{"id":351,"date":"2019-07-29T14:01:20","date_gmt":"2019-07-29T14:01:20","guid":{"rendered":""},"modified":"2019-08-07T12:19:49","modified_gmt":"2019-08-07T12:19:49","slug":"good-faith-modern-commercial-law-8262","status":"publish","type":"post","link":"https:\/\/www.lawteacher.net\/free-law-essays\/commercial-law\/good-faith-modern-commercial-law-8262.php","title":{"rendered":"Role of Good Faith in Modern Commercial Law"},"content":{"rendered":"

\u201cLord Mansfield\u2019s
\nuniversal proposition [that good faith applied to all contracts and dealings]
\ndid not survive. The commercial and mercantile law of England developed in a
\ndifferent direction preferring the benefits of simplicity and certainty which flow
\nfrom requiring those engaging in commerce to look after their own interests.\u2019
\n(Lord Hobhouse, 2001). <\/strong><\/p>\n

Critically discuss whether good
\nfaith should play a role either as a general principle, organising concept, or
\nsource of legal rights and duties in modern commercial law. <\/strong><\/p>\n

In comparison with other common and civil law jurisdictions,
\nin the English commercial law, there is no general obligation for a party to
\nact in good faith, either on contracting, negotiation or even performance. For
\ninstance, EU legislation frequently imposes such a duty on contracting parties,
\nwhilst in English law, despite the fact that the issue of good faith is of
\ngreat significance to certain areas, such as employment and insurance,[1]<\/a> it
\nstill remains distant to commercial contracts. As of the latter, the term
\nusually arises in dispute resolution clauses and future performance contracts. Therefore,
\nthis essay aims to analyse the role of good faith in modern commercial law.<\/p>\n

Good faith as a general principle<\/strong><\/p>\n

Currently, the reasons why the general principle
\nof good faith is not being recognised by English law is in order to avoid
\nuncertainty and to preserve the freedom of the parties. As to the former, the Courts,
\nrather than accepting such a vague term, which would lead to uncertainty as to
\nthe validity of the contact, prefer to not offer such a duty that would enable
\nparties to disregard their contracts in the event of a breach of faith or
\nunfairness. There is concern that the adoption of such obligation, would
\nundermine the fundamental goal of contractual certainty.<\/p>\n

Also, according to Bingham LJ, the traditional
\nEnglish hostility towards the doctrine of good faith is based on the fact that
\nthe Courts are searching for particular solutions to particular issues rather
\nthan enforcing such broad principles.[2]<\/a> It
\nis believed that each party is entitled to its own interests and should act
\naccordingly, as long as the acts meet the objectives of the underlying
\nagreement. This ethos of individualism allows the parties to pursue their
\ncommercial and self-interests in negotiating and performing contracts, as long
\nas no term has been breached.[3]<\/a><\/p>\n

However, despite the negative feeling towards
\ngood faith in commercial law and the difficulty to imply terms into contracts,
\nthere are cases where the Courts have established the implied duty of good faith.
\nThe highlight of this controversy is underlined in the case of Yam Seng Pte v
\nInternational Trade Corp Ltd[4]<\/a>,
\nwhich concluded that the Courts should recognise a limited form of good faith
\nas an implied term of a contract. The serving judge of the case, Sir Leggat[5]<\/a>,
\nheld that \u201chonesty, fair dealing, loyalty to the parties\u2019 intentions underpin
\ncertain relational contracts.\u201d[6]<\/a> In
\norder for good faith to be established, a certain degree of trust and
\nco-operation is necessary. <\/p>\n

Contradictory, Moore-Bick LJ agrees with the
\nbelief that good faith should not be recognized as a general principle, due to
\nthe lack of support in the authorities and the
\nfear that by adopting such principles would make the Court withdraw the
\nalready agreed terms of the parties.[7]<\/a>
\nTherefore, parties are advised that when they want to challenge such topics,
\nthey should refer to the lack of fairness or reasonableness.  <\/p>\n

Nonetheless, following the example of the
\nMedirest case[8]<\/a>,
\nwhere parties wish to add the duty of good faith in their contracts, the Court
\nwill give effect to their intentions, without implying  that the Court would construe the clause as
\nimposing upon the parties a general duty of good faith.[9]<\/a> <\/p>\n

Furthermore, good faith as a general principle provides
\na conduct-related framework for the application of
\nexisting legal doctrines[10]<\/a>,
\nwhile specific legal doctrines could derive from it. Thereupon, in the MSC v Cottonex case<\/em>[11]<\/strong><\/em><\/a> the
\nEnglish High Court saw that principle as the basis for the rule that \u2018a
\ncontractual discretion must be exercised in good faith for the purpose for
\nwhich it was conferred, and must not be exercised arbitrarily, capriciously or
\nunreasonably (in the sense of irrationally)\u2019.[12]<\/a> While
\nthis requires the consideration of the legitimate contractual interests of each
\nparty, it does not mean that a party has to prioritize the interests of the
\nother party[13]<\/a>,
\nas long as it won\u2019t undermine them in bad faith. <\/p>\n

Good faith as an organising concept <\/strong><\/p>\n

The English Courts insist that there is no
\n\u201cgeneral organising principle\u201d of good faith since its acceptance would
\npossibly undermine the already agreed express terms of the contract and that
\nthe law should develop along established lines[14]<\/a>,
\nhence, the successful implied duty cases are extremely limited. Such decisions
\nindicate that an innocent party will not be able to fulfil their side of the
\ncontract, due to a repudiatory breach by the other party, in case further
\nperformance is not possible. This is caused due to the frustrating alteration
\nthat the breach had on the commercial purpose of the contract. The discomfort
\nto create an overriding principle of good faith is similar to the approach of
\ncontract interpretation, where the solution to any possible problem lies at the
\nterms which were agreed by the parties and the interference of the Court should
\nbe avoided. <\/p>\n

Moreover,Leggatt J tried to define the good faith as a general principle, by
\nreferring to the leading authority of the Canadian Supreme Court, Bhasin v Hrynew<\/em>[15]<\/a>, where it was held that <\/em>there is an \u2018organising principle of good faith in
\ncommon law that underlies and manifests itself in more specific doctrines
\ngoverning contractual performance\u2019.[16]<\/a>
\nHowever, like the Court said it is not \u2018a free-standing rule, but rather a
\nstandard that underpins and is manifested in more specific legal doctrines\u2019.[17]<\/a>
\nTherefore, the general organising concept is not a doctrine governing
\ncontractual performance, which means that claims of good faith cannot be based
\non this principle.[18]<\/a><\/p>\n

Good faith as a source of legal rights and duties <\/strong><\/p>\n

Despite the general position that an agreement
\nto negotiate in good faith is not enforceable,<\/p>\n

the English Courts still see good faith as a
\nsource of legal rights and duties. In particular, they have held that specific
\nprovisions, which can be described as an agreement to negotiate, could be
\nenforceable. In Petromec Inc v Petroleo Brasileiro SA[19]<\/a>,
\nboth parties agreed to negotiate in good faith on the cost of an upgrade to an
\noffshore oil platform. The Court of Appeal decided that this express duty would
\ntake place only if this obligation (i) is included in the contractual valid
\nagreement, (ii) is an express obligation and (iii) the matter to be negotiated
\nis capable of objective assessment by a third party. Specifically, the Court
\nfound that the abovementioned requirements were fulfilled, hence, the possible
\nresult of negotiations could be identified. <\/p>\n

Additionally, if a duty of good faith \u201cmakes
\nreference to a clearly defined mechanism to discharge the obligation, it does
\nnot fail on the grounds of uncertainty of enforceability of any breach.\u201d[20]<\/a> This
\nmeasure was enforced at Cable & Wireless Plc v IBM United Kingdom Ltd[21]<\/a>,
\n\u201cwhere a dispute resolution clause included wording that the parties should
\nresolve their dispute in good faith, while the clause also made specific
\nreference to an alternative dispute resolution process.\u201d[22]<\/a> <\/p>\n

Establishing such a principle, will not
\nnecessarily create more duties, as long as the parties do not act upon their
\ncontractual duties capriciously. Also, there would be more requests in
\nlong-term agreements, due to the close collaboration and the importance of the
\nexchange.[23]<\/a>
\nFinally, it would be dependent on how the Court will interpret the nature of
\nthe general principle of good faith, something that is already done under the
\npiecemeal-approach[24]<\/a>,
\nwhere the parties are obliged to have \u2018fair, honest and genuine discussions
\naimed at resolving the dispute\u2019.[25]<\/a>
\nIt would be difficult to define the measures that should be taken and whether
\nthe parties are compelled to fulfil them, like having personal meetings or
\nexchanging information.  <\/p>\n

It should be highlighted, that the drafting of a
\nlist with detailed obligations would make it easier for the judiciary to apply
\ngood faith. Duties[26]<\/a>,
\nsuch as:<\/p>\n