Description
International trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product (GDP).
FINANCIAL STUDY ON INTERNATIONAL TRADE
INTRODUCTION: “Good faith” and “fair dealing” are concepts that steer in people?s minds, ideals of morality. Both termsbeing cognates1, and may be used together or interchangeably2. They convey an idea of “rightness”. But, rightness and in extension, goodness and fairness are concepts that are not subject to a universally accepted definition. This is largely so because what is good and fair may differ from one person to another depending on their divergent perceptions to life, cultures, and sometimes the different contexts and circumstances in which the moral judgement of good or bad is required3. Differences in interpretation however, do not detract from the fact that some conducts are generally considered to be good or bad and as such, subject to acceptance or opprobrium as the case may be. This holds true in international businesses also. Because a covert moral thread runs, almost, if not completely universally, amongst businessmen, there is a general expectation that parties should observe good faith in their dealings4. This is because “…commercial transactions must necessarily be based on mutual trust and confidence that each party to a contract will act reasonably and honestly, as no businessperson desirous of further access to world markets can afford to behave in a disreputable and unfair manner”5. It is for
this reason that the doctrine of good faith and fair dealing is recognized as one of the general principles of contract in many legal systems around the world6.
It is in recognition of this general recognition of the necessity for good faith and fair dealing in international trade that copious provisions requiring parties to international commercial transactions to act with good faith and fair dealing are made under the UNIDROIT Principles of International Commercial Contracts (“the Principles”).These provisions range from a general and overriding good faith principle7 to more specific provisions relating to negotiation8 processes leading to contracts, the performance9 of the contracts and those governing the interpretation10 of contracts.
Imposing such a duty in international trade however, raises some questions. Is it realistic to expect parties to international trade to act with good faith towards each other? Is the application of the principle in international trade free from difficulties? If not, what are the possible difficulties associated with the application of the principle? This treatise intends to answer the first question in the affirmative. In support of this view, it will briefly review the application of the principles in major international commercial jurisdictions. In further support of this position, the treatise will consider the present international position on the application of good faith in trade as reflected in the provisions of someinternational commercial conventions and instruments
7 8
. Art. 1.7 of the Principles. . see, Article 2.1.15 of the Principles 9 . see, Article 5.2 of the Principles 10 . see, Article 4.8 of the Principles
and arbitral awards. Before concluding, some difficulties which may be encountered in the application of the good faith principle in international trade will also be discussed.
It is believedthat the selected jurisdictions, international commercial conventions and instruments and arbitral awards herein discussed will serve as fair benchmarks for addressing the questions discussed in this work.
DEFINITION OF GOOD FAITH As noted in the introduction, what constitutes good faith is not subject to a universal meaning. Professor Forte11 rightly stated that “good faith as a concept or as a general principle is difficult to define”.Zaccaria12 sees the duty of good faith as one that requires a party to act reasonably as he would expect the other party to act towards him. Another writer defines good faith as “not only the standard of honesty in fact that applies …but also and more significantly „reasonable standards of fair dealing”13. With particular reference to international trade, Powers14 defines good faith as “an international doctrine that requires parties to an international transaction to act reasonably, as they would expect the other party to act”. Zimmermann and Whittaker identify five constituents of good faith. These are: the exclusion of bad faith conducts, the requirement of parties to a contract to keep to its terms (pacta sunt servanda), the requirement on a party not to behave in a manner as to make the position of the other party worse; the prevention
11 12
. A.D.M, Forte, supra, p.101 . E. C. Zaccaria, supra, p.5 13 .M. Bridge, “Good Faith in Commercial Contracts” in R. Brownsword et al. (eds.) Good Faith in Contract: Concept and Context, supra , p. 139. 14 . P. J. Powers, Defining the indefinable: Good faith and the United Nations Convention on the Contracts for the International sale of Goods”, (1999) 18 J.L. Com 333 at 352 cited in W. T etley, Q.C. supra,p.3.
of the parties from relying on or being bound by an absurdity arising from their agreement and; the prevention of a deliberate breach of a contract15.
The absence of a definition of good faith and fair dealing in the UNIDROIT Principles underscore the difficulty in securing a common and universally accepted definition for the term. Notwithstanding the above, it has been stated thatthe fair dealing component of good faithensures that the required standards are objective16. This objective component of good faith provides a fulcrum for its universal application17. Accordingly, the discussion in this treatise will consider good faith in its “objective” sense only, i.e.as constituting a standard of conduct by which the behaviour of a party has to conform and by which such behaviour may be judged18.
THE UNIDROIT PRINCIPLES AND GOOD FAITH The Principles stipulates a general requirement of good faith and fair dealing in international commercial contracts. Several other provisions in the Principles which do not expressly state the terms good faith and fair dealing,require their imputation in order to give them a complete and effective meaning19. The overriding and express good faith provision is contained in Article 1.7. It provides in sub-article (1) that: “Each party must act in accordance with good faith and fair dealing in international trade”
15
. S.Whittaker, and R. Zimmermann,“Coming to terms with good faith”, in R. Zimmermann, and S. Whittaker, (eds) Good Faith in European Contract Law. Cambridge, CambridgeUniversity Press, 2000. pp. 690-693. 16 . A.D.M. Forte, supra, p.101 17 . Prof. W. Tetley, defines good faith in contract in this objective sense. To him, good faith in contract means “just and honest conduct, which should be expected of both parties in their dealings one with another, and even with third parties, who may be implicated or subsequently involved. Good faith requires that each party be fair and honest in negotiations and, once the agreement has been reached, that the parties also perform their respective obligations and enforce their rights honestly and fairly”. See. W.Tetley, Q.C. “Good faith in contracts”, p. 4 18 . For the distinction between the objective and subjective nature of good faith, see. S.Whittaker, and R. Zimmermann,“Good Faith in European Contract Law: Surveying the Legal Landscape, in R. Zimmermann, and S. Whittaker, (eds.) supra, p.39. 19 . See, notes 7-10 above. See also, Official Comment to article 1.7 of the UNIDROIT Principles, supra.
Sub-article (2) of the same Article forbids parties in international trade from excluding or limiting the duty by agreement20.
Although the Principles adopt several phrases in expressing the notion and in imposing the obligation of good faith on parties to international trade21, it has been acknowledged that these terms provide for a direct or an indirect application of the principles of good faith and fair dealing in international commercial contracts and impose a duty on the parties “not only in the performance of the contract but also in its negotiation, its interpretation and in the event of a breach of the contract”22. However, the imposition of such a duty upon parties in commercial transactions has not been warmly received across all jurisdictions. While many jurisdictions view such a duty as necessary for the growth of commerce, some don?t. A consideration of these varying jurisdictional approaches to the imposition of a duty of good faith on parties to commercial contracts will aid us in determining the extent to which the imposition of the duty in international trade can be said to be realistic or not.
GERMANY The duty of parties to act in accordance with good faith and fair dealing is statutorily recognised under German law. Here, good faith as enshrined in §242 of the German Bürgerliches Gesetzbuch (BGB) is linked with the notion of „Treu und Glauben?, literally meaning fidelity
20
. Although the UNIDROIT Principles are not generally binding on parties to international trade, they are at liberty to make the Principles the governing law of their contract and where they so choose, will be bound by its provisions, including those imposing a duty of good faith and fair dealing, in accordance with the general principles of contract. See. Preamble to the UNIDROIT Principles, 2004. See. N.J. Barnes, supra, p. 2 21 . The various terms used in describing the notion of “good faith and fair dealing are captured by N. J. Barnes supra, p.3 22 . E. C. Zaccaria, supra at p. 10. The writer?s comments were based on the 1994 UNIDROIT Principles on International Commercial Contracts but remain valid even with respect to the 2004 edition.
and faith23. Under this provision, a debtor is bound to perform according to the requirements of good faith, with ordinary usage being taken into consideration24. The position of good faith in German law has been explained25 as follows:
“Treu?…signifies faithfulness, loyalty, fidelity, reliability; „Glaube? means belief in the sense of faith or reliance. The combination of „Treu und Glauben? is sometimes seen to transcend the sum of its components and is very widely understood as a conceptual entity. It suggests a standard of honest, loyal and considerate behaviour, of acting with due regard for the interest of the other party, and it applies and comprises the protection of reasonable reliance. Thus it is not a legal rule with specific requirements that have to be checked but may be called and „open? norm. its content cannot be established in an abstract manner but takes shape only by the way in which it is applied ”
26
Weitzenböck explains that the doctrine of good faith as enshrined in §242 BGB has had a profound effect in the area of German contract law through its development by the courts and legal writers, and that it operates „supplendi causa?, giving rise to a host of supplementary duties that may arise under a contract27. These duties, one can say, set the standard of fairness and transparency in the transaction between the parties. The doctrine of good faith in German contract law has been described as “…a judicial oak that overshadows the contractual relationship of private parties”28. The application of the doctrine of good faith in Germanyhas been developed to a large extent by the courts? in theexercise of their interpretative role thereby
23 24
. S. Whittaker and R. Zimmermann, supra. P.31 .§157 BGB provides also that “contracts shall be interpre ted according to the requirements of good faith, ordinary usage being taken into consideration”. 25 .S. Whittaker and R. Zimmermann, loc. cit 26 . (Emphasis mine). This point is worthy of note as the lack of a precise and internationally accepted definition for good faith has been one of the major criticism about its applicability in international trade. See. n. 30 below. 27 .E.M. Weitzenböck “Good faith and Fair Dealing in the Context of Contract Formation by Electronic Agents” . – Paper presentation at Proceedings of the AISB 2002 Symposium on Intelligent Agents in Virtual markets, 2-5 April 2002, imperial College London - available at http://folk.uio.no/emilyw/documents/Good%20Faith%20%20Contract%Formation%20&%20source.pdf - (last visited on 23 February 2008). 28 . W.F. Ebke and B.M. Steinhauer, “The Doctrine of Good Faith in German Contract Law”, in J. Beatson, and D. Friedmann (eds.), Good faith and faults in Contract law (1995) 171 adapted from S. Whittaker and R. Zimmermann, supra, p.13
giving the concept a broader meaning in line with commercial reality and reason. In applying the principle of good faith, the courts? have even disregarded provisions of legislations where they are considered to be in conflict with the requirement of good faith situations where legislation29. §242 BGB has therefore provided a platform for German judges to “…specify, supplement and modify the law… in accordance with the perceived needs of their time [and commercial reality]30.
FRANCE Article 1134, para.3 of the French Civil Code provides that contracts must be performed in good faith. This principle has also been extended to the negotiation and formation of contracts31. Thus, in France, the requirement of good faith transcends every aspect of a contract. It has been noted32 however, that while the French courts have not given the principle of good faith the same importance given to it by the German court?s, their application of a general theory of abus de droit which is based on good faith, has achieved similar results to those of the German courts. This theory stands to limit a party?s right where its enforcement would amount to an abuse.
Whittaker and Zimmermann33 explain that under French law, a person would be said to abuse a right if its purported exercise either (i) was effected with an intention to harm another person or (ii) was contrary to its economic or social purpose.
29
. see the decision of the court in RGZ 107, 78 discussed in S. Whittaker and R. Zimmermann, supra, p. 21 where, applying the principle of good faith, the Court refused to allow a debtor to discharge an obligation incurred before the First World War and secured by means of a mortgage, by paying the nominal value of a debt in paper marks which at that time, had plunged heavily in value. 30 .S. Whittaker and R. Zimmermann, supra, p. 33 – (Words in square bracket mine). 31 . E.M. Weitzenböck, supra, p.2 32 . ibid. 33 .E.M. Weitzenböck, supra, p. 34
ITALY The duty of good faith on parties to a contract is expressly recognized in the Italian Civil Code. Article 1337 of the Code provides that “[t]he parties, in the conduct of negotiations and the formation of the contract, shall conduct themselves according to good faith”. Commenting on Italian contract law, Galdano34 stated that the requirement of good faith in contracting implies a duty on the contracting parties to behave correctly and loyally. This duty, according to another writer35, is considered under Italian law, as an „ethical obligation? which is an integral part of public policy and must be respected by the parties through out the life of the contract. It can therefore be seen that the duty of good faith is a strong pillar in the Italian law of contract.
THE UNITED STATES OF AMERICA Under American Law, the duty of good faith is expressly recognized in the Uniform Commercial Code (UCC) and also in the Second Restatement of Contract. Section 1-203 UCC provides that “every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement”. In this regard, good faith is defined in section 1-201(19) as “honesty in fact in the conduct or transaction concerned”. With regards to merchants and sale of goods in Article Two of the UCC, section 2-103(1)(b) defines good faith to mean “honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade”. The duty of good faith and fair dealing in the performance and enforcement of contracts is also stipulated in section 205 of the Second Restatement of Contracts.
34
. F. Galdano, Diritto Privato. 3rd ed., CEDAM – Casa Editrice Dott. Antonio Milani, Padova; 1985 adopted from E.M. Weitzenböck, E.M. supra, p.2 35 . E. C. Zaccaria, supra, p. 6.
THE UNITED KINGDOM English law is generally held to be reluctant towards recognizing a general duty on contracting parties to act in good faith36. Reasons for this attitude have been given to range from concerns about preserving the freedom of the parties to contract to the argument that the Parliament (and not the courts) only, possess the right to impose such a duty, if need be. Further reasons have been stated to include the fact that the imposition of such a general duty of good faith may result in the inclusion of non-legal criteria, such as morality, into the law governing contracts and perhaps, most fundamentally, introduce uncertainty into the law37.
The absence of a general duty of good faith under English contract law, however, does not mean that there are no legal checks (as provided by the imposition of a duty of good faith and fair dealing) on contracting parties. On the contrary, English law has developed systems which in a similar fashion to that of good faith (as understood in the other major commercial jurisdictions), deal withissues dealt with under the broad heading of good faith without making reference to the term. Commenting on this point, one legal writer has this to say:“as in many cases, where good faith would be accepted in civil law, English law arrives at similar results but „only by a different route?, without having to refer to good faith”38.For instance, the common law rules relating to implied assurances, estoppel and those proscribing duress, fraudulent misrepresentation and
36
. ibid. see also, J.Styne, “ Contract Law: Fulfilling the Reasonable Expectations of Honest Men” (1997) 113 L.Q.R 433; 438 37 . See. S.C. Styles, “Good Faith: A Principled Matter” in ADM Forte (ed.) Good Faith in Contract and Property Law (1999) 157 at 161. see also, W.Tetley Q.C. “Good Faith in Contract” supra at p. 12 – “The opposition among common lawyers to a general duty of good faith is generally rooted in the persistent anxiety that importing such an overriding principle into the common law…would result in cases being decided on subjective standards of morality and fairness, thus giving rise to uncertainty, the bane of commercial law?. 38 . E.C. Zaccaria, supra. at p. 6
undue influence generally deals with issues that are commonly addresses under the good faith doctrine39.
However, this is not to say that there is no point of convergence between the good faith requirement and English commercial law. Indeed, there is. The requirement of reasonableness under English law40resonates with the ethos of good faith. The semblance between reasonableness under English law and good faith has been severally recognised. Lord Styne has indeed noted that “there is not a world of difference between the objective requirement of good faith and the reasonable expectations of parties” under English law41. Another writer had stressed that good faith and reasonable expectations, in essence,amount to the same thing42.
Good faith stands to exclude “bad faith”
43
conducts in contracts and require parties to act
honestly, fairly, loyally and truthfully to each other, and so does the requirement of reasonableness under English law. It appears, therefore, that the reluctance of the English lawyers and judges to accept a general duty of good faith on contracting parties, does not relate to any pathological dislike or refusal of good faith but stems more from a rejection of the moralistic flavour in the expression “good faith” than in what it intends to achieve. English
39
. Prof. W.Tetley sees these principles as media for a “disguised” entrance of good faith into English common law. See, W.Tetley, “Good Faith in Contract”, supra, p. 12. 40 . “Our law [English law] is generally based on an objective theory of contract. This involves adopting an external standard giving life by using the concept of the reasonable man” – J. Styne, supra. p. 433. – ( Words in square brackets and emphasis mine). 41 . J. Styne, supra, p.439. This semblance in meaning and co-relation between good faith and reasonableness appears to have been recognized in the definition of good faith in section 2-103(1)(b) of the UCC. According to Prof. W. Tetley, “The reasonable expectation of honest people? … is a value through which good faith concerns…have been introduced into the common law, piecemeal and through the „back door?”. - “Good Faith in Contract”, supra, p. 28. 42 . S.C. Styles, supra at p.168 43 . The conceptual formulation of the doctrine of good faith as an “excluder” of “bad faith” conducts was espoused by Summers see, R.S. Summers. “The Conceptualisation of good faith in American contract law: a general account, in R. Zimmermann and S. Whittaker, Good Faith in European Contract Law, supra.
courts have, in fact, applied good faith in certain types of contracts and claims 44. The rejection of a duty of good faith under the English legal system can therefore be described as a “paradoxical rejection of what it truly accepts” by way of doctrines relating to fraud, misrepresentation, etc.
IS THE EXPECTATION THAT PARTIES IN INTERNATIONAL TRADE SHOULD OBSERVE GOOD FAITH AND FAIR DEALING REALISTIC?
The above discussion so far, reveals that the obligation on contracting parties to act in good faith towards each other is one that is recognized in the major international commercial jurisdictions45, or at least, is implicit within some – as in England. This revelation may entitle one to conclude that an expectation that parties to international trade should observe good faith and fair dealing is in consonance with present international commercial reality as reflected in the laws of the major international commercial jurisdictions. To this end, the requirement for parties in international trade to observe good faith and fair dealing as provided under the UNIDROIT Principles can be said to be a reflection of international recognition of the necessity for such a duty in international trade and as such, realistic.
44
. See, the House of Lords decision in The Sea Star [2001]1 Lloyd?s Rep.389 where the duty of utmost good faith was held to apply even after the conclusion of an insurance contract. It is our humble submission that the expectations of the parties to an insurance contract are not dissimilar to those of parties to international commercial contracts. 45 . It is important to note that several other legal systems in Europe – the Greeks, Austria, Switzerland, Belgium and most of the Nordic nations – have provided for the doctrine of good faith in their national legal systems with variations. For the position of good faith in the national laws of these countries, see R. Zimmermann, and S. Whittaker (eds), Good Faith in European Contract Law, supra.
Good faith has been recognized to be the “primus mobile ac spiritus vivificans commercii”46and indeed, the recognition of this fact has led to the express stipulation of its requirement in several international commercial conventions and instruments (including the UNIDROIT Principles). Some of these instruments have gone as far as to stifle the right of international businessmen to exclude or limit the duty under their contract.
I). GOOD FAITH AND FAIR DEALING UNDER INTERNATIONAL COMMERCIAL CONVENTIONS AND INSTRUMENTS
Good faith and fair dealing provisions in International commercial conventions and instruments are numerous. For instance, Article 7(1) of the 1980 UN Instrument on Contracts for the International Sale of Goods (CISG) states that in the interpretation of the Instrument, regard is to be had, inter alia , to the “observance of good faith in international trade”. The duty of parties to observe good faith and fair dealing is also recognized under the Principles of European Contract Law (PECL) 1998. Article 1.106 (1) of the PECL, provides that in exercising his rights and performing his duties “eachparty must act in accordance with good faith and fair dealing”. Article 1.106(2) further provides that the parties may not limit or exclude this duty. Furthermore, the duty to observe good faith is also imposed on guarantors/issuers in international commercial transactions under Article 14 of the UN Instrument on Independent Guarantees and Stand-by Letters of Credit.
46
. “Prime mover and life giving spirit of commerce”. Casaregis – adapted from R. Zimmerman, and S.Whittaker. supra. p.18
II). GOOD FAITH IN INTERNATIONAL COMMERCIAL ARBITRATION Several arbitral awards bothering on international commercial transactions have also recognisedthe duty of good faith and fair dealing upon parties in international trade. As Professor Tetley rightly noted, good faith as an integral part of the new lex mercatoria is increasingly being invoked by both ad hoc and institutional arbitrators as a guiding rule of the contemporary law merchant in rendering awards in international commercial disputes47. For instance, in an arbitration matter between a Central European Company and a western European firm 48 where the parties had failed to reach an agreement with regards to a dispute that arose out of a product manufacturing and distribution agreement, the tribunal held that the good faith principle expressed in articles 1134 para. 3 and 1135 of the French Civil Code is also prevalent in international trade so that when the dispute arose and the parties entered into negotiations, both party were bound to act in good faith in search of an amicable solution.
In another arbitration matter, the tribunal held that the implicit obligation on parties to cooperate and pursue their professional practice in accordance with the principle of good faith and fair dealing is inherent in international contracts49. Similarly, the principle of good faith as provided under the UNIDROIT Principles [1994 edition] was applied by the court inCME Coopérative Maritime Etaploise S.A.C.V. v. Bos Fishproducts Urk BV50 where further to a contract for the delivery of fish by a French seller to a Dutch buyer, the buyer had refused to take delivery after receipt of the first consignment following complaints from its customers about the quality of the
47 48
. W. Tetley Q.C., “Good Faith in Contract” supra, at p. 44 . Unknown, Adhoc Arbitration (04.03.2004) available at www.unilex.info/case.cfm?pid=2&do=case&id=973&step=FullText (Last visited on 13 February 2008). 49 . Anderson Consulting Bus. Unit Member Firms v. Arthur Anderson Bus. Unit Member Firms, et. al., ICC International Court of arbitration, Case No. 9797, Geneva (28.07.2000), available at www.unilex.info/case.cfm?pid=2&do=case&id=668&step=FullText (last visited on 14 February 2008). 50 . Case No. HA ZA 95-640, Netherlands (05.03.1997), available at www.unilex.info/case.cfm?pid=2&do=case&id=640&step=Abstract (last visited on 14 February 2008)
fish supplied. Although the buyer had argued that the defects were such that it could not have reasonably discovered within the period for giving notice of defects as provided in the contract, the Court,applying the principle of good faith, held that the buyer ought to have more carefully inspected the goods and would have timely discovered the defects if it had so acted.
The above provisions ininternational commercial conventions and instruments and arbitral awards provide further evidence of international appreciation of the necessity for the obligation of good faith and fair dealing in international commercial transactions and the realistic and practical nature of such an expectation. It is our submission therefore, that a contention to the effect that the imposition of a duty of good faith and fair dealing on parties to international trade is unrealistic or unworkable51 would not reflect present international commercial reality. The obligation is not only realistic and in consonance with the expectations of international commercial men, but is “real” as has been provided in several international conventions and stated in several international commercial arbitral awards.
Finally, it is important to note that all member states of the European Union have implemented the Directive52 on Unfair Terms in Consumer Contracts which has the notion of good faith as one of its cardinal point53.
51 52
. With all due respect to Lord Akner. See Walford v. Miles [1992] 2 AC 128, at 138 . Council Directive 93/13/ECC of 5 April 1993. see.S.Whittaker, and R. Zimmermann, supra, p.13 53 . Article 3(1) of the Directive provides that “A contractual term which has not been individually negotiated shall be regarded as 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 ”. This Directive has been domesticated in England via Statutory Instrument 1999/2083 in force since 1 October 1999. Similar good faith requirements are made under the EC Directive on Commercial Agency- Council Directive 86/653/ECC of 18 December 1986, implemented in the UK the Commercial agents (Council Directive) Regulations 1993 S.I. 1993/3053, Regulation 4, obliges the Principal in his dealing with the Agent to act “dutifully and in good faith”. (Information obtained from W, Tetley, “Good Faith in Contracts”, supra, pp 25-26.
The fact that an expectation on parties to international trade to observe good faith and fair dealing is realistic does not however mean that the application of the principles in international trade is free from difficulties. We shall presently consider some difficulties which the application of the principle may give rise to generally and with respect to the provisions of the UNIDROIT Principles.
POSSIBLE DIFFICULTIES TO THE APPLICATION OF A DUTY OF GOOD FAITH AND FAIR HEARING IN INTERNATIONAL TRADE
a). Theproblem of vagueness54 of the principle of good faith The most obvious difficulty in applying the principles of good faith and fair dealing in international trade stems from the lack of a definite understanding as to its content, scope and “formula” for measuring compliance or non-compliance with its requirements; in other words, its vagueness. Because good faith and fair dealing are not subject to a universally accepted definition as to meaning and scope, the imposition of the duty may infuse a most undesirable element in international commerce - uncertainty.
Commercial men would rather transact under a legal regime where the outcome of their conducts and those of their business counterparts can be predicted with relative certainty. Certainty in the legal outcome of the conducts of business men in trade is important as it aids in the calculation of the risks involved in a given transaction, and ultimately, in deciding whether or not to enter into
54
. The problem of “vagueness” has been highlighted by several authors using different terminology and scenario. For e.g., Summers refers to the issue as “the general indefinability of good faith” – R.S. Summers, “the general duty of good faith – its recognition and conceptualization” C.L .Rev [vol.67:810, 1882]; Barnes refers to the problem as “lack of definition” – see, N.J. Barnes, supra; Gillete, identifies it as “the problem of vagueness” – see. C.P. Gillette, supra, at p. 643 – They all however, seem to be making the same point.
such transaction. This comfort, a general duty of good faith, having no universally accepted definition as to its scope, fails to offer international commercial men.
The vagueness of the scope of the principles may result in different judges and tribunals reaching decisions that are radically different from one another although relating to similar facts. This is so because the lack of a definite scope allows each judge or arbitrator to decide the matter before him/her based on his/her own personal appreciation of the demand of good faith in the circumstance. The international businessman is therefore placed in a difficult situation where he does not know the decision (amongst the conflicting ones) to rely upon as a guide in his future transactions as neither can be held sacrosanct to represent what every other court would or should decide in similar situations in the future. As one legal writer satirically noted “The command „go and act in good faith? is vague because the actor and the commander may disagree on the components of good faith conduct” as “…good faith may mean different things to different obligors as well”55. Noting this problem as relating to the duty under the UNIDROIT Principles, Barnes stated that the duty places contracting parties in apredicament, since they cannot, with any reasonable certainty, predict the prohibited conducts and yet, cannot exclude the duty from the scope of their obligations56.
The above noted predicament in which parties to international trade are placed as a result of the vagueness of the principle of good faith makes it difficult for the principles to be applied in international trade.
55
. C.P. Gillette, “Limitations on the Obligations of Good Faith” Duke Law Journal Vol. 1981, No. 4 (Sept. 1981) 619 at 643 56 . N.J. Barnes, supra at p.4
2. Upholding the contract of the Parties The principle of pacta sunt servanda requires parties to perform their contract in accordance with its terms. It conversely requires the courts to give effect to the terms of the contract as entered into by the parties. It is at this level that courts and arbitrators are required to exercise tact in applying a duty of good faith and fair dealing so as to give effect to the bargain of the parties and not to impose their own terms, which may not reflect the aspirations of the parties in contracting. In this regard, it has been rightly stated that “good faith should not be pressed into service to remake the parties? bargain”57 However, striking this balance is not always an easy task. The difficulty associated with achieving this balance is, possibly, responsible for the negative attitude of the English courts towards imposing a general duty of good faith on parties to a contract58.
Where courts and arbitral tribunals, in attempting to apply a duty of good faith, fail to uphold the bargain of the parties, they run the risk of destroying the contracts as contemplated by the parties and as such would be seen as a clog in the wheels of contractual development. This is a difficulty which judges and arbitrators are faced with in the application of a duty of good faith and fair dealing in international trade.
57
. C.P. Gillette, supra, p. 656
58
. “t is the function of the court to enforce contracts according to the bargain which the parties have made for
themselves. It is not for the court to interfere in order to modify a bargain which one of the parties later considers to be unfair”. - per Lord President Hope in EFT Commercial Limited v. Security Change Ltd. & Anor . (1992) SC 414 at 424,
3. Enforcing the duty of good faith and fair dealing with respect to pre-contractual negotiations In some jurisdictions, the duty of good faith has been held to apply in respect of pre-contractual negotiations59.Art. 2.1.15(b) of the UNIDROIT Principles provides that a party who negotiates or breaks off negotiations in bad faith is liable for the losses caused to the other party. Negotiations may be pre-contractual or occur in the course of an existing contract. Problems however arise where the breach had occurred during pre-contractual negotiations. On what basis would the “injured party” be remedied? Certainly, there has been no contract and so the conduct of the withdrawing party cannot amount to a breach of contract60. Assuming that this first hurdle is surpassed, the next problem relates to the manner in which the “injured party?s” losses are to be determined so as to determine the liability of the breaching party. On what basis would this be done? Would the liability of the defaulter be calculated on the basis of the projected earnings that the “injured party” would have received had the contract been concluded? Would such a solution not amount to equating a breach of the duty during pre-contractual negotiations to a breach where a contract actually exists? Would such a remedy be apt? Would it not be excessive? These questions create further problems for the application of a duty of good faith and fair dealing in international trade.
59
. See. Canadian Court of Appeal case of Empress Towers LT. v. Bank of Nova Scotia (1990)73 D.L.R. (4th) 400 cited from A.F. Mason, “Contract, Good Faith and Equitable standards in Fair dealing” (2000) 116 L.Q.R. 66 at 81 . see also, Unknown, ICC International Court of Arbitration, award No. 8540, Paris, (04.09.1996), available at www.unilex.info/case.cfm?pid=2&do=case&id=644&step=FullText (last visited on 14 February 2008) where the arbitral tribunal held that an agreement to negotiate in good faith is binding under the law of the State of New York, which it held to be the applicable law. See also, Article 1337 of the Italian Civil Code which provides that “[t]he parties, in the conduct of negotiations and the formation of the contract, shall conduct themselves according to good faith…” (Adapted from W.Tetley Q.C. “Good faith in Contract”, supra. p.10.). 60 . Prof. Tetley Q.C. suggests that in such a case, the injured party?s remedy may lie in delict or tort. See. W. Tetley Q.C. “Good Faith in Contract”supra. p.6.
4). Unreceptive disposition to the principles in some legal systems In this regard, the English legal system readily comes to mind. As stated earlier, it is common knowledge that English lawyers and judges are “generally” averse to the imposition of a general duty of good faith in contracts61. This attitude has led to the description of an obligation to negotiate in good faith as “inherently repugnant to the adversarial position of parties”62. It appears therefore, that a party seeking to enforce the terms of an international commercial contract in England on the ground of good faith and fair dealing is unlikely to meet with much success. This unreceptive disposition certainly stands as a hindrance to the application of the principles in international trade, and even more so when the importance of England as an international commercial centre is taken into context.
5). Problem of choice of law Closely related to 4 above but with particular reference to the UNIDROIT Principles is the problem associated with the choice of law. Although Parties may elect to have the Principles govern their contract (and in extension, the good faith requirement), the application of the good faith principle may encounter difficulty where the provisions of the principles do not conform with mandatory rules of applicable national laws which do not uphold the good faith principle. This is so because the UNIDROIT Principles cannot overrule such mandatory provisions63. Because the freedom of parties to designate the governing law of their contract has traditionally been limited to national laws,the law governing a contract which designates the Principles as the governing law will still have to be determined on the basis of the private international law rules
61 62
. See. note 31 above . Walford v. Miles, supra. 63 . Article 1.4 UNIDROIT Principles
of the forum64. In such a case, the Principles will only bind the parties to the extent that they do not affect the rules of the applicable law from which the parties may not
derogate65.Consequently, where the mandatory rules of a legal system do not recognize a duty of good faith on the parties as provided under the Principles, its application would not be possible.
As a possible solution to this problem, parties wishing to choose the Principles as the governing law of their contract have been advised to combine such a choice of law clause with an arbitration agreement, presumably because of the wide ranging powers which arbitrators usually wield in deciding the applicable law of a contract under arbitration66. However, this approach too is not immune from the problem because, even where the Principles are applied as the law governing the contract by an arbitrator, they cannot prejudice the application of mandatory rules which claim application irrespective of which law is applicable to the contract 67. In so far as the Principles remain subordinated to the mandatory provisions of other national, international or supranational rules, the application of the good faith principle thereunder will always be faced with a challenge as its application will always be subject to the provisions of such mandatory rules which may not necessarily cohere with the notion of good faith..
CONCLUSION This treatise has shown that an expectation on parties in international trade to act in accordance with good faith and fair dealing in international trade is realistic. The recognition of the obligation in the contract laws of major international commercial jurisdictions, in several
64 65
. Official Comment 4(a) on Preamble to the UNIDROIT Principles, supra. . ibid. 66 . ibid. 67 . see, Official Comment 3 to Article 1.4 of the UNIDROIT Principles, supra.
international commercial conventions and instruments, and also in numerous arbitration decisions bothering on international trade provides support for this view. Some difficulties which may arise in the application of the principle in international trade have also been identified. The responsibility to provide practical solutions to these difficultieslie with judges, lawyers, legal writers and scholars. And these solutions they must strive to provide, for as it has been stated, “good faith is much required of those who trade most”68.
68
. Baldus – adapted from R. Zimmerman and P. Whittaker, supra. p.18
doc_782528475.docx
International trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product (GDP).
FINANCIAL STUDY ON INTERNATIONAL TRADE
INTRODUCTION: “Good faith” and “fair dealing” are concepts that steer in people?s minds, ideals of morality. Both termsbeing cognates1, and may be used together or interchangeably2. They convey an idea of “rightness”. But, rightness and in extension, goodness and fairness are concepts that are not subject to a universally accepted definition. This is largely so because what is good and fair may differ from one person to another depending on their divergent perceptions to life, cultures, and sometimes the different contexts and circumstances in which the moral judgement of good or bad is required3. Differences in interpretation however, do not detract from the fact that some conducts are generally considered to be good or bad and as such, subject to acceptance or opprobrium as the case may be. This holds true in international businesses also. Because a covert moral thread runs, almost, if not completely universally, amongst businessmen, there is a general expectation that parties should observe good faith in their dealings4. This is because “…commercial transactions must necessarily be based on mutual trust and confidence that each party to a contract will act reasonably and honestly, as no businessperson desirous of further access to world markets can afford to behave in a disreputable and unfair manner”5. It is for
this reason that the doctrine of good faith and fair dealing is recognized as one of the general principles of contract in many legal systems around the world6.
It is in recognition of this general recognition of the necessity for good faith and fair dealing in international trade that copious provisions requiring parties to international commercial transactions to act with good faith and fair dealing are made under the UNIDROIT Principles of International Commercial Contracts (“the Principles”).These provisions range from a general and overriding good faith principle7 to more specific provisions relating to negotiation8 processes leading to contracts, the performance9 of the contracts and those governing the interpretation10 of contracts.
Imposing such a duty in international trade however, raises some questions. Is it realistic to expect parties to international trade to act with good faith towards each other? Is the application of the principle in international trade free from difficulties? If not, what are the possible difficulties associated with the application of the principle? This treatise intends to answer the first question in the affirmative. In support of this view, it will briefly review the application of the principles in major international commercial jurisdictions. In further support of this position, the treatise will consider the present international position on the application of good faith in trade as reflected in the provisions of someinternational commercial conventions and instruments
7 8
. Art. 1.7 of the Principles. . see, Article 2.1.15 of the Principles 9 . see, Article 5.2 of the Principles 10 . see, Article 4.8 of the Principles
and arbitral awards. Before concluding, some difficulties which may be encountered in the application of the good faith principle in international trade will also be discussed.
It is believedthat the selected jurisdictions, international commercial conventions and instruments and arbitral awards herein discussed will serve as fair benchmarks for addressing the questions discussed in this work.
DEFINITION OF GOOD FAITH As noted in the introduction, what constitutes good faith is not subject to a universal meaning. Professor Forte11 rightly stated that “good faith as a concept or as a general principle is difficult to define”.Zaccaria12 sees the duty of good faith as one that requires a party to act reasonably as he would expect the other party to act towards him. Another writer defines good faith as “not only the standard of honesty in fact that applies …but also and more significantly „reasonable standards of fair dealing”13. With particular reference to international trade, Powers14 defines good faith as “an international doctrine that requires parties to an international transaction to act reasonably, as they would expect the other party to act”. Zimmermann and Whittaker identify five constituents of good faith. These are: the exclusion of bad faith conducts, the requirement of parties to a contract to keep to its terms (pacta sunt servanda), the requirement on a party not to behave in a manner as to make the position of the other party worse; the prevention
11 12
. A.D.M, Forte, supra, p.101 . E. C. Zaccaria, supra, p.5 13 .M. Bridge, “Good Faith in Commercial Contracts” in R. Brownsword et al. (eds.) Good Faith in Contract: Concept and Context, supra , p. 139. 14 . P. J. Powers, Defining the indefinable: Good faith and the United Nations Convention on the Contracts for the International sale of Goods”, (1999) 18 J.L. Com 333 at 352 cited in W. T etley, Q.C. supra,p.3.
of the parties from relying on or being bound by an absurdity arising from their agreement and; the prevention of a deliberate breach of a contract15.
The absence of a definition of good faith and fair dealing in the UNIDROIT Principles underscore the difficulty in securing a common and universally accepted definition for the term. Notwithstanding the above, it has been stated thatthe fair dealing component of good faithensures that the required standards are objective16. This objective component of good faith provides a fulcrum for its universal application17. Accordingly, the discussion in this treatise will consider good faith in its “objective” sense only, i.e.as constituting a standard of conduct by which the behaviour of a party has to conform and by which such behaviour may be judged18.
THE UNIDROIT PRINCIPLES AND GOOD FAITH The Principles stipulates a general requirement of good faith and fair dealing in international commercial contracts. Several other provisions in the Principles which do not expressly state the terms good faith and fair dealing,require their imputation in order to give them a complete and effective meaning19. The overriding and express good faith provision is contained in Article 1.7. It provides in sub-article (1) that: “Each party must act in accordance with good faith and fair dealing in international trade”
15
. S.Whittaker, and R. Zimmermann,“Coming to terms with good faith”, in R. Zimmermann, and S. Whittaker, (eds) Good Faith in European Contract Law. Cambridge, CambridgeUniversity Press, 2000. pp. 690-693. 16 . A.D.M. Forte, supra, p.101 17 . Prof. W. Tetley, defines good faith in contract in this objective sense. To him, good faith in contract means “just and honest conduct, which should be expected of both parties in their dealings one with another, and even with third parties, who may be implicated or subsequently involved. Good faith requires that each party be fair and honest in negotiations and, once the agreement has been reached, that the parties also perform their respective obligations and enforce their rights honestly and fairly”. See. W.Tetley, Q.C. “Good faith in contracts”, p. 4 18 . For the distinction between the objective and subjective nature of good faith, see. S.Whittaker, and R. Zimmermann,“Good Faith in European Contract Law: Surveying the Legal Landscape, in R. Zimmermann, and S. Whittaker, (eds.) supra, p.39. 19 . See, notes 7-10 above. See also, Official Comment to article 1.7 of the UNIDROIT Principles, supra.
Sub-article (2) of the same Article forbids parties in international trade from excluding or limiting the duty by agreement20.
Although the Principles adopt several phrases in expressing the notion and in imposing the obligation of good faith on parties to international trade21, it has been acknowledged that these terms provide for a direct or an indirect application of the principles of good faith and fair dealing in international commercial contracts and impose a duty on the parties “not only in the performance of the contract but also in its negotiation, its interpretation and in the event of a breach of the contract”22. However, the imposition of such a duty upon parties in commercial transactions has not been warmly received across all jurisdictions. While many jurisdictions view such a duty as necessary for the growth of commerce, some don?t. A consideration of these varying jurisdictional approaches to the imposition of a duty of good faith on parties to commercial contracts will aid us in determining the extent to which the imposition of the duty in international trade can be said to be realistic or not.
GERMANY The duty of parties to act in accordance with good faith and fair dealing is statutorily recognised under German law. Here, good faith as enshrined in §242 of the German Bürgerliches Gesetzbuch (BGB) is linked with the notion of „Treu und Glauben?, literally meaning fidelity
20
. Although the UNIDROIT Principles are not generally binding on parties to international trade, they are at liberty to make the Principles the governing law of their contract and where they so choose, will be bound by its provisions, including those imposing a duty of good faith and fair dealing, in accordance with the general principles of contract. See. Preamble to the UNIDROIT Principles, 2004. See. N.J. Barnes, supra, p. 2 21 . The various terms used in describing the notion of “good faith and fair dealing are captured by N. J. Barnes supra, p.3 22 . E. C. Zaccaria, supra at p. 10. The writer?s comments were based on the 1994 UNIDROIT Principles on International Commercial Contracts but remain valid even with respect to the 2004 edition.
and faith23. Under this provision, a debtor is bound to perform according to the requirements of good faith, with ordinary usage being taken into consideration24. The position of good faith in German law has been explained25 as follows:
“Treu?…signifies faithfulness, loyalty, fidelity, reliability; „Glaube? means belief in the sense of faith or reliance. The combination of „Treu und Glauben? is sometimes seen to transcend the sum of its components and is very widely understood as a conceptual entity. It suggests a standard of honest, loyal and considerate behaviour, of acting with due regard for the interest of the other party, and it applies and comprises the protection of reasonable reliance. Thus it is not a legal rule with specific requirements that have to be checked but may be called and „open? norm. its content cannot be established in an abstract manner but takes shape only by the way in which it is applied ”
26
Weitzenböck explains that the doctrine of good faith as enshrined in §242 BGB has had a profound effect in the area of German contract law through its development by the courts and legal writers, and that it operates „supplendi causa?, giving rise to a host of supplementary duties that may arise under a contract27. These duties, one can say, set the standard of fairness and transparency in the transaction between the parties. The doctrine of good faith in German contract law has been described as “…a judicial oak that overshadows the contractual relationship of private parties”28. The application of the doctrine of good faith in Germanyhas been developed to a large extent by the courts? in theexercise of their interpretative role thereby
23 24
. S. Whittaker and R. Zimmermann, supra. P.31 .§157 BGB provides also that “contracts shall be interpre ted according to the requirements of good faith, ordinary usage being taken into consideration”. 25 .S. Whittaker and R. Zimmermann, loc. cit 26 . (Emphasis mine). This point is worthy of note as the lack of a precise and internationally accepted definition for good faith has been one of the major criticism about its applicability in international trade. See. n. 30 below. 27 .E.M. Weitzenböck “Good faith and Fair Dealing in the Context of Contract Formation by Electronic Agents” . – Paper presentation at Proceedings of the AISB 2002 Symposium on Intelligent Agents in Virtual markets, 2-5 April 2002, imperial College London - available at http://folk.uio.no/emilyw/documents/Good%20Faith%20%20Contract%Formation%20&%20source.pdf - (last visited on 23 February 2008). 28 . W.F. Ebke and B.M. Steinhauer, “The Doctrine of Good Faith in German Contract Law”, in J. Beatson, and D. Friedmann (eds.), Good faith and faults in Contract law (1995) 171 adapted from S. Whittaker and R. Zimmermann, supra, p.13
giving the concept a broader meaning in line with commercial reality and reason. In applying the principle of good faith, the courts? have even disregarded provisions of legislations where they are considered to be in conflict with the requirement of good faith situations where legislation29. §242 BGB has therefore provided a platform for German judges to “…specify, supplement and modify the law… in accordance with the perceived needs of their time [and commercial reality]30.
FRANCE Article 1134, para.3 of the French Civil Code provides that contracts must be performed in good faith. This principle has also been extended to the negotiation and formation of contracts31. Thus, in France, the requirement of good faith transcends every aspect of a contract. It has been noted32 however, that while the French courts have not given the principle of good faith the same importance given to it by the German court?s, their application of a general theory of abus de droit which is based on good faith, has achieved similar results to those of the German courts. This theory stands to limit a party?s right where its enforcement would amount to an abuse.
Whittaker and Zimmermann33 explain that under French law, a person would be said to abuse a right if its purported exercise either (i) was effected with an intention to harm another person or (ii) was contrary to its economic or social purpose.
29
. see the decision of the court in RGZ 107, 78 discussed in S. Whittaker and R. Zimmermann, supra, p. 21 where, applying the principle of good faith, the Court refused to allow a debtor to discharge an obligation incurred before the First World War and secured by means of a mortgage, by paying the nominal value of a debt in paper marks which at that time, had plunged heavily in value. 30 .S. Whittaker and R. Zimmermann, supra, p. 33 – (Words in square bracket mine). 31 . E.M. Weitzenböck, supra, p.2 32 . ibid. 33 .E.M. Weitzenböck, supra, p. 34
ITALY The duty of good faith on parties to a contract is expressly recognized in the Italian Civil Code. Article 1337 of the Code provides that “[t]he parties, in the conduct of negotiations and the formation of the contract, shall conduct themselves according to good faith”. Commenting on Italian contract law, Galdano34 stated that the requirement of good faith in contracting implies a duty on the contracting parties to behave correctly and loyally. This duty, according to another writer35, is considered under Italian law, as an „ethical obligation? which is an integral part of public policy and must be respected by the parties through out the life of the contract. It can therefore be seen that the duty of good faith is a strong pillar in the Italian law of contract.
THE UNITED STATES OF AMERICA Under American Law, the duty of good faith is expressly recognized in the Uniform Commercial Code (UCC) and also in the Second Restatement of Contract. Section 1-203 UCC provides that “every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement”. In this regard, good faith is defined in section 1-201(19) as “honesty in fact in the conduct or transaction concerned”. With regards to merchants and sale of goods in Article Two of the UCC, section 2-103(1)(b) defines good faith to mean “honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade”. The duty of good faith and fair dealing in the performance and enforcement of contracts is also stipulated in section 205 of the Second Restatement of Contracts.
34
. F. Galdano, Diritto Privato. 3rd ed., CEDAM – Casa Editrice Dott. Antonio Milani, Padova; 1985 adopted from E.M. Weitzenböck, E.M. supra, p.2 35 . E. C. Zaccaria, supra, p. 6.
THE UNITED KINGDOM English law is generally held to be reluctant towards recognizing a general duty on contracting parties to act in good faith36. Reasons for this attitude have been given to range from concerns about preserving the freedom of the parties to contract to the argument that the Parliament (and not the courts) only, possess the right to impose such a duty, if need be. Further reasons have been stated to include the fact that the imposition of such a general duty of good faith may result in the inclusion of non-legal criteria, such as morality, into the law governing contracts and perhaps, most fundamentally, introduce uncertainty into the law37.
The absence of a general duty of good faith under English contract law, however, does not mean that there are no legal checks (as provided by the imposition of a duty of good faith and fair dealing) on contracting parties. On the contrary, English law has developed systems which in a similar fashion to that of good faith (as understood in the other major commercial jurisdictions), deal withissues dealt with under the broad heading of good faith without making reference to the term. Commenting on this point, one legal writer has this to say:“as in many cases, where good faith would be accepted in civil law, English law arrives at similar results but „only by a different route?, without having to refer to good faith”38.For instance, the common law rules relating to implied assurances, estoppel and those proscribing duress, fraudulent misrepresentation and
36
. ibid. see also, J.Styne, “ Contract Law: Fulfilling the Reasonable Expectations of Honest Men” (1997) 113 L.Q.R 433; 438 37 . See. S.C. Styles, “Good Faith: A Principled Matter” in ADM Forte (ed.) Good Faith in Contract and Property Law (1999) 157 at 161. see also, W.Tetley Q.C. “Good Faith in Contract” supra at p. 12 – “The opposition among common lawyers to a general duty of good faith is generally rooted in the persistent anxiety that importing such an overriding principle into the common law…would result in cases being decided on subjective standards of morality and fairness, thus giving rise to uncertainty, the bane of commercial law?. 38 . E.C. Zaccaria, supra. at p. 6
undue influence generally deals with issues that are commonly addresses under the good faith doctrine39.
However, this is not to say that there is no point of convergence between the good faith requirement and English commercial law. Indeed, there is. The requirement of reasonableness under English law40resonates with the ethos of good faith. The semblance between reasonableness under English law and good faith has been severally recognised. Lord Styne has indeed noted that “there is not a world of difference between the objective requirement of good faith and the reasonable expectations of parties” under English law41. Another writer had stressed that good faith and reasonable expectations, in essence,amount to the same thing42.
Good faith stands to exclude “bad faith”
43
conducts in contracts and require parties to act
honestly, fairly, loyally and truthfully to each other, and so does the requirement of reasonableness under English law. It appears, therefore, that the reluctance of the English lawyers and judges to accept a general duty of good faith on contracting parties, does not relate to any pathological dislike or refusal of good faith but stems more from a rejection of the moralistic flavour in the expression “good faith” than in what it intends to achieve. English
39
. Prof. W.Tetley sees these principles as media for a “disguised” entrance of good faith into English common law. See, W.Tetley, “Good Faith in Contract”, supra, p. 12. 40 . “Our law [English law] is generally based on an objective theory of contract. This involves adopting an external standard giving life by using the concept of the reasonable man” – J. Styne, supra. p. 433. – ( Words in square brackets and emphasis mine). 41 . J. Styne, supra, p.439. This semblance in meaning and co-relation between good faith and reasonableness appears to have been recognized in the definition of good faith in section 2-103(1)(b) of the UCC. According to Prof. W. Tetley, “The reasonable expectation of honest people? … is a value through which good faith concerns…have been introduced into the common law, piecemeal and through the „back door?”. - “Good Faith in Contract”, supra, p. 28. 42 . S.C. Styles, supra at p.168 43 . The conceptual formulation of the doctrine of good faith as an “excluder” of “bad faith” conducts was espoused by Summers see, R.S. Summers. “The Conceptualisation of good faith in American contract law: a general account, in R. Zimmermann and S. Whittaker, Good Faith in European Contract Law, supra.
courts have, in fact, applied good faith in certain types of contracts and claims 44. The rejection of a duty of good faith under the English legal system can therefore be described as a “paradoxical rejection of what it truly accepts” by way of doctrines relating to fraud, misrepresentation, etc.
IS THE EXPECTATION THAT PARTIES IN INTERNATIONAL TRADE SHOULD OBSERVE GOOD FAITH AND FAIR DEALING REALISTIC?
The above discussion so far, reveals that the obligation on contracting parties to act in good faith towards each other is one that is recognized in the major international commercial jurisdictions45, or at least, is implicit within some – as in England. This revelation may entitle one to conclude that an expectation that parties to international trade should observe good faith and fair dealing is in consonance with present international commercial reality as reflected in the laws of the major international commercial jurisdictions. To this end, the requirement for parties in international trade to observe good faith and fair dealing as provided under the UNIDROIT Principles can be said to be a reflection of international recognition of the necessity for such a duty in international trade and as such, realistic.
44
. See, the House of Lords decision in The Sea Star [2001]1 Lloyd?s Rep.389 where the duty of utmost good faith was held to apply even after the conclusion of an insurance contract. It is our humble submission that the expectations of the parties to an insurance contract are not dissimilar to those of parties to international commercial contracts. 45 . It is important to note that several other legal systems in Europe – the Greeks, Austria, Switzerland, Belgium and most of the Nordic nations – have provided for the doctrine of good faith in their national legal systems with variations. For the position of good faith in the national laws of these countries, see R. Zimmermann, and S. Whittaker (eds), Good Faith in European Contract Law, supra.
Good faith has been recognized to be the “primus mobile ac spiritus vivificans commercii”46and indeed, the recognition of this fact has led to the express stipulation of its requirement in several international commercial conventions and instruments (including the UNIDROIT Principles). Some of these instruments have gone as far as to stifle the right of international businessmen to exclude or limit the duty under their contract.
I). GOOD FAITH AND FAIR DEALING UNDER INTERNATIONAL COMMERCIAL CONVENTIONS AND INSTRUMENTS
Good faith and fair dealing provisions in International commercial conventions and instruments are numerous. For instance, Article 7(1) of the 1980 UN Instrument on Contracts for the International Sale of Goods (CISG) states that in the interpretation of the Instrument, regard is to be had, inter alia , to the “observance of good faith in international trade”. The duty of parties to observe good faith and fair dealing is also recognized under the Principles of European Contract Law (PECL) 1998. Article 1.106 (1) of the PECL, provides that in exercising his rights and performing his duties “eachparty must act in accordance with good faith and fair dealing”. Article 1.106(2) further provides that the parties may not limit or exclude this duty. Furthermore, the duty to observe good faith is also imposed on guarantors/issuers in international commercial transactions under Article 14 of the UN Instrument on Independent Guarantees and Stand-by Letters of Credit.
46
. “Prime mover and life giving spirit of commerce”. Casaregis – adapted from R. Zimmerman, and S.Whittaker. supra. p.18
II). GOOD FAITH IN INTERNATIONAL COMMERCIAL ARBITRATION Several arbitral awards bothering on international commercial transactions have also recognisedthe duty of good faith and fair dealing upon parties in international trade. As Professor Tetley rightly noted, good faith as an integral part of the new lex mercatoria is increasingly being invoked by both ad hoc and institutional arbitrators as a guiding rule of the contemporary law merchant in rendering awards in international commercial disputes47. For instance, in an arbitration matter between a Central European Company and a western European firm 48 where the parties had failed to reach an agreement with regards to a dispute that arose out of a product manufacturing and distribution agreement, the tribunal held that the good faith principle expressed in articles 1134 para. 3 and 1135 of the French Civil Code is also prevalent in international trade so that when the dispute arose and the parties entered into negotiations, both party were bound to act in good faith in search of an amicable solution.
In another arbitration matter, the tribunal held that the implicit obligation on parties to cooperate and pursue their professional practice in accordance with the principle of good faith and fair dealing is inherent in international contracts49. Similarly, the principle of good faith as provided under the UNIDROIT Principles [1994 edition] was applied by the court inCME Coopérative Maritime Etaploise S.A.C.V. v. Bos Fishproducts Urk BV50 where further to a contract for the delivery of fish by a French seller to a Dutch buyer, the buyer had refused to take delivery after receipt of the first consignment following complaints from its customers about the quality of the
47 48
. W. Tetley Q.C., “Good Faith in Contract” supra, at p. 44 . Unknown, Adhoc Arbitration (04.03.2004) available at www.unilex.info/case.cfm?pid=2&do=case&id=973&step=FullText (Last visited on 13 February 2008). 49 . Anderson Consulting Bus. Unit Member Firms v. Arthur Anderson Bus. Unit Member Firms, et. al., ICC International Court of arbitration, Case No. 9797, Geneva (28.07.2000), available at www.unilex.info/case.cfm?pid=2&do=case&id=668&step=FullText (last visited on 14 February 2008). 50 . Case No. HA ZA 95-640, Netherlands (05.03.1997), available at www.unilex.info/case.cfm?pid=2&do=case&id=640&step=Abstract (last visited on 14 February 2008)
fish supplied. Although the buyer had argued that the defects were such that it could not have reasonably discovered within the period for giving notice of defects as provided in the contract, the Court,applying the principle of good faith, held that the buyer ought to have more carefully inspected the goods and would have timely discovered the defects if it had so acted.
The above provisions ininternational commercial conventions and instruments and arbitral awards provide further evidence of international appreciation of the necessity for the obligation of good faith and fair dealing in international commercial transactions and the realistic and practical nature of such an expectation. It is our submission therefore, that a contention to the effect that the imposition of a duty of good faith and fair dealing on parties to international trade is unrealistic or unworkable51 would not reflect present international commercial reality. The obligation is not only realistic and in consonance with the expectations of international commercial men, but is “real” as has been provided in several international conventions and stated in several international commercial arbitral awards.
Finally, it is important to note that all member states of the European Union have implemented the Directive52 on Unfair Terms in Consumer Contracts which has the notion of good faith as one of its cardinal point53.
51 52
. With all due respect to Lord Akner. See Walford v. Miles [1992] 2 AC 128, at 138 . Council Directive 93/13/ECC of 5 April 1993. see.S.Whittaker, and R. Zimmermann, supra, p.13 53 . Article 3(1) of the Directive provides that “A contractual term which has not been individually negotiated shall be regarded as 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 ”. This Directive has been domesticated in England via Statutory Instrument 1999/2083 in force since 1 October 1999. Similar good faith requirements are made under the EC Directive on Commercial Agency- Council Directive 86/653/ECC of 18 December 1986, implemented in the UK the Commercial agents (Council Directive) Regulations 1993 S.I. 1993/3053, Regulation 4, obliges the Principal in his dealing with the Agent to act “dutifully and in good faith”. (Information obtained from W, Tetley, “Good Faith in Contracts”, supra, pp 25-26.
The fact that an expectation on parties to international trade to observe good faith and fair dealing is realistic does not however mean that the application of the principles in international trade is free from difficulties. We shall presently consider some difficulties which the application of the principle may give rise to generally and with respect to the provisions of the UNIDROIT Principles.
POSSIBLE DIFFICULTIES TO THE APPLICATION OF A DUTY OF GOOD FAITH AND FAIR HEARING IN INTERNATIONAL TRADE
a). Theproblem of vagueness54 of the principle of good faith The most obvious difficulty in applying the principles of good faith and fair dealing in international trade stems from the lack of a definite understanding as to its content, scope and “formula” for measuring compliance or non-compliance with its requirements; in other words, its vagueness. Because good faith and fair dealing are not subject to a universally accepted definition as to meaning and scope, the imposition of the duty may infuse a most undesirable element in international commerce - uncertainty.
Commercial men would rather transact under a legal regime where the outcome of their conducts and those of their business counterparts can be predicted with relative certainty. Certainty in the legal outcome of the conducts of business men in trade is important as it aids in the calculation of the risks involved in a given transaction, and ultimately, in deciding whether or not to enter into
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. The problem of “vagueness” has been highlighted by several authors using different terminology and scenario. For e.g., Summers refers to the issue as “the general indefinability of good faith” – R.S. Summers, “the general duty of good faith – its recognition and conceptualization” C.L .Rev [vol.67:810, 1882]; Barnes refers to the problem as “lack of definition” – see, N.J. Barnes, supra; Gillete, identifies it as “the problem of vagueness” – see. C.P. Gillette, supra, at p. 643 – They all however, seem to be making the same point.
such transaction. This comfort, a general duty of good faith, having no universally accepted definition as to its scope, fails to offer international commercial men.
The vagueness of the scope of the principles may result in different judges and tribunals reaching decisions that are radically different from one another although relating to similar facts. This is so because the lack of a definite scope allows each judge or arbitrator to decide the matter before him/her based on his/her own personal appreciation of the demand of good faith in the circumstance. The international businessman is therefore placed in a difficult situation where he does not know the decision (amongst the conflicting ones) to rely upon as a guide in his future transactions as neither can be held sacrosanct to represent what every other court would or should decide in similar situations in the future. As one legal writer satirically noted “The command „go and act in good faith? is vague because the actor and the commander may disagree on the components of good faith conduct” as “…good faith may mean different things to different obligors as well”55. Noting this problem as relating to the duty under the UNIDROIT Principles, Barnes stated that the duty places contracting parties in apredicament, since they cannot, with any reasonable certainty, predict the prohibited conducts and yet, cannot exclude the duty from the scope of their obligations56.
The above noted predicament in which parties to international trade are placed as a result of the vagueness of the principle of good faith makes it difficult for the principles to be applied in international trade.
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. C.P. Gillette, “Limitations on the Obligations of Good Faith” Duke Law Journal Vol. 1981, No. 4 (Sept. 1981) 619 at 643 56 . N.J. Barnes, supra at p.4
2. Upholding the contract of the Parties The principle of pacta sunt servanda requires parties to perform their contract in accordance with its terms. It conversely requires the courts to give effect to the terms of the contract as entered into by the parties. It is at this level that courts and arbitrators are required to exercise tact in applying a duty of good faith and fair dealing so as to give effect to the bargain of the parties and not to impose their own terms, which may not reflect the aspirations of the parties in contracting. In this regard, it has been rightly stated that “good faith should not be pressed into service to remake the parties? bargain”57 However, striking this balance is not always an easy task. The difficulty associated with achieving this balance is, possibly, responsible for the negative attitude of the English courts towards imposing a general duty of good faith on parties to a contract58.
Where courts and arbitral tribunals, in attempting to apply a duty of good faith, fail to uphold the bargain of the parties, they run the risk of destroying the contracts as contemplated by the parties and as such would be seen as a clog in the wheels of contractual development. This is a difficulty which judges and arbitrators are faced with in the application of a duty of good faith and fair dealing in international trade.
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. C.P. Gillette, supra, p. 656
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. “t is the function of the court to enforce contracts according to the bargain which the parties have made for
themselves. It is not for the court to interfere in order to modify a bargain which one of the parties later considers to be unfair”. - per Lord President Hope in EFT Commercial Limited v. Security Change Ltd. & Anor . (1992) SC 414 at 424,
3. Enforcing the duty of good faith and fair dealing with respect to pre-contractual negotiations In some jurisdictions, the duty of good faith has been held to apply in respect of pre-contractual negotiations59.Art. 2.1.15(b) of the UNIDROIT Principles provides that a party who negotiates or breaks off negotiations in bad faith is liable for the losses caused to the other party. Negotiations may be pre-contractual or occur in the course of an existing contract. Problems however arise where the breach had occurred during pre-contractual negotiations. On what basis would the “injured party” be remedied? Certainly, there has been no contract and so the conduct of the withdrawing party cannot amount to a breach of contract60. Assuming that this first hurdle is surpassed, the next problem relates to the manner in which the “injured party?s” losses are to be determined so as to determine the liability of the breaching party. On what basis would this be done? Would the liability of the defaulter be calculated on the basis of the projected earnings that the “injured party” would have received had the contract been concluded? Would such a solution not amount to equating a breach of the duty during pre-contractual negotiations to a breach where a contract actually exists? Would such a remedy be apt? Would it not be excessive? These questions create further problems for the application of a duty of good faith and fair dealing in international trade.
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. See. Canadian Court of Appeal case of Empress Towers LT. v. Bank of Nova Scotia (1990)73 D.L.R. (4th) 400 cited from A.F. Mason, “Contract, Good Faith and Equitable standards in Fair dealing” (2000) 116 L.Q.R. 66 at 81 . see also, Unknown, ICC International Court of Arbitration, award No. 8540, Paris, (04.09.1996), available at www.unilex.info/case.cfm?pid=2&do=case&id=644&step=FullText (last visited on 14 February 2008) where the arbitral tribunal held that an agreement to negotiate in good faith is binding under the law of the State of New York, which it held to be the applicable law. See also, Article 1337 of the Italian Civil Code which provides that “[t]he parties, in the conduct of negotiations and the formation of the contract, shall conduct themselves according to good faith…” (Adapted from W.Tetley Q.C. “Good faith in Contract”, supra. p.10.). 60 . Prof. Tetley Q.C. suggests that in such a case, the injured party?s remedy may lie in delict or tort. See. W. Tetley Q.C. “Good Faith in Contract”supra. p.6.
4). Unreceptive disposition to the principles in some legal systems In this regard, the English legal system readily comes to mind. As stated earlier, it is common knowledge that English lawyers and judges are “generally” averse to the imposition of a general duty of good faith in contracts61. This attitude has led to the description of an obligation to negotiate in good faith as “inherently repugnant to the adversarial position of parties”62. It appears therefore, that a party seeking to enforce the terms of an international commercial contract in England on the ground of good faith and fair dealing is unlikely to meet with much success. This unreceptive disposition certainly stands as a hindrance to the application of the principles in international trade, and even more so when the importance of England as an international commercial centre is taken into context.
5). Problem of choice of law Closely related to 4 above but with particular reference to the UNIDROIT Principles is the problem associated with the choice of law. Although Parties may elect to have the Principles govern their contract (and in extension, the good faith requirement), the application of the good faith principle may encounter difficulty where the provisions of the principles do not conform with mandatory rules of applicable national laws which do not uphold the good faith principle. This is so because the UNIDROIT Principles cannot overrule such mandatory provisions63. Because the freedom of parties to designate the governing law of their contract has traditionally been limited to national laws,the law governing a contract which designates the Principles as the governing law will still have to be determined on the basis of the private international law rules
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. See. note 31 above . Walford v. Miles, supra. 63 . Article 1.4 UNIDROIT Principles
of the forum64. In such a case, the Principles will only bind the parties to the extent that they do not affect the rules of the applicable law from which the parties may not
derogate65.Consequently, where the mandatory rules of a legal system do not recognize a duty of good faith on the parties as provided under the Principles, its application would not be possible.
As a possible solution to this problem, parties wishing to choose the Principles as the governing law of their contract have been advised to combine such a choice of law clause with an arbitration agreement, presumably because of the wide ranging powers which arbitrators usually wield in deciding the applicable law of a contract under arbitration66. However, this approach too is not immune from the problem because, even where the Principles are applied as the law governing the contract by an arbitrator, they cannot prejudice the application of mandatory rules which claim application irrespective of which law is applicable to the contract 67. In so far as the Principles remain subordinated to the mandatory provisions of other national, international or supranational rules, the application of the good faith principle thereunder will always be faced with a challenge as its application will always be subject to the provisions of such mandatory rules which may not necessarily cohere with the notion of good faith..
CONCLUSION This treatise has shown that an expectation on parties in international trade to act in accordance with good faith and fair dealing in international trade is realistic. The recognition of the obligation in the contract laws of major international commercial jurisdictions, in several
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. Official Comment 4(a) on Preamble to the UNIDROIT Principles, supra. . ibid. 66 . ibid. 67 . see, Official Comment 3 to Article 1.4 of the UNIDROIT Principles, supra.
international commercial conventions and instruments, and also in numerous arbitration decisions bothering on international trade provides support for this view. Some difficulties which may arise in the application of the principle in international trade have also been identified. The responsibility to provide practical solutions to these difficultieslie with judges, lawyers, legal writers and scholars. And these solutions they must strive to provide, for as it has been stated, “good faith is much required of those who trade most”68.
68
. Baldus – adapted from R. Zimmerman and P. Whittaker, supra. p.18
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