Thursday, April 25, 2013

Good faith in Contract Law

It is widely assumed that English contract law does not recognise a general duty of good faith. Instead, the law has preferred an incremental, piecemeal approach of solving particular problems as and when they arise; rather than a general overriding notion of ‘good faith’. For instance, Bingham LJ said in Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] 1 QB 433, “In many civil law systems, and perhaps in most legal systems outside the common law world, 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, a principle which any legal system must recognise; its effect is perhaps most 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 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.

Examples of these piecemeal solutions are not too hard to find. In White & Carter v. McGregors [1962] AC 413, the House of Lords affirmed that it was open for a contracting party to refuse to accept a repudiatory breach and (if possible to do so without the cooperation of the other contracting party) continue with the contract, and bring an action for the agreed price after the time for performance. Lord Reid however held that there was no notion known to English law which compelled a contracting party to act reasonably while making a choice between accepting or refusing a repudiation. Leaving the door slightly open, however, Lord Reid held “"it might be said that, if a party has no interest to insist on a particular remedy, he ought not to be allowed to insist on it…” This door was pushed further open in a couple of cases (The Puerto Buitrago [1976] 1 Lloyds Rep 250; The Alaskan Trader [1984] 1 All ER 129) but more recently, the position has been summarized in The Aquafaith [2012] 2 Lloyd's Rep 61: “The arbitrator was wrong to regard the comments of Kerr J (and all the subsequent references in the authorities to the need for an extreme case of unreasonableness on the part of the owners to bring in the exception) as a "gloss" on Lord Reid's dictum in White & Carter and to treat Lloyd J's dictum as entitling him to focus on "no legitimate interest", without reference to the degree of unreasonableness. When Lord Reid's speech is read in its entirety, it is clear that the innocent party's right to elect is not trammeled by the need to act reasonably. It requires something beyond that before the courts will interfere and prevent the innocent party insisting on performance of the contract. The effect of the authorities is that an innocent party will have no legitimate interest in maintaining the contract if damages are an adequate remedy and his insistence on maintaining the contract can be described as 'wholly unreasonable', 'extremely unreasonable' or, perhaps, in my words, 'perverse'.”

Another example can be found in the line of cases exemplified in Socimer International Bank v. Standard Bank London [2008] EWCA Civ 116 – where the question is whether a party which contractually enjoys certain discretion must exercise that discretion reasonably. Socimer, and subsequent cases, note that it need not exercise the discretion reasonably: however, the exercise of discretion must not be so unreasonable as to be arbitrary. The threshold is thus rationality (somewhat analogous to the Wednesbury standard which is so familiar to public lawyers). The Court will intervene when the party has taken a perverse view. 

This structure of piece-meal solutions may well change if the approach recently adopted by Leggatt J. in Yam Seng PTE v. International Trade Corporation, [2013] EWHC 111 (QB) gains currency. Leggatt J. drew on several established lines of authority on the various ways in which absolute discretions of contracting parties are read down (including the Socimer line, referred to above). These lines indicated to the Judge that the traditional view – that English law looks at good faith with antipathy – is misplaced. The learned Judge then chose to imply a term into the contract between the parties: the term was implied in fact (and not in law: thus, the term was based on the presumed intent of the parties), but the reasoning behind the implication of the term has great significance. The learned judge started from the proposition in Attorney General of Belize v. Belize Telecom [2009] 1 WLR 1988 that implication is part of the broader process of construction of the contract as a whole. He next considered the tests for interpreting a contract: one of which is that the contract must be interpreted as a whole in light of the ‘factual matrix’: Investors Compensation Scheme [1998] 1 WLR 896. Leggatt J. then held – and this proposition appears to me to require further consideration – that this factual matrix includes “shared values” of the parties. One of these shared values was (and, indeed, it will be hard to think of a case where counsel would have instructions to argue to the contrary) was ‘honesty’. If one accepts that Belize laid down a broader test for implication than was traditionally understood, and if one accepts that 'shared values' are part of the background of fact in which a contract must be interpreted, this reasoning may well follow. Both those assumptions are debatable.

Leggatt J. however also indicated that the same result would follow even on the traditional tests of implication. He held that implication of a good faith duty is necessary for the business efficacy of most contracts, and is a term which both parties would have immediately accepted without thinking. This is problematic: while both parties may testily suppress an officious bystander asking “will you act in good faith?” with an “Oh! Of course!", it is unclear if they would do so if the officious bystander elaborated on what he meant by good faith. Was it a duty to not make false statements? Was it a duty to bring all relevant information to the light of the other party? Was it a duty to not give evasive answers if asked by the other party about one aspect? I am not sure whether all contracting parties would immediately agree with these types of obligations. In Socimer, for instance, while Rix LJ does speak of implication on the basis of ‘good faith’, he does point to the narrow content of the duty he has implied: he is careful to draw a distinction between reasonableness in an objective sense, and rationality. The English law of contract has worked fairly well – indeed, is perhaps the law most favoured by businessmen – for centuries without an overarching notion of good faith: what particular business efficacy was lacking is unclear. Ultimately, the concerns over certainty would persist, with no obvious benefit which is not found in the already established lines of authority. The implication of the notion of a duty of good faith on the presumed intention of parties would perhaps allow a back-door entry to the Court imposing its standards of conduct on parties under the guise of presumed intention. For a term to be properly implied, it is not enough to show that there was a presumed intention as to goods faith: what must be shown is a presumed intention as to the content of that good faith norm. One could well argue, therefore, that the judge ought not to have aggregated the several lines of authority to draw a general principle based on implication. Instead, it was best to leave the several lines of authority to chart their own courses.

Leggatt J. also was of the view, “In so far as English law may be less willing than some other legal systems to interpret the duty of good faith as requiring openness of the kind described by Bingham LJ in the Interfoto case as "playing fair'" "coming clean" or "putting one's cards face upwards on the table", this should be seen as a difference of opinion, which may reflect different cultural norms, about what constitutes good faith and fair dealing in some contractual contexts rather than a refusal to recognise that good faith and fair dealing are required.” This, it is respectfully suggested, only highlights the problems with implying a free-standing duty of good faith: it will be impossible to determine what the standards of good faith which were presumably intended by the parties are, and is a license for uncertainty. On the facts, the necessary term to be implied – the duty to not acquiesce in undercutting of prices by other distributors, on the facts in Yam Seng – could perhaps (though this is by no means certain: the point seems arguable both ways) have been implied without having to resort to ‘good faith’. Further, one could also argue that adequate remedies were available under the Misrepresentation Act, 1967 on the facts of the case. It is not clear what the notion of good faith added.

One area of where an idea of ‘good faith’ may be useful, according to the learned Judge, is the law governing long-term contractual relations. “While it seems unlikely that any duty to disclose information in performance of the contract would be implied where the contract involves a simple exchange, many contracts do not fit this model and involve a longer term relationship between the parties which they make a substantial commitment.” While this point has force, it is only an argument to suggest that certain contracts must have certain specific duties implied: it is not an argument for why ‘good faith’ must be implied. In other words, one wonders whether there is any advantage from shifting the question from “should there be a duty of good faith?” to “what is good faith?” Ultimately, it is respectfully (and very tentatively, at this stage) suggested that there is no need for a general implication of a duty of good faith being incorporated into commercial contracts under English law.

1 comment:

vswami said...

IMPROMPTU 9intending to provoke more thoughts)

"..English contract law does not recognise a general duty of good faith......"
May be so, but with all usually trailing "ifs and buts" ; perhaps, even under the Indian contract law. Provided that, one is concerned with a contract of the kind in which the impact/effect is confined to only the rights and interests of merely /solely the 2 parties to the contract agreement; in one's conviction, certainly not of the kind involving the rights and interests of 'third' parties (e.g. stakeholders).

Incidentally, an interesting point, but for wrong reasons, has surfaced , centered on the very concept of 'good faith'.

If interested,attention is invited to the lately reported and discussed tax cases in which the taxpayers woes / grouses have come to be exposed consequent upon the tax officers not acting strictly in accordance with the mandates of the law, so also of the mandamus issued by courts.

To get a glimpse, one may begin with a reading of the court case in front line @Taxguru, titled - "HC issued guidelines to end TDS credit & refund adjustment harassment of Assessee by CPU" ; the BL article @ "Take up TDS problems with deductors, Delhi High Court tells taxmen".
For more, suggest to read individual's viewpoints aired through the related blogs @ swamilook.