Things both common and civil (Part IV): Yet, in good faith, some say that thee beheld (contract law)

Colette Watt

In this final instalment, we will investigate the myth that English law does not recognise a concept of good faith in contract law whereas it is entrenched in civilian systems. This article is somewhat different for, as students of Part IB and beyond already know, the situation is much more nuanced than that. For example, the UnfairContract Terms Act 1977 and Consumer Rights Act 2015 bring a reasonableness and fairness standard into contract law to a certain extent. This instalment will only look at good faith at common law, not in legislation. Although the Tripos has shed some light on this area, it may be useful to look at the civil law perspective and mixed jurisdictions to better understand our own position.

 

Traditions

Common Law

It is hard to ascertain what good faith really requires. In English law, good faith has been “most aptly  conveyed by…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...”[1]However, as English contract law is traditionally adversarial and individualist, there is no general doctrine of good faith at common law which forces parties to give up their negotiating advantage. By contrast, a legal obligation (general doctrine) of good faith will usually override the express contractual provisions.[2] This position was made very clear by House of Lords in Walford v Miles (1992)[3].Lord Ackner explained that “the concept of a duty to carry on negotiations in good faith is inherently repugnant to the adversarial position of the parties when involved in negotiations…”. [4]

Whilst there is no general principle, good faith is not completely absent from the common law. In Petromec (No. 3)[5]the Court of Appeal considered that Lord Ackner’s observations were neither appropriate, nor binding, for determining the validity of an express obligation to negotiate in good faith.[6]Longmore LJ explained that there were three traditional objections to such terms. First, that they were too uncertain. Second, that it was too difficult to prove that negotiations had been ended in bad faith. Third, that it was impossible to assess any loss because it would be unclear whether the negotiations would have produced an agreement, or what the terms of an agreement produced would have been.[7]The express obligation in Petromec was regarded as generally enforceable(rebutting the first objection) and related to a limited aspect of extra costs(neutralising the third). However, he wrote that it would be difficult to find bad faith in absence of fraud, and so a term to negotiate in good faith was of“comparatively narrow scope”. Given that it had been “deliberately and expressly” entered by the parties in a professionally drafted commercial contract, it would be “a strong thing to declare [it] unenforceable” as this would “defeat the reasonable expectations of honest men”.[8]May J commented in Rosalina Investments[9]that such a term could only be valid if the three objections did not arise and, on the facts of that case, they were rebutted.

The courts have also considered provisions to act in good faith. In CPCGroup Limited v Qatari Diar Real Estate Investment Company[10],acting “in the utmost good faith” was interpreted by the court as an obligation to adhere to the spirit of the contract and be faithful to the agreed common purpose, to observe reasonable commercial standards of fair dealing and act consistently with the parties’ justified expectations.[11]On the facts, Vos J found no such breach. In the leading case of MidEssex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd (t/aMedirest),[12]Beatson LJ observed that “the content of a duty of good faith is heavily conditioned by its context”. He stressed that whilst a provision to “co-operate with each other in good faith” was valid, it did not and should not stretch over all conduct, as it may impose limitations on particular provisions.Instead it should be considered as an obligation to work together honestly endeavouring to achieve the stated purposes of the contract.[13]This is in line with ordinary contractual interpretation, during which the court takes into consideration “documentary, factual and commercial context”,including “commercial common sense”. However, courts are careful not to “undervalue the importance of the language of the provision which is to be construed”.[14]

Courts have also discussed the implication of terms of good faith. The nowLord Leggatt has been a strong supporter of introducing a duty of good faith into contract law.[15]In Yam Seng[16] he seemed to argue in favour of a general implied term of good faith (meaning honesty, fidelity to the parties’ bargain, cooperation and observance of common commercial standards),[17] notonly in relational contracts[18] but in almost all commercial contracts.[19] TheCourt of Appeal did not overrule Yam Seng but in Medirest it placed great emphasis on the type of contract. The contract in Yam Seng was a ‘skeletal document’[20]whereas in Medirest it laid out specific rules which greatly and precisely narrowed the employer’s decision making power under the contract. TheCourt acknowledged that it would be harder to imply terms into this type of detailed and professionally drafted contract.[21]Despite the apparent roll back of Yam Seng, the High Court has more recently adopted a wider view. In Bates & Ors v Post Office Ltd (No 3) Fraser J. held that the contracts between the Post Office and sub-postmasters were relational contracts and therefore included an implied term requiring good faith. Consequently, this required a series of more particular implied terms, such as not exercising its discretion arbitrarily, irrationally or capriciously, and exercising its contractual or other powers “honestly and in good faith for the purpose for which [they were]conferred”.[22]These subsequent implied terms affected the entirety of the Post Office’s contractual powers and discretions under the contract.[23] Good faith is not as absent as our stark myth would maintain. In summary the accepted position remains that there is no general principle of good faith in English common law[ATT1] [CW2] [ATT3] [CW4] . However, the nature of English precedent means that law use good faith on a case by case basis, in the same way a pocketknife might be used.[24]

Roman Law

In his Institutes, Gaius considered contracts to be one of two only sources of obligation.[25]There was no general contract law for Romans. Both Gaius and Justinian categorised contract law into four types[26]

1.    contracts re (obligation formed on delivery of the ‘thing’)

2.    verbal contracts (obligation formed by a set of words)

3.    Contracts litteris (a special kind of writing)

4.    Consensual contracts (by agreement alone).

Contracts were also delineated in terms of their level of obligation. Unilateral contracts were “stricti juris”,and so only bound the promisor to exactly what was promised. All consensual contracts (sale, hire, partnership, and mandate) were bilateral contracts. As such, they were “bonae fidei” (in good faith) and consequently the judge was instructed to decide a dispute according to good faith. Good faith was also relevant to Roman contract law as a vitiating factor. A contract could be vitiated for “dolus” which was an umbrella term for both fraud and bad faith. Good faith was also a requirement for certain specific contracts such as a loan or a pledge.

It is evident that this is a much simpler position doctrinally. There is no debate about interpretation or implication of specific terms within an agreement. The Roman law of actions, by which an action had to fit a specific formula somewhat mitigated problems of uncertainty which upsets modern judges and commentators. The claim already had to fit the precise contractual formula to count as a valid contract and also had to fit the particular  formula for the action in front of the iudex.

Mixed Jurisdictions

Scotland

Although T.B. Smith once wrote that “in the Scottish law of contract bona fides is a general concept”[27],if such a concept exists it is considered “latent and inarticulate”[28].The common law has profoundly affected Scottish contract law and significantly outweighs the Roman influence.[29]There is no general duty to negotiate in good faith, which is considered to be fundamental on the continent.[30]

However, as in English law, it is possible to find rules cases relating to contractual good faith. For example, the Scottish principle of mutuality and right of retention can pressure the contract breaker into proper performance. This is considered to be the Scottish version of the “exceptio non adimpleti contractus”- a Roman defence. There are certain situations in which a party cannot take advantage of another party’s error even without misrepresentation.[31]However, contrary to Stair’s suggestions, modern Scots law has not developed a general doctrine which allows it to challenge “leonine”, extortionate or unfair bargains.[32]

Nonetheless, Smith v Bank of Scotland[33]is thought by some commentators to indicate the existence of a general principle of good faith in Scots law. The House of Lords used a general principle of good faith to come to a solution where the existing law was lacking. Lord Clyde said: “it seems to me preferable to recognise the element of good faith which is required of the creditor on the constitution of the contract…As a part of that same good faith which lies behind that duty it seems to me reasonable to accept…good faith in the particular circumstances…”.[34]Some, like Brand and Brodie, upon review of subsequent case law consider good faith to be confined to that particular relationship.[35]Others, like MacQueen, consider this to be judicial innovation, akin to the development of a general principle of negligence in Donoghue v Stevenson.However, they acknowledge that it should remain very broad in order to be balanced against the important values of certainty and predictability. There is therefore no consensus on any general principles of good faith in Scottish contract law. Like English law, there are discrete pockets where good faith is relevant. However, Scotland (especially in light of Smith v bank ofScotland) is far better placed to develop an agreed general principle in the future.

South Africa

MacQueen notes that South Africa has taken “more or less” the same approach as Scots law.[36]However, Brand and Brodie believe it has been “much more drawn to creating an overriding principle” of good faith than the Scots. In Tucker Land andDevelopment v Hovis: Jansen JA stated that “All contracts are said to be bonae fidei…This meant that…the court had wide powers of complement or restricting the duties of parties, of implying terms in accordance with the requirements of justice, reasonableness an fairness”[37].The Constitution of the Republic of South Africa Act 108 of 1996 enshrines the post-apartheid constitutional dispensation. Section 39(2) places a duty on“every court, tribunal or forum” to “promote the spirit, purport and objects of the Bill of Rights” when interpreting legislation and developing the common law or customary law.[38]

There has been much debate over the role of good faith in contract law. At the appellate level, Olivier JA argued in his minority judgement in the Saayman case[39]that public policy includes good faith, but the judgement made no reference to the Constitution. This doctrine was disputed and limited in the Supreme Court of Appeal in the Brisley case.[40]There, the court found that “good faith could not be relied on as an independent,‘flee-floating’ basis” for setting aside a contract. Cameron JA wrote that the courts cannot “invalidate contracts on the basis of judicially perceived notions of unjustness or to determine their enforceability on the basis of imprecise notions of good faith”.[41]They upheld this formalistic approach in latter cases such as Napier[42].However, the Napier case was then appealed in the ConstitutionalCourt (known as Barkhuizen).[43]There, Ngcobo J held that concepts of fairness, justice, equity and reasonableness could not be isolated from public policy. He laid out a two-part test in which it would have to be shown that a contractual clause was unreasonable and in the circumstances it operated unfairly.[44]However, this did not bring closure to the debate and there has been a lot of back and forth[45].The Constitutional Court attempted to clarify the position in Everfresh. Moseneke J wrote “contracting parties certainly need to relate to each other in good faith…it would be hardly imaginable that our constitutional values would not require that that negotiation be done…in good faith”. [46]However, these remarks and those similar made by Yacoob J were obiter. Two years later, theConstitutional Court heard the Cool Ideas[47]case.In another turn, the majority held that “equity[ATT5] [CW6] [ATT7]  considerations do not apply” and offset the norms of good faith with the principle of legality.[48]It can be difficult to reconcile this more formalistic approach with previous cases and it is likely that this is not the end of the debate over good faith in South African law. However, it is possible to conclude that at the moment,South African law does not recognise a free-standing principle of good faith.

Quebec

The position of good faith inQuebecois contract law is somewhat clearer due to the codified nature of the system and the much stronger Roman influence. Article 6 of the Civil Code ofQuebec (CCQ) states that everyone is bound to “exercise their civil rights in good faith”. This, of course, includes contractual relations.[49]There are two forms of good faith in Quebec. One which is active and the other, passive. The active form of good faith is a positive obligation during the formation, performance or extinction of the contract (such as the duties of disclosure or loyalty). The passive form acts as a limit to contractual rights.[50]This form of good faith keeps the contractual provision within what is considered reasonable given the social and contractual context[51]This has been codified in A7 and A1375 of CCQ. Moreover, A1434 of CCQ requires that an obligation “incident to” the contract be “in conformity with usage, equity or law” according to its nature.[52]Modern civil law sees a contract as a relationship between the two parties, rather than merely the performance of an obligation. Therefore, there is no doubt in these systems that the relationship itself must be governed by good faith. As such, good faith is applied from negotiations to extinction.

Conclusion

This instalment has probably shown the sharpest distinction between the mixed jurisdictions. Quebec’s strong Roman tradition has allowed it to easily accept and assimilate the principle of good faith into its contract law. The codification of Quebec’s legal systems has quashed any dispute as to the existence of good faith and helps to clarify its application. On the other hand, the situation is very different in Scotland andSouth Africa. These uncodified mixed jurisdictions have struggled and debated whether good faith is a principle or just a norm to consider when resolving contractual disputes. A legal principle is a general legal norm that is applied irrespective of specific legal facts, like a default rule that cannot be changed.[53]Whereas, a legal norm is more specific and its application is based on the existence of certain facts. Much of this reflects the difficulties facing the doctrine of good faith in English law. This also most likely reflects English commercial influence. This makes sense for Scotland in terms of its political and economic relationship with England. It would be difficult to contract across the border if parties had very different contractual traditions and expectation. South Africa is particularly interesting because the court is trying to work out its new Constitutional obligations. It is likely that this debate will continue until there is consistent case law on the subject. It seems to be warring between the two traditions: on the one hand, it seeks to have the commercial freedom of English law but on the other understands the importance that civil systems have given good faith.

 

References

[1] Interfoto Picture Library Ltd v Stilletto VisualProgrammes Ltd [1989] 1 Q.B. 433, 439

[2] MacQueen H, Good Faith in the Scots Law of Contract:An Undisclosed Principle, University of Edinburgh School of Law, Working PaperSeries, No 2011/19, p9

[3] Walford v Miles [1992] 2 A.C. 128

[4] Ibid. 138

[5] Petromec Inc v Petroleo Brasileiro SA Petrobras (No.3) [2005] EWCA Civ 891

[6] 1-052 (Chitty on Contracts, ed.33, Professor HughBeale, Main work publication date: 26-10-2018, Supplement publication date:26-11-2019)

[7] Ibid.

[8] Ibid. and op.cit [2005] EWCA Civ 891 at [121] echoing Steyn (1997) 113 L.Q.R. 433.

[9] Rosalina Investments Ltd v New Balance Athletic Shoes(UK) Ltd [2018] EWHC 1014 (QB) at [50]

[10] [2010] EWHC 1535 (Ch)

[11] Ibid. [246].

[12] [2013] EWCA Civ 200, [2013] B.L.R. 265.

[13] Op.cit. Chitty 1-054

[14] Arnold v Britton [2015] UKSC 36 at [15].

[15] www.judiciary.uk/wp-content/uploads/2018/10/leggatt-jill-poole-memorial-lecture-2018.pdf

[16] Yam Seng Pte Ltd v International Trade Corp [2013] EWHC111 (QB), [2013] Lloyd’s Rep. 526.

[17] Good faith in English law    What does it mean? https://www.eversheds-sutherland.com/documents/services/construction/ConstructionGoodfaithinEnglishlaw.pdf

[18] Fraser J in Bates & Ors v Post Office Ltd(No 3) accepted that this concept of “relational contracts” is now established in English law”. They are ones which “may require a high degree of communication, cooperation and predictable performance based on mutual trust and confidence and involve expectations of loyalty which are … implicit in the parties’ understanding and necessary to give business efficacy to the arrangements.”.  

[19] Op. cit. Chitty 1-058

[20] Op.cit https://www.eversheds-sutherland.com/documents/services/construction/ConstructionGoodfaithinEnglishlaw.pdf

[21] See support from Andrews J in Greenclose Ltd vNational Westminster Bank Plc [21][2014] EWHC 1156 (Ch), [2014] 2 Lloyd’s Rep. 169 [150]

[22] Op. cit Chitty 1-058A

[23] Ibid.

[24] ‘Worthington (2018) Cambridge, Lent Term

[25] G.3.88

[26] J.3.13.2 / G.3.89

[27] Zimmermann R, Reid K, and Visser D, Mixed LegalSystems in Comparative Perspective: Property and Obligations in Scotland andSouth Africa, Chapter 4: Good Faith in Contract Law, Brand, F &Brodie, D p95

[28] Op. cit, MacQueen H, p7 – see MacKay v ScottishAirways 1948 SC 254 President Lord Cooper at [163]

[29] Palmer VV, Mixed Jurisdictions Worldwide: The ThirdLegal Family,2nd edition, Cambridge University Press. Online publication date:July 2012, Reid, E. Chapter 3 Scotland, ft 199

[30] Op.cit. MacQueen, p12

[31] Op.cit MacQueen, p9

[32] Ibid. and McBryde, Contract, pp. 255-8; SME, vol 15, para 677.

[33] 1997 SC (HL) 111

[34] Ibid. [121]

[35] Op. cit MacQueen p11 fn 62/ cf op. cit. Brand &Brodie p103

[36] Op.cit. MacQueen p7

[37] Op.cit Brand & Brodie p96 / 1980 (1) SA 645 (A),615C-F

[38] Layton-McCann, K, THE ROLE OF GOOD FAITH AND FAIRNESS IN CONTRACT LAW:  Where do we stand inSouth Africa, and what can be learnt from other jurisdictions?, Thesis forMaster of Laws, Commercial Law, University of Cape Town, September 2017 p5

[39] Eerste Nasionale Bank van Suidelike Afrika Bpk v Saayman 1997 (4) SA 302 (A)

[40] Brisley v Drotsky 2002 (4) SA 1 (SCA)

[41] Op.citLayton-McCann p9, Brisley v Drotsky 2002 (4) SA 1 (SCA) [7B]

[42] Napier v Barkhuizen 2006 (4) SA 1 (SCA)

[43] Barkhuizen v Napier 2007(5) SA 323 (CC)

[44] Op.cit.Layton-McCann p10, Barkhuizen v Napier 2007 (5) SA 323 (CC) [51E] [56]

[45] For example: Bredenkamp v StandardBank of SA Ltd 2010 (4) SA 468 (SCA), Maphango v Aengus Lifestyle Properties(Pty) Ltd 2012 3 SA 531(CC)

[46] Everfresh Market Virginia (Pty) Ltd v Shoprite Checkers (Pty) Ltd 2012 (1) SA 256 (CC), [72]

[47]  Cool Ideas 1186CC v Hubbard 2014 (4) SA 474 (CC)

[48] Ibid. [52H] op.cit. Layton-McCann p14

[49] Art 1375 CCQ ; Jean-LouisBaudouin, Pierre-Gabriel Jobin & Nathalie Vézina, Les obligations, 7th ed(Cowansville, Que : Yvon Blais, 2013) at para 132 [Baudouin & Jobin].

[50] https://www.mcgill.ca/centre-crepeau/projects/terminology/guide/good-faith

[51] Houle v Canadian National Bank, [1990] 3 SCR 122, 74DLR (4th) 577

[52] Article 1434 CCQ

[53] Daci, J Legal Principles, Legal Values and LegalNorms: are they the same or different?, Academicus - International ScientificJournal, Universum University, Prishtina, Kosovo, p109-11