To What Extent Does the Principle of Good Faith Play in English Contract Law, and French Contract Law - Research Paper Example

To what extent does the principle of "good faith" play in (a) English contract law, and (b) French contract law Introduction - general aspects ofcontract law – good faith The principles applied in contracts are traditionally differentiated in accordance with the legal system in which a specific contract refers. For this reason, in the international marketplace the disputes between parties, regarding the rules that should be applied for their resolution, are common. In this context, Collins (1994, 230) stated that “the traditional solution for international transactions invokes the choice of law rules of private international law; under these rules, now codified by the Rome Convention, the parties to a contract are free to select the governing law, and in the absence of an express choice, the default rule applies the law which is most closely connected to the transaction”. In other words, the law applicable in a specific contract is decided primarily by the parties of this contract and only in cases that no special provision exists, then this issue is resolved directly by the relevant legal provisions referring to jurisdiction in cases of international transactions. The examination of the validity and the content of a contract has been traditionally an issue of primary importance for countries of civil law. For common law countries the above issues are also extensively examined by the courts. In this context, the study of Beatson et al., (1997, 14) showed that “once the contract passes the test of initial validity, the control of its terms on the ground of unfairness becomes problematical since it is in direct conflict with the notion of freedom of contract; nevertheless, the law has for centuries possessed tools that could be utilized in order to exercise such control, notably the doctrine of public policy and the equitable rules against penalty and forfeiture; the doctrine of good faith provides another important tool for the control of contractual terms and their application; the doctrine has long been recognized by continental law; recently it has been gradually absorbed by a number of common law jurisdictions”. In accordance with the above researcher the doctrine of ‘good faith’ is not broadly used in common law countries but only in cases where its application is inevitable taking into account the circumstances of a specific country and the behaviour of the parties involved. As pointed out by Summers (1968, 198) ‘Without a principle of good faith , a judge might , in particular cases , be unable to do justice at all , or he might be able to do it only at the cost of fictionalizing existing legal concepts and rules, thereby snarling up the law for future cases; in begetting snarl, fiction may introduce inequity, unclarity or unpredictability; in addition, fiction can divert analytical focus or even cast aspersions on an innocent party’. On the other hand, is has been noticed that “Common law lawyers have traditionally tended to regard good faith as an invitation to judges to abandon the duty of legally reasoned decisions and to produce an unanalytical incantation of personal values and the point out that it could well work practical mischief if ruthlessly implanted into our system of law’ (Zimmermann et al., 2000, 15). According to Miles (1992, 128) ‘A duty to negotiate in good faith has even been described as inherently repugnant to the adversarial position of the parties when involved in negotiations and as unworkable in practice’. Moreover, O’Connor (1990, 99) supported that “the legal principle of good faith in English law, as in legal systems generally, is firmly based on the ethical principle, and since the development of the good faith actions in Roman law, the legal principle encompasses the basic rule, pacta sunt servanda and the ethical concepts of honesty and fairness”. Good faith could be defined as “the mental and moral state of honesty, conviction as to the truth or falsehood of a proposition or body of opinion, or as to the rectitude or depravity of a line of conduct, even if the conviction is objectively unfounded” (Wikipedia, 2007) The doctrine of good faith has been evaluated using different approaches. Indicatively, we could refer to the work of Mather (1999) who tried to explain the above principle by formulating the aspect of ‘standard’. In accordance with the study of the above researcher (1999, 83) “the standard is an ethical standard of conduct (for example, honesty, good faith, fairness, reasonableness, or some other moral virtue), but the standard could be a value or end that should be pursued (individual autonomy or social equality, for example)”. In accordance with the above, good faith is a necessary part of the contractual agreement. In fact it has been found to be a valuable tool towards the interpretation of the will of parties in a specific contract and their obligations in accordance with the conditions related with the relevant contract and the common sense as held in the social ethics. 2. ‘Good faith’ in English contract law The use of good faith in English contract law is significant but indirect. In other words, good faith is not usually included in the terms of the contractual agreements; however it is expected to be applied when interpreting a particular contract and mainly when responding to the demands of a contract in accordance with the agreement made, i.e. the will of the parties as expressed in a particular piece of text. Good faith can be evaluated by courts under many different aspects. In this context, it has been found by Musy (2001) that today there is no specific rule in the English common law imposing to the parties to show a ‘good faith’ when participating in a particular contract. However it is noticed that (2001, 4) “the utopian idea of the common law is that manners in business are oriented by a “rough and tough” rule and according to this rule Courts are used to take a fairly extreme position on the duties of the parties to look after themselves and to stay, so to say, “on their own feet”. Moreover, Brodie (1998, 79) examined whether “the courts would permit the parties to contract-out of mutual trust and confidence and it has been found that on public policy grounds, any such attempt should be illegitimate”. Under these terms, the contract of employment should be restructured in order to meet the requirements of ‘good faith’. For this reason it has been suggested by Brodie (1998, 79) that ‘this might involve more extensive obligations being owed by employees as well as employer; one instance of this might be over disclosure of information; both at the time of the formation of the contract and during the period it subsists’. The evaluation of good faith by common law has been extensively examined in the case of Interfoto Picture Library Ltd v Stiletto Visual Programs Ltd1. In the particular case the court held that “most systems of law outside the common law world recognise the principle of good faith in making and carrying out contracts - playing fair, putting ones cards on the table; the plaintiffs were under a duty in all fairness to draw the attention of Stiletto to the high price payable for the retention of the transparencies; English law has no such overriding principle, but has piecemeal solutions - equitable remedies for unconscionable bargains - and control of exemption clauses; the common law in some areas requires utmost good faith for some contracts [most notably insurance contracts] and does not allow people to recover penalties disguised as estimated damages”. The methods used by common law in order to ensure the application of good faith in contractual agreements should be considered as really valuable although perhaps one could notice that they do not address the issue of good faith directly. It seems rather that good faith is guaranteed through the application of subordinate measures, particularly the remedies provided in order to ensure the credibility of contracts and their enforcement in accordance with the targets set by the parties. On the other hand, in Southern and District Finance plc v Barnes and Barnes2 the court held that (p. 68): “When a time order is made, it should normally be made for a stipulated period on account of temporary financial difficulty. If, despite the giving of time, the debtor is unlikely to be able to resume repayment of the total indebtedness by at least the amount of the contractual instalments, no time order should be made. In such circumstances it will be more equitable to allow the regulated agreement to be enforced” In the above case the issue of ‘good faith’ is related with the time available to the party of a contractual agreement for the completion of its obligations towards the other party. In accordance with the above views, the principle of good faith should be applied only if its application could be helpful regarding the conditions of a particular contract and the behaviour of the parties (especially of the party that does not comply with the terms of the contract). If ‘good faith’ is not expected to play a role regarding the ‘completion’ of the terms of a particular contract, then its use should be avoided. For this reason, in the above case it was held3 that “the court may include in a time order any amendment of the agreement, which it considers just to both parties, and which is a consequence of a term of the order...” In any case, the decision regarding the potential effectiveness of the principle of good faith if applied in a specific contractual agreement belongs to the court which will decide on this issue taking into consideration all the circumstances of the specific case and mostly the behaviour of the parties involved. Moreover, in the case The Manganese Bronze and Brass4, Lord Wright said that (p. 423) “Such a reliance must be affirmatively shown: the buyer must bring home to the mind of the seller that he is relying on him in such a way that the seller can be taken to have contracted on that footing. The reliance is to be the basis of a contractual obligation”. In another case, Grant v. Australian Knitting Mills Ltd5. Lord Wright said (p. 99): “It is clear that the reliance must be brought home to the mind of the seller expressly or by implication. The reliance will seldom be express: it will usually arise by implication from the circumstances”. In the above cases, good faith is used in order to evaluate the behaviour of the parties as it can be observed throughout the contractual agreement. However, it could be noticed that the existence of good faith cannot be always identified using the behavioural patterns applied in contractual agreements under normal circumstances. This assumption can be justified by the fact that contracts are considered to be primarily the written expression of the parties’ will. Therefore this will constitutes the basis for the interpretation of the contract’s terms while any common practice and behaviour should follow. The issue of ‘good faith’ was also examined in the case of Director General of Fair Trading V First National Bank6 in which the court tried to identify the potential use of the Unfair Terms in Consumer Contracts Regulations 1999 in the resolutions of disputes appeared in contractual agreements related with the application of the above principle. In the above case Lord Steyn (par. 34) stated that “under the Regulations, a term in a standard form contract that is unfair is not binding on the consumer; but certain provisions, sometimes called core terms, have been excepted from the regulatory regime; Regulation 3(2) so provides: In so far as it is in plain, intelligible language, no assessment shall be made of the fairness of any term which - (a) defines the main subject matter of the contract, or (b) concerns the adequacy of the price or remuneration, as against the goods or services sold or supplied”. Moreover, the above judge tried to identify the content of the ‘unfair term’ in order to proceed to a more detailed evaluation of the particular case. The identification of the meaning of this term was based on the article 4(1) of the Unfair Terms in Consumer Contracts Regulations 1999 which provides that “unfair term means any term which contrary to the requirement of good faith causes a significant imbalance in the parties rights and obligations under the contract to the detriment of the consumer”. The presentation of the definition of the above term can be particularly helpful for the court in order to decide on the issue whether the application of the principle of ‘good faith’ could be useful for resolving a dispute related with a particular contractual agreement. Towards the same direction, Lord Hope of Craighead7 (par. 45) stated regarding the above case that Unfair Terms in Consumer Contracts Regulations 1994 could be also used in order to evaluate the content of the term ‘unfair’ in relation with a particular contract. In accordance with the above judge the particular legislative text “states that an assessment of the unfair character of unfair terms must be supplemented by an overall evaluation of the different interests involved while Regulation 4(2) indicates the wide range of circumstances to be taken into account in the assessment providing that the assessment is to be done as at the time of the conclusion of the contract; but an appreciation of how the term will affect each party when the contract is put into effect must clearly form part of the exercise”. However, it is noticed that the recognition of ‘good faith’ present differences between the legal provisions applied in the particular member states, a phenomenon which can be possibly explained by the existence of different social and political attitudes in each particular member state. The recognition and the acceptance of specific legal rules in the context of the European Union cannot exclude the application of different policies regarding the internal legal framework of each member state. However, it is generally accepted that the responsibility of the interpretation of a particular contractual agreement belongs to the court which has to decide in accordance with the ‘will’ of the parties as expressed in a specific contract while in cases where this ‘will’ cannot be identified, the principle of ‘common sense’ can be used in order to interpret the meaning of a particular term or clause, critical for the resolution of a dispute appeared in the relevant contract. In this context, in the case Shiloh Spinners Ltd. v. Harding8 (p. 723) the court held that: “Where clauses incorporated into a contract contain particularly onerous or unusual terms, the party seeking to enforce those terms must show that the onerous terms have been brought reasonably and fairly to the attention of that other party” The particular aspects of good faith have been examined in the case of Lever Bros Ltd v Bell9. In the specific case, the court referred to the The Panama Mail Company case in which it was held that “the error relied on did not affect the substance of the consideration and the contract in question was accordingly enforced”. In the particular case “the contract was one to take shares in a company; the prospectus on the faith of which the Plaintiff had applied for shares contained a representation made in good faith that the company had obtained a valuable contract for the carriage of mails; the representation was intended to, and did in fact, induce the Plaintiff to apply for shares; it was untrue, for though at the time the application for shares was made and accepted there were reasonable grounds for expecting that such a contract would be obtained, it was never in fact concluded”. In the same case (Lever Bros Ltd v Bell) it was held that the application of the doctrine of good faith can be related with a series of elements including the intentions of the parties when signing a particular contract. More specifically, it is noticed10 that “in Smith v. Hughes, there was no sufficient finding that the mistake was mutual; it was alleged that the vendor was intending to sell and the purchaser intending to buy and believed he was buying old oats whereas the actual parcel of oats, the subject of the contract, consisted of new oats; the purchasers claim to be relieved of the contract failed because the learned Judge at the trial did not point out the necessity of finding not only that the purchaser believed the oats were old but that he also believed that the vendor was selling them as old”. In other words, in order for the principle of good faith to be applied it is necessary that the parties have accepted all terms included in a particular contractual agreement or at least their behaviour indicates such an acceptance. From another point of view, where the application of good faith should be expected to take place because of the circumstances of a particular case, the court is obligated to be conformed on the relevant principle. In this context, in Foster v. Mackinnon11, Byles J., delivering the judgment of the court, said (p.711): “It seems plain, on principle and on authority, that, if a blind man, or a man who cannot read, or who for some reason (not implying negligence) forbears to read, has a written contract falsely read over to him, the reader misreading to such a degree that the written contract is of a nature altogether different from the contract pretended to be read from the paper which the blind or illiterate man afterwards signs ; then, at least if there be no negligence, the signature so obtained is of no force”. Regarding the above case, the court in Saunders v Anglia Building Soc12 held that “as to persons who are illiterate, or blind, or lacking in understanding, the law is in a dilemma; on the one hand, the law is traditionally, and rightly, ready to relieve them against hardship and imposition; however regard has to be paid to the position of innocent third parties who cannot be expected, and often would have no means, to know the condition or status of the signer; The law ought to give relief if satisfied that consent was truly lacking but will require of signers even in this class that they act responsibly and carefully according to their circumstances in putting their signature to legal documents”. In other words, the application of principle of ‘good faith’ is decided by the court in accordance with the conditions related with a particular case. In this context, the existence of similar cases is really helpful for the court while the events on which the case is based are considered to have a significant importance for the relevant decision. 3. ‘Good faith’ in the European and French contract law The history of the doctrine of good faith in the civil law has been the main issue of the research of Whittaker et al. (2000, 94) who stated that Roman law ‘used good faith or equity to describe three types of conduct expected of the contracting parties; first each party should keep its word; second neither should take advantage of the other by misleading him or by driving too harsh a bargain and third each party should abide by the obligations that an honest person would recognise even if they were not expressly undertaken’. On the other hand, Schneiber (1998, 282) stated that ‘there is the strong sense that if global contract law is to be a set of general principles and a call for just and fair results, then judges of different national or subnational legal cultures will decide contract cases to a significant degree in the light of those different cultures’. In civil law countries, including France, in order to investigate the content of a specific contract, judge has primarily “to determine the scope and content of contract laws «default rules», the rules that will, in the absence of express exclusion, govern parties’ contractual relationships” (Riley, 2000, 367). In this context, the following three issues are usually examined by the court: “that defaults be grounded in the subjective consent of contracting parties, in the customs and norms immanent within the parties» community, and in the value of economic efficiency” (Riley, 2000, 367). However, it should be noticed that the application of the above rules can be differentiated in the European Union in accordance with the legal framework of the particular member states regarding especially the particular area of law. On the other hand, it has been supported by Musy (2001, 3) that “both the French doctrine and courts are not making a clear distinction between subjective and objective good faith (the German Guter glaube and Treu und Glaube), particularly in the context of cooperation cases, such as réticence dolosive, erreur sur la substance”. Generally, it is stated by Nedzel (1997, 110) that civil law ‘traditionally recognizes a duty of good faith in both precontractual and contractual situations’. Regarding specifically France and the principle of good faith it is stated that (Nedzel, 1997, 110) “the French concept of precontractual liability is not so much premised on a duty to negotiate in good faith as it is premised on a duty not to negotiate in bad faith; under French law, as long as no contract has been concluded, damages may be compensated only in tort as expressed by article 1382 of the Civil Code: Every act whatever of man that causes damage to another obliges him by whose fault it happened to repair it”. The issue of good faith is extensively analyzed in the European law. One of the legislative texts that have produced in the context of the European law is the Directive on Unfair Terms in Consumer Contracts (1994) which has been examined and evaluated by Collins (1994). The particular Directive refers to the issue of good faith with a special reference to both the English law and the rules applied in the civil law countries. Particularly regarding the countries of the last category, it is noticed that “for the civil law the idea of good faith encompasses all the variety of instances when one party has abused the social practice of making promises; it involves taking advantage of anothers trust either by encouraging misplaced reliance or by securing an unduly advantageous transaction’ (Collins, 1994, 50). In the French law (which belongs to the broader ‘civil law’ family) the principle of good faith will have a similar content. On the other hand, Musy (2001, 1-4) stated that “Western legal systems differ as to the scope of the good faith principle; in the Civil Law system, the minimalist view is represented by the French courts, who have not relied on the ‘bonne foi’ to the same extent that their German and Italian counterparts did; an even more minimalist approach is represented by the common law of England which does not recognize any general obligation of the parties to a contract to conform to the standard of good faith”. At the same time it is noticed by Nicholas (1992, 48) that “the requirement of good faith, though explicitly mentioned by the French Code only in connection with the performance of contracts, is introduced into the context of their formation under cover of the requirement of a genuine consent; for, it is held, there cannot be a genuine consent if one party is aware of the others mistake, even if only to the extent of passively acquiescing in it”. The principle of good faith would be used here in order to identify the role of each party as it can be evaluated under the circumstances related with the specific contract. 3. Conclusion As it has been proved above, English law and French law use similar approaches regarding the application of the doctrine of good faith on contracts. The difference between the common law and the civil law regarding the recognition and the application of principle of ‘good faith’ is analyzed in the work of Nicholas (1992, 48) who stated that “where the Common law, in the interests of commercial convenience and the security of transactions, looks to the external appearance of consent, French law, influenced no doubt by the doctrine of the autonomy of the will and more concerned for justice in the individual case than for commercial expediency, often takes account of the true state of mind of one of the parties; it is for this reason that the category of defects of consent, and in particular of mistake and réticence dolosive, plays a more important part in French law than it does in the Common law”. Under these terms the application of the principle of good faith would be decided in accordance with the conditions related with the particular contract (will of the parties, local legal provisions). When interpreting the terms included in a particular contract we should take into account the legal framework of the country involved, i.e. the country of jurisdiction as it is defined by the parties’ will. In case that a ‘transfer’ of legal rules is necessary to take place a specific procedure needs to be followed. In this context, Teubner (1998) found that two methods could be used in order to complete this task. In this cases it is stated that “legal transplant is an unsatisfactory metaphor for describing the transfer of legal rules from one legal system to another; instead, the metaphor of legal irritant better describes the impact on the legal system, and then a distinction between tight and loose coupling between law and its social context better explains the trajectory of social effects; the example of the importation of the civil law concept of good faith into British law illustrates the co-evolving trajectories of the legal system and tightly coupled social systems which instead of furthering harmonisation of laws produces new divergences as their unintended consequences” (Teubner, 1998, 12). Good faith has been used by the above researcher as an example illustrated the ‘transfer’ of legal rules mostly because contractual agreements usually present elements related with more than one countries and the transfer of principles of law is usually examined by the courts as of its feasibility. On the other hand, it should be noticed that the interpretation of contracts cannot follow the same rules as the interpretation of the legal provisions. In the context of the European law, the interpretation of contracts should be in accordance with the culture of the country involved and the ethics held in the particular market (the will of the parties would remain the basis for the completion of the above task). Regarding this issue it has been found by Truilhé-Marengo (2004, 463) that “the important rights granted to different contracting parties (consumer-purchaser, consumer-tourist, and certain professionals) stand in contrast to the formal incoherence and fragmented character of the legal texts and for this reason in analysing the notion of European contact law, it is necessary to adapt a functional approach rather than a formal one, because the functional approach has dominated European integration and the European law of contracts since its inception”. It should also be noticed that the potential differences in the legal frameworks of the countries involved would also have a major influence on the evaluation of the terms of a particular contractual agreement. Towards the same direction, it has been supported by Gordley (2001, 18) that “the civil law has traditionally had ways of considering directly whether a transaction was unfair; in some situations, Roman law required the parties to act in good faith”. Despite the provisions for direct application of the doctrine of good faith when evaluating particular contractual agreements using the principles of the civil law, in common law countries the application of good faith is mainly indirectly. On the other hand, it should be noticed that good faith can be related with many aspects of contractual agreements. In case of a ‘breach’ of the terms of a specific contract, good faith will be used in order to retrieve the basis of the party’s behaviour under the specific circumstances (Crawford et al., 2005). Under these terms, court will have to decide whether the use of good faith would have prohibited the appearance of a particular problem taking into account the general circumstances involved. In other words, good faith can be used not only to identify the parties’ will in the case of a relevant dispute but also to explain their behaviour, i.e. if it was justified or not given the circumstances related with a particular contract. References Books Beatson, J., Friedmann, D. (1997) Good Faith and Fault in Contract Law. Oxford: Clarendon Press Crawford, J., Bell, J. Bussani, M. (2005) Mistake, Fraud and Duties to Inform in European contract law, Cambridge: Cambridge University Press Gordley, J. (2001) The Enforceability of Promises in European Contract Law. Cambridge: Cambridge University Press Mather, H. (1999) Contract Law and Morality. Westport: Greenwood Press Nicholas, B. (1992) The French Law of Contract. Oxford: Clarendon Press O’Connor, J. (1990) Good faith in English Law. Dartmouth Publishing Company Schneider, H. (1998) The State and Freedom of Contract. New York: Stanford University Press Whittaker, S., Zimmermann, R. (2000) Good Faith in European Contract Law. Cambridge: Cambridge University Press Journals Brodie, D. (1998) Beyond Exchange: The New Contract of Employment. Industrial Law Journal, 27(2): 79-102 Collins, H. (1994) Good Faith in European Contract Law. Oxford Journal of Legal Studies, 14(2): 229-254 Musy, A. (2001) The Good Faith Principle in Contract Law and the Precontractual Duty to Disclose: Comparative Analysis of New Differences in Legal Cultures. Global Jurist Advances, 1(1): 1-17 Nedzel, N. (1997) A Comparative Study of Good Faith, Fair Dealing and Precontractual Liability. Tulane European and Civil Law, 12: 97-159 Riley, C. (2000) Designing Default Rules in Contract Law: Consent, Conventionalism and Efficiency. Oxford Journal of Legal Studies, 20(3): 367-390 Summers, R. (1968) Good faith in general contract law and the sales provisions of the Uniform commercial code, 54 Vir LR 195,198-199 Teubner, G. (1998) Legal Irritants: Good Faith in British Law or How Unifying Law Ends Up in New Divergencies. Modern Law Review, 61(1): 11–32 Truilhé-Marengo, E. (2004) Towards a European Law of Contracts European Law Journal, 10(4): 463–478 Case law Director General of Fair Trading V First National Bank ([2000] 1 WLR 98 Foster v. Mackinnon (1869) L.R.4 C.P. 704 Grant v. Australian Knitting Mills Ltd. [1936] A.C. 85 Interfoto Picture Library Ltd v Stiletto Visual Programs Ltd [1989] 2 QB 433 Kennedy v. Panama Mail Company, L.R., 2 Q.B., 580 Lever Bros Ltd v Bell [1931] UKHL 2 Lloyds Bank Ltd v. Bundy [1975] QB 326 Saunders v Anglia Building Soc (sub nom Gallie v Lee) [1970] UKHL 5 Shiloh Spinners Ltd. v. Harding [1973] A.C. 691 Smith v. Hughes, L.R., 6 Q.B. 597 Southern and District Finance plc v Barnes and Barnes [1995] CCLR 62 The Manganese Bronze and Brass Co. [1934] A.C. 402 (all case law has been extracted from the following websites: http://netk.net.au/contractlaw.asp and http://www.austlii.edu.au/ ) Websites http://netk.net.au/contractlaw.asp http://www.austlii.edu.au/ http://en.wikipedia.org/wiki/Bona_fide Read More