Agreement Contract Negotiations

Contract Law I

Should an agreement to negotiate in good faith ever be capable of enforcement as a binding contract?

“The concept of a duty to carry on negotiations in good faith is inherently repugnant to the adversarial position of the parties when involved in negotiations. Each party to the negotiations is entitled to pursue his (or her) own interest, so long as he avoids making misrepresentations…A duty to negotiate in good faith is as unworkable in practice as it is inherently inconsistent with the position f a negotiating party”, Lord Ackner alleged in Walford v Miles. Various opinions, both positive and negative, have been stated around the principle of good faith and the possibility of incorporation of the principle into English Contract Law. Indeed, despite the fact that the jurisprudence of good faith is up to date in many other legal systems in the world, English lawyers don’t accept the idea that a party must act in good faith.

But what is the principle of good faith? The principle of “good faith” is a general condition of enforceability of an agreement indicating that the parties have acted in good faith. Article 1.106 of the Land Commission’s principles of European contract law explains the principle of good faith and the fair dealing as, “in exercising his rights and performing his duties each party must act in accordance with good faith and fair dealing and the parties may not exclude or limit this duty”. Thus, good faith in the performance and enforcement of contracts as a recognized principle is being followed in many European legal systems, such as the German BGB (civil code), the French civil code and the Italian civil code, including also other major common law systems around the world, such as that of the United States.

The main point of this essay, it is to discuss if the principle of good faith should be adopt and not be dismissed by the English law, so that would be capable of enforcement as a binding contract. Illustrating this notion, the case of Interfoto Picture Library v Stiletto Visual Programmes Ltd should be cited at first. Plaintiff hired 47 photographs to Defendant. They were sent round in a jiffy bag with a delivery note. The delivery note contained nine conditions including a clause which provided that £5.00 per transparency per day must be paid, when they were kept more than 14 days. The defendant didn’t use photos, and forgot about them. Plaintiff sued Defendant for £3.783.50. Lord Bingham asserted “In many civil law systems, and perhaps in most legal systems outside the common law, the law of obligations recognizes 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…; its effect is perhaps mostly 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”. He also said that English law has developed piecemeal solutions in response to demonstrate problems of unfairness instead of committing itself to no such overriding principle. The court in this case, rejected condition 2 and while the defendant refused to pay, the trial judge ruled in favour of the plaintiffs. Someone can interpret this as a version of market-individualism in which market-individualists believe that good faith is indefinite healthy doctrine.

The case of Timeload Ltd v British Telecommunications plc is the one that regardless of the fact that English law does not yet explicitly recognize an overriding requirement of good faith in contracts, indisputably come near on such approach. However, how close is to be embodied this doctrine into the English contract law and how far are the courts prepared to accept a doctrine as such? The answer to these questions can be found in the case of Walford v Miles, where in relation to the first question the answer is not unless the adversarial ethic of English contract law is abandoned and as for the last question is not very far. The case of Baird Textile Holding Limited v Marks and Spencer plc expressed the alacrity of the courts to be stretched by implicit good faith ideas. The Court of Appeal taken their behavior from classical individualistic thinking rejected the view of Baird (relied on the co-operative nature of his relationship with Marks & Spencer). Thus, even to this context in which good faith can be found, the individualistic doctrinal thinking is not absent. Nonetheless, the possibility of adoption of good faith by stealth might come upon by the pressures that built up this adoption. The pressures of it are the common law and the civilian law worlds, which it’s authoritative that good faith dealing is the basis of any system of regime of contract law.

Moreover, many national legal systems who have been unified due to the European Union adopted the doctrine of good faith. Already two Directives, the one on Commercial Agents (‘act dutifully and in good faith’ in relation to one another’s interest) and the other on Unfair Terms in Consumer Contracts (a term is unfair if ‘contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer’) have been introduced, so the concept of good faith is no longer an unfamiliar idea. It’s logically also, that the English contract law it is exerted by the EC law, due to the pressures it accepts form it. Nevertheless, it would be wrong to think that English lawyers now agree that the adoption of the general doctrine of good faith would be sensible.

Accessory, it should be mentioned here the case of Director General of Fair Trading v First National Bank, too. A term in a standard form loan agreement permitted the bank to charge additional interest where a borrower defaulted on the repayment of the loan and agreed to pay off the debt by instalments over a longer period. Regulation 3(2)(b) provides that contract terms relating to the adequacy of remuneration are not subject to the fairness test. The House of Lords held that the term was not unfair (guided by the jurisprudence of the European Court of Justice) but regardless of that, their Lordships considered that good faith implies “open and fair dealing” (Lord Bingham). At the same point, Lord Steyn warned that “any purely procedural or even predominantly procedural interpretation of the requirement of good faith must be rejected”.

Thereafter, we are still wondering if it’s sensible for the English contract law to adopt the doctrine of good faith. The skeptical view provides five negative arguments against adopting the general principle of good faith. Firstly, a doctrine of good faith when it demands the parties to take into account the legitimate interests or expectations of one another, cuts against the essentially individualist ethic of English contract law. In the case of Walford v Miles, Lord Ackner explained that the adoption of a requirement of good faith would not be compatible with the adversarial ethic underpinning English contract law. Secondly, it is said the good faith, presupposes a set of moral standards against which contractors are to be judged, but it is not clear whose (or which) morality this is. Closely, related to the second concern, there is a third concern, that is to say that a doctrine of good faith would call for difficult inquiries into contractors’ states of mind. Fourthly, if good faith controls matters of substance including the remedial regime, then this wipes on the autonomy of the contracting parties. If someone combines, the thought that good faith indicates an uncertain discretion with the thought that good faith challenges the autonomy of contracting parties, then it is clear that we should be sceptical about the ‘wisdom’ of adopting such a doctrine. These ides have been expressed by the Privy Council in the case of Union Eagle Ltd v Golden Achievement Ltd referring also the thing that the court has a manumitted discretion to relieve against the express terms of a contract where enforcement would be contrary to faith. The final negative view of scepticism is that a general doctrine of good faith goes wrong in failing to recognise that contracting contexts are not the same. If there’s any possibility that contract law is to be sensitive to context, then it cannot be right to apply a doctrine of good faith irrelevant of context.

It is important to denote here, that the arguments for and against adopting a general doctrine of good faith depends on which model of good faith someone has in mind. There are three models of good faith, which someone must understand first before either the negative or positive arguments can be estimated. The first model is the one of “a good faith requirement”, which operates on the standards of fair dealing that are already recognized in a particular contracting context. The second model, “a good faith regime”, acts on the standards of fair dealing that are dictated by a critical morality of co-operation. The difference between the first model and the second, it is that the second one does not track identified standards but on contrast, tries to make the market in the rationale of prescribing the co-operative ground rules. The third and final model of good faith, it is what Michael Bridge calls “visceral justice”. In this model, the judges react impressionistically to the merits of a situation and finish off cases accordingly, all in the name of good faith. This is the only model that it is of judicial license.

Thus, to conclude should an agreement to negotiate in good faith ever be capable of enforcement as a binding contract? In my point of view, the doctrine of good faith should be adopted by the English contract law. There are so many cases that the doctrine of good faith has been a theme of debates, thus the courts must set at last a precedent about it. But, nowadays, as we have seen from all those cases and opinions cited above, the doctrine of good faith it is not recognizable, and can not be apply in any situation in the English contract law. An agreement to negotiate in good faith is not capable of enforcement as a binding contract. Notwithstanding, at the same time, we have to expect and hope that sometime, English law, will make a step further, will move towards the adoption of the doctrine of good faith as a requirement. Consequently, an agreement to negotiate in good faith sometime will be capable of enforcement as a binding contract.

Bibliography

• Lectures Notes
• The Contract Law, second edition, Lexis Nexis Butterworths
• Understanding contract law, fourth edition, John N Adams and Roger Brownsword
• Commercial agents Directive 86/653/EEC
• Unfair Terms in Consumer Contracts Directive 93/13/EEC