their own idiosyncratic views of fair dealings” It is evidence that no two people think alike if the facts of case are left at the mercy of the judge in question for interpretation then there can never be any two decisions alike. One can only imagine what case law would be like if that was the situation of things. Also if every case was decided on its own distinct facts that will be time wasting and this could lead to the court being flooded with undecided cases at the same time. Sir peter Millet (as he then was) had this to say about the requirement of certainty in commercial transactions “business men need speed and certainty, these do not permit a detailed and leisurely examination of the parties conduct. Commerce needs the kind of brightness which the common law provides and which equity abhors”. The globalisation of businesses has even made it even more difficult for the equitable doctrine of good faith to find a place in English law. What business or business man will want his name or company dragged through the long processes of litigation? It is an issue that there has had to be recourse to litigation to now have the process delayed will be like adding salt to an already painful injury. [Bradgate, 2005: pg 5] also pointed out the need for certainty on commercial transaction “…if the law is certain, the outcome of a dispute may be predicted and the parties may resolve it without resort to litigation” [12] Where the outcome of contractual defaults can be predictable it will serve as a check and deterrent for the contracting parties because then the strict interpretation of common law unlike the loose nature of equitable principle (one of which is good faith) gives the parties an idea of what to expect should they breach their own side of the bargain. But where the law is not predictable people will be more willing to gamble. Lord Brown Wilkinson in the case of Westdeutsche Landesbank Girozentrale v Islington London Borough Council [13] warned against the importation of the equitable principles into commercial transaction for its lack of speed and certainty. Lord Ackner clearly pointed this out in the case of Walford v Miles where he argued that negotiation in good faith was full of uncertainty and quite difficult to enforce an would be inherently repugnant to the ‘adversarial position of the parties when involved in negotiations’. (See Bradgate, R. Commercial law, 2005 Oxford University Press, New York, pp 26-30 for further details.)

In the case of Interfoto v stiletto, Bingham LJ pointed out one significant fact; the English law has an endless list of regulatory mechanisms which the courts can use to regulate the affairs of contracting parties: election, estoppels, waiver, relief against forfeiture [Sealy LJ & Hooley RJA, 2009 pg 44]. Take for instance the rule of promissory estoppel which itself is an equitable doctrine as it applies in contract, where a party will be stopped from reneging on a promise which the other party had relied upon especially where such reliance had been reasonably made and failure to fulfil will be detrimental to the party that had so relied. See the case of Collier v P& MJ Wright (Holdings) Ltd. [14] The rule for relief against forfeiture is another area available to contracting parties in a commercial transaction. See the case of Demand Information Plc (in administrative receivership) v Michael Gerson (Finance) Plc. [15] Another remedy available to an innocent party who desires to repudiate and mitigate his loss [16] is the contra proferentem rule. [17] This rule allows the interpretation of ambiguous terms to be interpreted against the party who includes it in the contract. See these cases Miller v LLC [18] and Peak Construction (Liverpool) Ltd v McKinney Foundation Ltd [19] . See also the case of White & Carter v McGregor (Councils) Ltd.

Civil law notion of good faith imposes the duty of disclosure on the contracting parties. A party who has information which the other party would not have been able to have access to without being told is obligated to tell the party in the interest of fair dealing [Kessler, 1985]. One of the requirements for disclosure is as a result of the parties’ unequal access to information. Article 1338 of the Italian civil code provides for such disclosure. Fabre-Magnam, 1995 however pointed out that where a mistake arises out of negligence from the party who claims disclosure he should have himself to blame.

Harrison, 1997 pointed out that although English law does not recognise good faith in negotiation the law will step in “… exposing a seller ‘s evasions, pregnant half truths and the like, and penalising him for failing in his duty of good faith by deeming the contractual provisions to have included the duty of good faith”. Although the situation under the English law is caveat emptor, see the case of Smith v Hughes [20] the SGA has come in to mitigate the excesses of the doctrine. [21] It is important that a party with privileged knowledge should make known to the disadvantaged party by means of implied terms [Whitaker, 2000].

Even though the general duty of good faith has received more criticism than praise some commentators believe that the issue of lack of certainty has been blown out of proportion. Lord Steyn [1997] writing extra judicially had this to say in support of the need for the inclusion of the general duty of good faith into English law “I am quite confident that businessmen and indeed people of the Underground have no problem with the concept of good faith, or fair dealing…” [22] He pointed out that the resulting uncertainty is as a result of the subjective test and advocates for a more objective test to know exactly the perception of the general public to the general duty of good faith. He further stated that “good faith additionally sets an objective standard, viz, the observance of reasonable commercial standard of fair dealing in the conclusion and performance of the transaction concerned”. [Mason, 2000: pg 94] in showing his support for the need of recognition of the principles of good faith accuses the law of unjust in his word he states that “good faith and fair dealing duties based on the reasonable expectations of the party, might advance the interests of justice. Moreover, recognition of good faith and fair dealing concept would bring greater coherence and unity to the varied array of principles which are presently available in the area of contract performance.”

Although the English law has no explicit provision which obligates contracting parties to act in good faith in certain contractual circumstances the principle will be applied take for instance contract of employments and insurance contracts. Another area that has witnessed the influence of good faith principle is in the area of nemo dat quod non habet [section 21-25] where a person cannot pass title that he does not possess. Here I shall be relying on section 21(1) alone and shall be treating the other sections later on in the course of the essay. 21(1) of the SGA states and I quote “…where goods are sold by a person who is not their owner, and who does not sell them under the authority or with the consent of the owner, the buyer acquires no better to the goods than the seller had…”. Lord Denning in the case of Bishopgate Motor Finance Corp Ltd. v Transport Brakes Ltd sums up the controversy of the Nemo dat quod non habet principle by stating “two principles have striven for mastery. The first is for the protection of property: no one can give better title than he himself possesses. The second is the protection of commercial transactions: the person who takes in good faith and for value without notice should get a good title.” The second ambit of the statement I concur. I have always wondered why an innocent third party who takes in good faith and for value title without notice should be refused good title to such goods. If I have innocently purchased a good without being aware of lack of title will it be fair dealing if I am subsequently deprived title because the seller never possessed title? On the other hand if it is not fair to the innocent purchaser will it then be fair dealing to the rightful owner who never passed possession I also do not think so. So where do we then find the balance? I assume section 23 of the SGA has taken care of the situation. The act states “when the seller of goods has a voidable title to them, but his title has not been avoided at the time of the sale, the buyer acquires a good title to the goods, provided he buys them in god faith and without notice of the seller’s defect of title.”

Conclusion

I will like to round up this work by recognising that the courts have not completely abandon good faith but will more often than not seek remedies from other principles to regulate the contractual relationship between two contracting parties. The case of Interfoto Picture Library v Stiletto Visual Productions (supra) and Paragon Finance v Nash; Paragon Finance v Staunton are evidence. In both decisions the court recognised the principle of general duty of good faith, particularly on the general duty of disclosure. However let me point out that even though the English law does not recognise the general duty of good faith the purpose of the law is to encourage fair dealings between contracting parties. Even though the standards of honesty and fair dealing are not very high the purpose of the law is to uphold a high standard of honesty and fair dealings. See the case of Interfoto Picture Library where Bingham LJ succinctly put it. Note however that the law will show hesitation where it would have to intervene on the basis of ‘inequality of bargaining power’ see the case of Lloyds Bank Ltd v Bundy. [23] The case National Westminster Bank Plc v Morgan [24] shows the attitude of the courts when it comes to the general principle which allows the court to interfere in the affairs of contracting parties. See also the case of Pao On v Lau Yiu Long. [25] Likewise, will the court show hesitation when the principle prevents the freedom of parties in a contractual agreement. See the case of Glencore Grain Rotterdam BV v Lebanese Organisation for International Commerce. [26]

The future probably holds the key to unlocking the fate of the general duty of good faith as it stands now under English law. Although I have my doubts because with the advancement of commercial transaction and the need for speed and certainty one may only wonder but with the EC Directives on commercial agency [27] and unfair terms in consumer contract [28] and the 1998 Lord Payment of Commercial Debt (Interest) Bill maybe all hope is not lost after all.