The principle of good faith and fair dealing in the CESL; from an English perspective
Author: Morgane Denat Student Number: 10847081 Date: 30 June 2015
2 Tables of Contents
Introduction 3
Chapter 1: The position of England towards the concept of good faith
1.1 The historical significance of good faith in English contract law 6 1.2 Ideological considerations for the irrelevance of good faith 8 1.3 Technical alternatives to the importation of a general principle of good faith 10
1.4 The influence of the acquis communautaire 13
Chapter 2: Good faith and fair dealing under the CESL
2.1 Organization and provisions related to the concept 17 2.2 Specific uses of good faith in a particular context 19 2.3 The UK’s position toward the CESL and successive amendments 21
Chapter 3: Overcoming the obstacles
3.1 Yam Seng v CESL: potential interface issues 24
3.2 The utility of a good faith principle: the example of Scottish law 29
Conclusion 32
3 Introduction:
In October 2011, the Commission’s Proposal for a Regulation on a Common European Sales Law (CESL) was published.1 Taking its roots in considerable academic and policy works,2 the CESL finds its sources in the “Draft Common Frame of Reference”,3 the “Principles of European
Contract Law”,4 and “UNIDROIT Principles”.5 As such, the CESL might represent the
culmination of these impressive projects, which aim to promote harmonization of national contract laws in Europe.
Initially, the CESL was designed to be applied as an optional6 and self-standing uniform set of contract law rules, which was to be considered as a second contract law regime within the national law of each Member State.7 The CESL would have been available for cross-border transactions between business and consumers (B2C) and between businesses (B2B),8 for the sale of goods, the supply of digital content, and provisions of related services. Nonetheless, this ambitious and innovative instrument ran into considerable resistance. Even though it was backed by a majority in the European Parliament (EP),9 which however proposed different amendments to the initial draft,10 the CESL met with great misfortune, due to the concerns of Member States regarding the adoption of such an optional instrument and the appointment of a new commission in 2014.11 Unfortunately, “innovative and ambitious” are two adjectives that rarely rhyme with success
1 Proposal for a Regulation of the European Parliament and of the Council on a Common European Sales Law, 2011, COM (2011) 635 final
2 The proposed Common European Sales Law; useful links regarding the key documents and background materials [online via: scotlawcom.gov.uk]
3 Study Group & Aqcuis Group, Principles, Definitions and Model Rules of European Private Law, 2009 4 The Commission on European Contract Law, The Principles of European Contract Law. Parts I and II, 2000 5 International Institute for Unification of Private Law, UNIDROIT Principles of International Commercial Contracts, 2010
6 Reg-CESL, art.3 7 Reg-CESL, rec.9
8 Reg-CESL, art.7: in B2B, the instrument only applies if one party is a Small or Medium Enterprise (SME), defined in art.7(2)
9 European Parliament Legislative Resolution of 26.02.2014 on the proposal for a regulation of the European Parliament and of the Council on a Common European Sales Law (P7_TA(2014)0159)
10 European Parliament Committee on Legal Affairs of 25.09.2013, on the proposal for a regulation of the European Parliament and of the Council on a Common European Sales Law (COM(2011)0635–C7-0329/2011– 2011/0284(COD))
11 The necessity of the instrument was a considerable issue discussed in Brussels, with many questioning whether the proposal complied with subsidiarity and proportionality and whether a clear legal basis existed. It was particularly questioned whether the use of Article 114 TFEU which provides for the “approximation” of laws was appropriate for the creation of an optional instrument
4 within the European Union (EU), and the CESL is concrete evidence of that fact. After being listed in the withdrawn proposals of the Commission’s programme,12 it seems notwithstanding that the
CESL is still meant to play a role in the Digital Single Market Strategy set up by the European Commission.13 This would probably result in dramatically limiting the scope of the proposal for consumers making online digital purchases,14 while it is not certain that the instrument would
remain an “optional regulation”. Such restrictions would meet the concerns of the Member States and at the same time allow the Commission to claim political success.15
This thesis focuses on one particular aspect of the CESL, namely the concept of good faith and fair dealing.16 Such a notion has always been mentioned as a prominent example of contentious concepts that divides European jurisdictions, traducing a substantive difference in approach to the law of contract. On the one hand, it has long been recognized that English contract law does not have a general principle of good faith.17 This means that English contract law does not recognize any general duty to negotiate or perform contracts in good faith, and contracting parties do not have to exercise their rights in good faith. In this respect, it has been advocated that English law tolerates “a certain moral insensitivity in the interest of economic efficiency”.18 On the other hand, this is unlike the position in most civil law systems which promote notions such as solidarity and collaboration, and where, as a result, a principle of good faith, stemming from Roman law, is clearly stated to apply to contracts in general.19
The ambitious CESL proposes to give a central place to the notion of good faith and fair dealing by raising this concept to the status of general principle.20 Following the initial drafting: “each
party has a duty to act in accordance with good faith and fair dealing”. This is further defined as
“a standard of conduct characterised by honesty, openness and consideration for the interests of
12 EPRS, European Commission’s 2015 Work Programme Briefing, 2015 (PE 545.732)
13 Single Market Strategy for Europe Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, 2015, COM (2015)192 final 14 Clive, Rebirth of EU contract law proposal, EPLN May 2015, [online]
15 Dannemann & Vogenauer, The Common European Sales Law in Context: Interactions with English and German
Law, 2013, p.15 [online]
16 CESL, art.2
17 Zimmermann & Whittaker, Good faith in European Contract Law, 2000, p.39
18 Barry, The Pre-contractual Obligations to Disclose Information, English Report, in: Contract Law Today:
Anglo-French Comparisons, 1991, p.187
19 See for instance the German BGB at art.242 states that the debtor is bound to effect performance according to the requirement of good faith. The French Civil Code, art.1134(3) states that contracts must be executed or performed in good faith
5
the other party to the transaction or relationship in question”.21 This is what Martijn Hesselink classifies as “objective good faith” in his general analysis of the role of good faith in Continental systems.22 In essence, the CESL aims at imposing social standards of honesty and correctness which must be followed by contracting parties. At first glance, this approach seems to genuinely embrace a continental vision on the contractual relationships between parties and thus contrasts with that of England where this concept of objective good faith is not recognized.
Nevertheless, in the recent judgment Yam Seng Pte Ltd v International Trade Corp Ltd 23 (Yam Seng), Mr. Justice Leggatt valiantly challenged the traditional view that a doctrine of good faith in the performance of contracts between commercial parties is unworkable. He investigates, in depth, whether English law should be (or is already) moving towards the attitude of many civil- and even common law systems, which already recognize an implied duty to perform contracts in good faith. In that respect, Leggatt J. challenges the stereotype of how the principle of good faith still represents an irreconcilable contentious notion between the two traditions within the EU. From a pragmatic perspective, so dear to English courts, and as analyzed by Leggatt J. himself,24 it can be argued that as a result of the influence of international and EU laws, the impact of good faith is likely to increase in the foreseeable future, and English law has to seriously question whether it can afford to ignore this development. This argument is particularly pertinent in light of the proposed CESL wherein the principle of good faith is intended to play a significant role.
This attempted rapprochement between English law and its European counterparts calls for more clarifications. This paper aims at investigating to which extent the concept of good faith and fair dealing under the CESL is compatible with English law. It will do so by comparing the functioning and interpretation of good faith under the CESL and in English law, following a functionalist approach. As advocated by Zweigert and Kötz,25 this method permits to find ‘norms’ which are serving a certain social function, and the methodological skeleton-idea is to find in a foreign system the norms, which are functionally equivalent to those other principles that have been taken into comparisonfrom the other systems.26 As such, functionalism is, through its methodological nature, clearly a method that relies first and foremost on comparison. More precisely, in the context of
21 Reg-CESL, art.2
22 Hesselink, The Concept of Good Faith, in: Towards a European Civil Code, 2010, p.619-620
23 High Court 01-02-2013 (Yam Seng Pte Ltd v International Trade Corp Ltd) [2013] EWHC 111(QB) [online] 24 Ibid, para.124
25 Zweigert & Kötz, An introduction to comparative law, 1998, p.34
6 this paper, it is about asking whether the English legal system knows methods or ‘norms’ that fulfill a similar function to the principle of good faith as presented in the CESL. In practice, the starting point is, of course, posing the functional question as to how good faith is defined and operates in England and within the CESL. Then, it is about describing the systems and their way of solving problems related to bad faith or unfairness, which should highlight similarities and differences between the systems under comparison. In other words, it explores the degree to which there are or are not functional equivalents of a principle of good faith in England, without necessarily using the same terminology, or even the same rule or procedure as stipulated in the CESL. Finally, the aforementioned considerations should permit to define a point of view from which to consider explanations of differences and similarities.27
Hence, the thesis begins by analyzing the extent to which English law has already adopted the language of good faith and the reasons for refusing to use it more broadly (Chapter 1). Then, the principle of good faith and fair dealing under the CESL will be presented, taking the provisions as initially proposed and further amended into account. This part also explores the objections raised by the UK Government regarding the use of such a concept (Chapter 2). Finally, the last part will confront the treatment of good faith and fair dealing under the CESL with the reasoning employed by Leggatt J. in Yam Seng; in other words, whether the definition of good faith as provided in that decision is compatible with the one formulated in the CESL, and whether the traditional arguments raised against the use of good faith in the performance of contract is still relevant. Furthermore, this part will assess the interest that might represent the recognition of a general principle of good faith by investigating its treatment in Scotland (Chapter 3).
Chapter 1: The position of England towards the concept of good faith
1.1 The historical significance of good faith in English contract law
From a historical perspective, English law has not always been hostile to the concept of good faith.
27 Ibid, p.1104
7 Indeed, from the early Middle Ages until the late nineteenth century, the term ‘common law’ was used in different senses.28 This term was in contrast with ‘equity’. Common law referred to a law that can be traced back to the decisions of the King’s courts. The law as applied by these courts was ‘common’, in that it consisted of a general set of legal rules which were applied across the country. By contrast, ‘equity’ is a type of law which can be traced back to the decisions of a separate group of courts: the Courts of Equity under the control of the King’s Chancellor. Those courts were developed separately in order to mitigate the harshness of common law. Given that the early Chancellors were well versed in Latin and French, as well as Roman civil and canon law, this theological training necessarily influenced the development of equity.29 Thus, the rules of equity were evolved to mitigate the rigidity of the (old) common law by conferring, for instance, remedies which were not given under common law, such as specific performance.30 The Chancellor, hearing such petitions, could decide on cases according to what ‘equity’ required. This was defined as a ‘decision of conscience’31 based on the Chancellor’s discretion in order to find
an appropriate result to solve the case at hand. Eventually, the Judicature Acts 1873-75 amalgamated the common law courts with the court of equity by creating one system: the Supreme Court of Judicature. Nowadays specific performance is still classified as an ‘equitable (and exceptional) remedy’.
Another historical development linked to the general concepts of good faith and equity can be found in merchant law. As explained by Sir Roy Goode, England once had a general concept of good faith in the days of the old law merchant.32 The lex mercatoria can be defined as an uncodified body consisting of the accumulation of mercantile customary law administrated by the merchant courts which merchants travelling across Europe would have to obey. It is heavily rooted in Roman law,33 and commercial practice drew on civil law and the canonist notion requiring ‘faith
to be kept’.34 However, gradually, merchant courts disappeared, their jurisdictions being taken over by common law courts, and the principles of the law merchant were absorbed into the general common law. The law merchant lost its international character and became national commercial
28 Cartwright, An introduction to the English Law of Contract for the Civil Lawyer, 2007, p.3-4 29 Worthington, Equity, 2006, p.10-11
30 Goode, The Concept of “Good Faith” in English Law, in: Centro di studi e ricerche di diritto comparator e
straniero, 1992, n.2
31 See Cartwright, note 28, p.4 32 See Goode, note 30
33 Zimmerman, Roman Law, Contemporary Law, European Law, The Civilian Tradition Today, 2001, p.175 34 Holdsworth, History of English Law, 1966, p.112
8 law. As a result, common law courts did not feel the need to take mercantile customs into account. Yet, it is worth noting that, by the 18th century Lord Mansfield suggested that good faith could be “the governing principle applicable to all contracts and dealing”.35 Originally intended to apply
to all contracts, the application of this statement was rejected by common law and only survives in respect of insurance law. The fact that such an approach did not survive resulted from the rise of legal positivism and the pursuit of legal certainty, attendant on the growth of laissez-faire liberalism.36 This resulted in the English concept of absolute freedom of contract. As such, the role
of contract law disregarded legal principles including those of morality and fairness, and focused instead on voluntary choices of individuals in order to give them legal effect. The balance has thus strongly switched from general standards of fairness to favor predictability. The task of the courts became exclusively to ascertain what parties have agreed upon in the contract and to enforce it.
1.2 Ideological considerations for the irrelevance of good faith
The English hostility towards the recognition of a doctrine of good faith can be explained through three main factors. Firstly, the legal reasoning of a common lawyer does not start from a general principle; there is no single coherent set of principles of law, from which the answer to a legal question can be deduced, and solutions to legal disputes are based on the facts of this case at hand, and the solutions of earlier cases.37 English courts express a certain reluctance to generalize abstract principles. Instead, English law has tended to operate on a case-by-case basis whereby specific outcomes are developed in response to certain problems of unfairness. This conception was illustrated by Bingham LJ in Interfoto:38
“In most legal systems outside the common law world, the law of obligations recognizes
and enforces an overriding principle that in making and carrying out contracts parties
35 King’s Bench (Carter v Boehm) 01-01-1766, [1766] 3 Burr. 1905 at 1910
36 Atiyah, The Rise and Fall of Freedom of Contract, 1979 at 168: “We should begin by noting that in the latter half of the eighteenth century there were signs of an emerging principle of good faith in contract law. The idea of good faith would, of course, have been completely congruent with the traditional morality, though it needed someone like Lord Mansfield to enunciate and apply the principle in a wide variety of cases. Mansfield began this task, but it was never completed, for the economic liberalism which he also favored and helped to develop, ultimately proved fatal to anything as paternalistic as a general principle of good faith”.
37 See Cartwright, note 28, p.9
38 Court of Appeal 12-11-1987 (Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd) [1987] EWCA Civ 6 [online]
9
should act in good faith […] English law had characteristically, committed itself to no such overriding principle but has developed piecemeal solutions in response to demonstrated problems of unfairness”
Secondly, English law considerably supports freedom of contract as a general principle of contract law.39 English courts take the view that parties should be free to (not) enter into a contract, with who they wish, according to freely chosen contract terms. In contrast, good faith is perceived as a notion which undermines this fundamental doctrine by its lack of precision. Consequently, it was decided that “parties are free to contract as they may think fit”.40 This reasoning is particularly noticeable in commercial contexts. There is indeed a fear to drive business away by referring to vague concepts of fairness which would make judicial decisions unpredictable. Accordingly, English judges will be very reluctant to intervene by imposing overriding obligations of good faith. Indeed, duty to negotiate or perform contracts in good faith has been professed to be inconsistent with the pursuit of one’s own self-interest.41 Therefore, parties do not have to deal with each other in good faith during negotiation or performance, provided that they do not act in breach of a term of the contract. Consequently, in case of breach of contract, apart from the context of anticipatory breaches, “a deliberate contract breaker is guilty of no more than breach of contract”.42 The
contract is perceived as a commercial vehicle to be entered into by parties bargaining at arm’s length, and protecting their own economic interests accordingly.43 Thus, the remedies for breach of contract do not favor literal performance but the economic equivalence of performance. As such, a breach will be assessed in economic terms; the party in breach must not be punished by remedies. In other words, the allocation of damages will be determined regardless of the party’s conduct. Finally, the last reason for the non-recognition of a principle of good faith is the prevalence of certainty over fairness. This position was clearly illustrated in Chapman v Honing,44 where it was
39 Chitty, On Contracts Volume I General Principles, 2012, [1-012]
40 House of Lords 01-01-1966 (Suisse Atlantique Société d’Armement Maritime SA v N.V. Rotterdamsche Kolen
Centrale) [1967] 1 AC 361
41 House of Lords 23-01-1992 (Walford v Miles) [1992] 2 AC 128 [online] Lord Ackner: “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”
42 Court of Appeal 01-01-1990 (Bank of Nova Scotia v Hellenic Mutual War Risks Association Ltd) [1990] 1 QB 818, 894 May LJ
43 See Cartwright, note 28, p.271
10 advocated that parties can exercise their legal rights regardless of motive. For according to Pearson L.J.:
“A person who has a right under a contract or other instrument is entitled to exercise it
and can effectively exercise it for a good reason, or bad reason, or no reason at all […] If the rule were different, if the exercise of such a right were liable to be overthrown, in an action […] by proof that the act was done with a wrong motive, there would be a great unsettlement of […] commercial transactions and relationships”.
In the aforementioned case, the defendant landlord gave a termination notice to the tenant, solely because this tenant had testified against the landlord in another’s proceedings. Nonetheless, the court limited its inquiry to ascertain whether the right was performed in accordance with the provisions of the contract, without assessing the motif behind it. As such, predictability of the legal outcome of a case is more highly valued than absolute justice.45 If this means that the outcome of disputes might sometimes appear to be harsh on a party, this is simply seen as an acceptable price to pay in the interest of the great majority of business litigants.46 In sum, under English law, good faith is not considered to be a facilitating tool in solving contractual disputes, but would, on the contrary, increase the likelihood of litigation. This fundamental approach to certainty for the parties runs deep in English law and a general principle of good faith in formation or performance in contracts would run counter to it.
One would therefore think that because of its rejection of a principle of good faith, English law would deviate from the other systems as to the results it would reach. This has actually little influence on the outcome of the cases. The oft-quoted passage of Lord Bingham in Interfoto, voices that English contract law implicitly regulates fairness.
1.3 Technical alternatives to the importation of a general principle of good faith
This section will explore a number of solutions which English courts have used to police the fairness of contracts and their performance. This leads to some legal results which in other systems
45 See Goode, note 30 46 Ibid
11 are dealt with by a general requirement of good faith. In the absence of a general good faith doctrine, exist, among others, the common law rules on misrepresentation, the objective interpretation of contracts, including the contra proferentem doctrine, and the concept of implied terms.
To begin with, misrepresentation of facts made by one party in order to induce another party to enter into a contract is sanctioned by rescission of the contract and/or by damages at common law and under the Misrepresentation Act 1967. While the common law is normally concerned only with representations as to facts, statements as to the future intentions or opinions of one party to a contract may also engender liability for misrepresentation in some situations.47 For example, where a party has special knowledge or expertise, the other party is expected to rely on his opinion on this particular matter. If that is the case, liability for misrepresentation may ensue if the party did not in fact hold the opinion that he expressed and the other party relied on the opinion to his detriment. The purpose of misrepresentation is to restrict certain forms of dishonest or bad-faith conduct by contracting parties
Secondly, English lawyers have long used recourse to interpretation of the parties’ intentions to achieve a variety of normative results.48 Following the leading case on contractual interpretation, the meaning of the contract is to be found in the contract itself.49 In other words, when a court is required to construe a contract, the judge will first try to find the ordinary and natural meaning of the words as they are written down. However, when the wording provided in the contract does not make sense in the relevant commercial setting, the judge will ascertain the meaning of the words following an objective inquiry. As stated by Lord Steyn:50
“The inquiry is objective: the question is what a reasonable person, circumstanced as the
actual parties were, would have understood the parties to have meant by the use of the specific language. The answer to that question is to be gathered from the text under consideration and its relevant contextual scene”.
47 Tetley, Good Faith in Contract Particularly in the Contracts of Arbitration and Chartering, 35 JMLC 2004, p.572 48 See Zimmermann, note 17, p.45
49 House of Lords 19-06-1997 (Investors Compensation Scheme v West Bromwich Building Society (ICS)) [1997] UKHL 28 [online]
50 House of Lords 02-12-2004 (Sirius International Insurance Company v FAI General Insurance Limited and
12 In other words, what would the reasonable commercial parties, using these words in those circumstances, reasonably understood them to mean? Does it make business common sense? English courts, facing these interrogations may thus choose to interpret the contract in order to reach a ‘reasonable’ result, rather than based on the strict wording of the contract.51 In this respect,
Lord Steyn stated that “there is not a world of difference between the objective requirement of good faith and the reasonable expectations of the parties”.52 Also related to the interpretative function of good faith, is how certain equitable doctrines have been established to address unfairness in a contractual context. That is the case, for instance, where one party claims to have induced a term in its favour in the contract (typically a term which excludes or limits the party’s liability for breach of contract), the courts will have their suspicions towards the term. Of course, it is not sufficient to strike it down since it might simply be the parties exercising their freedom of contract. What the courts can do, is prevent an unreasonable term from having effect by controlling its interpretation. Where there is doubt about the meaning of a term, it will be construed contra
proferentem. This means that the ambiguous term will be interpreted against the party who is
seeking to rely on it to its own advantages. It is for this party to show that the clause clearly and unambiguously confers the benefits which it claims.
Secondly, the obligation of good faith has also been imposed upon parties under fiduciary duties. As defined by Lord Millet:
“A fiduciary is someone who has undertaken to act for and on behalf of another in a
particular matter in circumstances which give rise to a relationship of trust and confidence […] A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit […] without the informed consent of his principal”.53
The fiduciary’s duty of loyalty bears a striking resemblance to a general principle of good faith. The fiduciary owes a duty of undivided loyalty to his principal, which includes an obligation to act in good faith. In fact, sometimes, fiduciaries must go even further than good faith would
51 This is also illustrated in House of Lords 04-04-1973 (Wickman Machine Tool Sales Ltd v Schuler) [1973] UKHL 2 p.4 [online]
52 Steyn, Contract Law: Fulfilling the Reasonable Expectations of Honest Men, LQR,1997, p.438
13 require, to the point of preferring the interests of others to their own. For instance, a solicitor is a fiduciary who owes a duty of good faith to his principal.
Finally, the treatment of implied terms in fact under English law occupies a similar function, like gap filling generally attributed to good faith.54 Terms implied in fact are based on the imputed intention of the parties. The five criteria for implying a term in fact were expressed in B.P. Refinery
(Westernport) Pty Ltd v Shire of Hastings:55 it must be reasonable and equitable; it must be necessary to give business efficacy to the contract, which means that no term will be implied if the contract is effective without it; it must be so obvious that it goes without saying; it must be capable of clear expression; and it must not contradict any express term of the contract.
Further clarifications have been given in Attorney General of Belize v Belize Telecom Limited,56 regarding the manner the above mentioned criteria have to be understood. In that case, Lord Hoffman linked the doctrine of implied terms firmly to contractual interpretation by stating that there is only one question: “What the instrument, read as a whole against the relevant background,
would reasonably be understood to mean”.57 The criteria set above are merely different ways of
applying the same central idea. In essence, the court will try to make the contract workable and ascertain the presumed intentions of the parties in the sense of what they would have agreed if they had thought about the point.58
All these resorts to good faith (or its equivalents), have been used when solving a dispute at a national level, without the interference of the EU, proving the capabilities of English judges to deal with the concept. On the other hand, the recourse to good faith is differently shaped when resulting from the acquis communautaire.
1.4 The influence of the Acquis Communautaire
The Community acquis is the body of common rights and obligations which binds all the Member States together within the EU. It includes the rights and obligations arising from the founding treaties and the provisions of instruments enacted by the European institutions deriving from them.
54 See Hesselink note 22, p.627
55 Privy Council 01-01-1977 [1978] 52 ALJR 20 [online] 56 Privy Council 18-03-2009 [2009] UKPC 10 [online] 57 Ibid, para.16
14 Pressure for harmonization of contract law is stimulated by the European Commission, which has the task of monitoring the application of Community law in order to ensure compliance with, and its proper application by, the Member States. On the other hand, the Court of Justice of the European Union (CJEU) has to make sure that EU legislation is interpreted and applied in the same way in all Member States.
The majority of existing EU contract law has been devoted to protect what is seen as the paradigm of weaker parties: the consumer. The reasons for such devotion are generally described as the lack of equilibrium between consumers and producers regarding their bargaining power and inequality of information. The two are often linked since imbalance of bargaining power is often caused by inequality of information.59 In this respect, freedom of contract can be subject to restrictions when it is monopolized by one contracting party, with a stronger bargaining position since this might lead to contractual injustice for the weaker party. As a result, EU interventions involving contractual good faith have been largely confined to consumer contracts, and the move towards harmonization within the EU has already led England to incorporate the objective aspect of good faith into its domestic contract law.
The most prominent example is the judicial review of unfair contract terms, embodied in the Council Directive of 5 April 1993 on unfair terms (UTD),60 where good faith becomes a ground of invalidity in relation to standard form contracts. For a long time, English law has contained two separate schemes for the regulation of unfair contract terms: the Unfair Contract Terms Act 1977 (UCTA)61, prior to the implementation of the Directive, and the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR)62, transposing the Directive. As a result, many problems arise among these regulations, for instance “inconsistent and overlapping provisions, using different language and concepts to produce similar but not identical effects”.63 In order to rectify
the complexities of English consumer law, the UK Government has announced plans to merge all
59 Sims, Good Faith in English Contract Law: Of Triggers and Concentric Circles, ALR, 2004, p.203: “while the imbalance of bargaining power raises the issue of contract formation and therefore pre-contractual good faith, it remains equally relevant during the performance and enforcement of contracts, for example because the stronger party can dominate the contractual interpretation”
60 Directive 93/13 on unfair terms in consumer contracts [1993] OJ L95/21 61 1977 c. 50
62 1999 No. 2083
15 existing consumer protection laws and regulations into one single act: the Consumer Right Act 2015.64
The UTD’s purpose is to improve consumer protection against unfair terms in their contracts with suppliers or sellers. It does so by requiring that any written term of the contract be in “plain, intelligible language”;65 the requirement of fairness applies to any term “which has not been
individually negotiated”. The basic test of unfairness of a term is that such a term will be regarded as unfair if it causes a significant imbalance between the parties’ rights and obligations under the contract, which is to the detriment of the consumer and contrary to the requirement of good faith.66
In this respect, specific attention should be devoted to the strength and bargaining positions of the parties, and on whether the consumer had an inducement to agree to the term. The requirement of good faith may be satisfied by the seller or supplier where he deals fairly and equitably with the other party whose legitimate interests have to be taken into account. As a result, if a term is unfair, it will not be binding on the consumer,67 but will continue to bind the seller or supplier (even if it is unlikely that a consumer would wish to hold him to it). However, if the contract can be held up without the unfair term, both parties are still bound by the unaffected terms.68
The lack of transparency of a contractual term will be sanctioned by a mechanism similar to the
contra proferentem rule. In other words, when ambiguous, the meaning most favorable to the
consumer will prevail.69 Another interesting feature of the Directive is that when applying the unfairness test, it is possible to be guided by the indicative list of unfair terms, found in the Annex to the Directive and implemented in Schedule 2 to the UTCCR.70
Since the UTD imported the continental principle of bona fides directly into English contract law to monitor the contractual relationships between consumers and businesses,71 it is not surprising
64 On 23 January 2014 the draft Consumer Rights Bill (the “Draft Bill”) was introduced into Parliament and received Royal Assent on 26 March. It is likely that the Draft Bill will come into force during late 2015/early 2016. The Draft Bill includes some major changes to consumer law, making it clearer and easier for both consumers and businesses to understand. There are four distinct sections of the Draft Bill relating to Goods, Digital Content, Services and Unfair Terms, that will impact retailers and their dealings with consumers
65 1993 Directive, rec.11 66 1993 Directive, art.3(1) 67 1999 Regulations, reg.8(1) 68 1999 Regulations, reg.8(2) 69 1999 Regulations, reg.7(1)
70 See for instance, Annex Terms referred to in art.3(3): “Terms which have the object or effect of: (a) excluding or limiting the legal liability of a seller or supplier in the event of the death of a consumer or personal injury to the latter resulting from an act or omission of that seller or supplier”
71 See Chitty on contracts, note 39, [15-065] stating that the origins of the reference to good faith in the Directive flows from the use in the German Statute which significantly influenced the Directive
16 that it has ignited an intensive debate among academics.72 Obviously, questions arose as to how English courts would interpret such a standard, and how to confront notions of good faith in contracts. This was done in Director General of Fair Trading v First National Bank Plc.,73 where Lord Bingham described the requirement of good faith to mean “fair and open dealings”.74 The
openness requirement means that the terms should be expressed fully, clearly and legibly, containing no pitfalls or traps.75 He further stated that:
“Fair dealing requires that a supplier should not, whether deliberately or unconsciously,
take advantage of the consumer's necessity, indigence, lack of experience, unfamiliarity with the subject matter of the contract, weak bargaining position. Good faith in this context is not an artificial or technical concept […] it looks to good standards of commercial morality and practice”.76
This decision illustrates how no one should underestimate the capacity of English judges to deal with the concept of good faith. Lord Bingham does not seem to echo the traditional fear that such concept is “alien” for English law. On the contrary, he is perfectly aware that the member states have no common concept of fairness or good faith and that the Directive does not purport to state the law of any single member state.The requirements and definition are to be set in respect of the objective of the Directive (teleological approach), and as such should reflect a European vision on what constitutes contractual fairness between consumers and suppliers. This same reasoning is required when dealing with the CESL, as will be shown later.
Even though most of the EC interventions involving contractual good faith have been largely confined to consumer contracts, it is worth mentioning that the notion of good faith does have some commercial application outside this specific sphere. Pursuant to the EC Council Directive 86/653/EEC,77 and as transposed under English law in the Commercial Agents Regulations 1993,
commercial agents engaged in selling goods and their principals are required to act towards each
72 See for instance, Teubner, Legal Irritants: Good faith in British Law or How Unifying Law Ends Up in New
Divergences, 1998, 61 MLR, p.11-32
73 House of Lords 25-10-2001 [2001] UKHL 52 [online] 74 Ibid, para.17
75 Ibid 76 Ibid
77 Council Directive (EC) 86/653/EEC on the coordination of the laws of the Members States relating to self-employed commercial agents, OJ L382, 31.12.1986
17 other “dutifully and in good faith”. As such, commercial agents, defined under the regulation,78
have to undertake proper efforts to negotiate and conclude transactions entrusted to him by his principal, communicating all necessary information and complying with the principal’s reasonable instructions.79 From the principal’s perspective, the duty of good faith materialized in the necessity to provide the agent with documentation and information, also providing the agent with a reasonable notification period regarding the principal’s expected volume of transactions and his acceptance or refusal of the transactions.
As a result of the efforts to harmonize contract law within the EU, good faith penetrated within the English legal system. The level playing field which the EU aims at, has not necessarily been accepted with great joy in England, and the use of good faith was mainly confined to relationships between businesses and consumers. The CESL goes further; not only good faith and fair dealing becomes a principle, but it will also affect relationships in B2B.
Chapter 2: Good faith and fair dealing under the CESL
2.1 Organization and provisions related to the concept
To begin with, “good faith and fair dealing” is given a prominent place in the instrument. It sits between the principles of freedom of contract and cooperation, and as such it is accorded the status of ‘general principle’.80 Good faith and fair dealing only follows the first principle of freedom of contract. Thus, having stated that “parties are free to conclude a contract and to determine its contents, subject to any applicable mandatory rules”,81 Article 2 stipulates that “each party has a
duty to act in accordance with good faith and fair dealing”; not only the duty is mandatory,82 but
the party in breach of that duty may also be precluded from exercising a right, remedy, or defence, which he otherwise would have exercised; the so called ‘shield function’.83 In addition, the party
78 Regulation, sec.2(1): a self-employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of another person (the “principal”), or to negotiate and conclude the sale or purchase of goods on behalf of and in the name of that principal
79 Regulation, sec.3 80 CESL, arts.1-3 81 CESL, art.1 82 CESL, art.2(3) 83 CESL, art.2(2)
18 in breach is liable for damages for any loss thereby caused to the other party; the ‘sword function’.84 The duty is applicable both in context of an established contractual relationship and
for the pre-contractual phase, but in the latter case, only if a contract is actually concluded under the CESL.
It seems that a hierarchy is established among the principles: if freedom of contract certainly sits on the first place, its application is nevertheless restricted by any applicable mandatory rules. This is precisely what constitutes the duty to act in accordance with good faith and fair dealing. The definition of good faith and fair dealing85 makes it clear that both parties are required to act
honestly. Moreover, each party must act openly and have consideration for the interests of the other party; the extent with which such duty operates is quite ambiguous. It seems that one party should not act out of pure malice or ignorance toward the other party’s situation in pursuit of its own interests. On the other hand, Article 3 states that parties are obliged to cooperate “to the extent that can be expected” in the performance of their contractual obligations. This would mean that a party is not expected to go against its own interests. This obligation is elevated to the rank of general principle and should be distinguished from the principle of good faith and fair dealing in Article 2.
Good faith, as a general principles also plays an important role regarding the application of the CESL’s provisions. In this respect, Article 4 regulates the interpretation of the CESL’s provisions and determines how the gaps within the scope should be filled. It states that the instrument should be interpreted autonomously and in accordance with its objectives and underlying principles, as it is always the case in EU legislation. This is based on the idea that a true uniformity of legal outcomes cannot be achieved if courts in different countries give different meanings to the provisions of the unified law. Nothing new here, since the Court of Justice has held for more than forty years that: “Terms used in Community law must be uniformly interpreted and implemented
throughout the Community, except when an express or implied reference is made to national law”.86 This technique requires that the methods to interpret the instrument must be developed
without reference to national interpretative approaches. In other words, good faith in the CESL cannot be interpreted through the lenses of national private laws.
84 Damages are recoverable for any loss described in Reg-CESL, art.2(C) and CESL, chap.16 85 Reg-CESL, art.2(b)
19 Most importantly, it is quite impressive how the drafters tried to restrict the random application inherent to such a subjective concept. Indeed, Recital 31 provides some important guidance as to the recourse to use a principle of good faith, stating that “as some rules constitute specific manifestations of the general principle of good faith and fair dealing, they should take precedent over the general principle. The general principle should not be used as a tool to amend the specific rights and obligations of parties as set out in the specific rules”. In other words, the general duty to act in accordance with good faith applies only when there are no other specific provisions in the CESL itself.87 Specific uses of good faith can, for instance, justify the exclusion of unfair contract
terms,88 and should provide guidance on the way parties should behave in the execution of their obligations, by encouraging them to act in a reasonable and diligent manner.89
2.2 Specific uses of good faith in a particular context
What is worth mentioning, is how good faith plays a role at the pre-contractual stage. In a nutshell, it justifies the duty to disclose information about goods and related services in B2B,90 (though not B2C contracts, where a more specific approach is taken, following the legislative acquis),91 and it polices the parties’ consent in cases of mistake and fraud.92 In certain situations, failure to disclose information might amount to fraud where “the other party has induced the conclusion of the contract by […] fraudulent non-disclosure of any information which good faith and fair dealing, or any pre-contractual information duty, required that party to disclose”. Particular attention should thus be devoted to the criteria laid down in Article 23(2) in order to determine whether good faith and fair dealing require a party to disclose particular information. Consequently, what is required for making a binding contract is a genuine expression of true autonomy. Mere formal freedom does not suffice. It is only in the absence of mistake, fraud, unfair exploitation etc., that a party is bound to a contract.
87 An express reference to ‘good faith and fair dealing’ is found in CESL, arts.23(1), 48(1)(b)(iii), 49(1)(3), 59(h), 68(1)(c), 83(1), 86(1)(b), and 170(1): as such, they constitute ‘specific manifestations’ of the general principle of good faith and fair dealing and take precedent over the general principle
88 CESL, chap.8
89 For instance, CESL, arts.74, 77, 97, 149 which refer to the notion of ‘reasonableness’
90 CESL, art.23: “the supplier has a duty to disclose by any appropriate means to the other trader any information concerning the main characteristics of the goods […] to be supplied […] and which it would be contrary to good faith and fair dealing not to disclose to the other party”
91 CESL, arts.13-20 92 CESL, arts.48-49
20 Regarding control on unfair contract terms, Chapter 8 distinguishes between the issues of unfair contract terms in B2C and B2B. In any case, contract terms not individually negotiated (following the meaning in Article 7) are generally subjected to an unfairness test.93 In B2C, the provisions of Section 2 (arts.82-85) are clearly built on the content of the UTD. As such it benefits from the interpretative certainty resulting from the CJEU’s decisions. The condition is the same, namely that the term “has not been individually negotiated” and that it causes “a significant imbalance in the parties’ rights and obligations […] to the detriment of the consumer, contrary to good faith and fair dealing”. It seems that the notion of consideration toward the other party’s interest is predominantly targeted. When assessing whether a term is unfair, the court should consider whether the term is predominantly one-sided that it does not reflect proper consideration of the consumer’s interests. Nevertheless, the unfairness test might appear clearer in the CESL than in the UTD for two reasons: firstly, Article 83(2) provides a list of criteria to be taken into account when assessing the fairness of a term, and secondly, Article 84 provides a black list of eleven contract terms which are always unfair, while Article 85 presumes that 23 contract terms mentioned therein are unfair. By contrast, in B2B, such lists are not applied and Article 86(1) postulates that a term not individually negotiated is unfair when contrary to good faith and fair dealing, its use grossly deviates from good commercial practice. In both B2B and B2C an unfair term is not binding on the other party.94
Finally, the specific uses of good faith in particular contexts do not exhaust the CESL’s resort to open-ended concepts which may be related to good faith and fair dealing.95 For instance by resorting to the notion of ‘reasonableness’, the CESL aims at providing guidance on the manner parties have to deal with each other in the performance of their contractual obligations: “Reasonableness is to be objectively ascertained, having regard to the nature and purpose of the contract, to the circumstances of the case and to the usages and practices of the traders or professions involved”.96 The test is objective in the sense that the expectations will be assessed on
what a reasonable person in the particular situation could reasonably expect, given the usages and practices of the trades or professions involved. As such, the reference to commercial practice might provide a source of norms about how to be a good contracting party. For instance, regarding the
93 CESL, arts.83(1) in B2C and art.86 in B2B
94 CESL, art.79: other contract terms remain binding if the contract can be maintained without the unfair contract term. 95 See Dannemann, note 15, p.32
21 seller’s obligations when the buyer does not accept the goods or digital content, it states that: “A seller who is left in possession of the goods or digital content […] must take reasonable steps to protect and preserve them”.97 A similar obligation is imposed on the service provider who “must take reasonable precautions in order to prevent any damage to the goods or the digital content, or physical injury or any other loss or damage in the course of or as a consequence of the performance of the related service”.98
2.3 The position of the UK toward the CESL and successive amendments
Unsurprisingly, the UK Government was vehemently skeptical towards the usefulness of the CESL in general, partly based on the criticism that fairness seems to have been prioritized over certainty.99 The critique concerning uncertainty seems to reflect a clear lack of trust in English judges to deal with the notion of good faith and, on the other hand, the capability of the CJEU to control the interpretation of such a concept. In this respect, it might be advisable to remind domestic judges not to lose sight of the EU origin of the instrument and the interpretative peculiarities flowing from this.100 The general requirements to autonomously interpret the CESL should not prove to be problematic for the courts in England. They have long acknowledged the need to an autonomous interpretation to EU law.
The other criticisms addressed against the principle of good faith were, as usual: the vagueness of its definition and the fact that parties have to take each other’s interests into account.101 Consequently, while this might be appropriate in B2C, where, as a result of European initiatives, these concepts are already used in some legislation, it is seen as highly burdensome in B2B.102 Article 2 is also clearly seen as undermining freedom of contract, which is a cornerstone in commercial relationships, because it restricts the ability of parties to completely rely on their contract terms. As such, there is a fear that this would provide courts powers to rewrite the bargain between parties. Moreover, the fact that Article 2 constitutes an independent basis of liability,
97 CESL, art.97(1) 98 CESL, art.149
99 Ministry of Justice, the Department for Business, Innovation & Skills, Scottish Government and the Department for Finance & Personnel Northern Ireland. A Common European Sales law for the European Union –A proposal for a Regulation from the European Commission: The Government Response, 2012
100 See Dannemann, note 15, p.110
101 Reg-CESL, art.2: ‘consideration for the interest of the other party to the transaction or relationship in question’ 102 See The Government Response, note 97, p.37
22 regardless of the other provisions of the contract, raised considerable concerns: it is uncertain and its effects are unpredictable. Article 2 is thus at odds with the nature of commercial contracts, whereby parties effectively apportion risk in the event of breach.103
On 25 September 2013, the European Parliament Committee on Legal Affairs published its report which proposed to amend the CESL.104 These amendments were backed up by the European
Parliament on 26 February 2014, which adopted its position in first reading,105 following a vigorous debate.106 As a result, the UK’s concerns previously presented were addressed and some
provisions related to the principle of good faith and fair dealing were amended, as highlighted in bold (in the following three paragraphs) with deletion showing the previous draft.
First of all, the definition of good faith and fair dealing was amended as follows:
“(fe) ‘good faith and fair dealing’ means a standard of conduct characterised by honesty,
and openness and, in so far as may be appropriate, reasonable consideration for the interests of the other party to the transaction or relationship in question”.
Clearly, and as seen previously, the notion of consideration toward the other party was controversial, especially in B2B, and thus some limitations were provided. Consideration takes place only in so far as is appropriate and is further limited to consideration which can be qualified as ‘reasonable’. The new definition is thus designed to emphasize how consideration towards the other party does not prevent parties from driving a hard bargain, particularly in B2B, while no party should abuse its rights. Furthermore, reasonableness is “to be objectively ascertained, having regard to the nature and purpose of the contract, to the circumstances of the case and to the usages and practices of the trades or professions involved”.107 The addition of ‘reasonable’ to what a party
is ‘expected’ to do, will thus narrow down the scope for interpretation; it is aimed at excluding
unrealistic expectations which could possibly arise.
Some additional information has been brought in Recital 31 where the ‘general’ principle of good faith is explained as requiring “a standard of conduct which ensures an honest, transparent and
103 Ibid
104 See European Parliament Committee on Legal Affairs, note 10 105 See European Parliament Legislative Resolution, note 9
106 See Common European sales law, the plenary debate in the European Parliament on 26.02.2014 [online via: europarl.europa.eu]
23 fair relationship”. While a certain frankness is expected from parties “the principle as such should not give rise to any general right to damages”. The right to damages can only operate in ‘very specific cases’, when it constitutes violation of a specific manifestation of the general principle of good faith: namely, in cases of fraud or non-performance of an obligation created by implied terms.108 These amendments are a clear response to the UK Government which heavily
criticized the fact that a violation of the general principle of good faith and fair dealing could be
actionable in its own right.
Finally, the change is also relevant for the unfairness test in both B2C and B2B, which is, in turn, also influenced by the new definition of good faith. Regarding unfairness control in B2B, the new definition is designated to mitigate the related concern that parties to a contract might not be allowed to follow their own interests when they negotiate. As a result, an unfair term supplied by one party will not bind the other party when it represents an abuse of rights.109 On the other hand, Article 86(b) has been amended, and the non-individually negotiated terms would be assessed on whether they grossly deviate from “customary commercial practice, contrary to good faith and
fair dealing”, and no longer ‘good commercial practice’ as in the initial draft. The drafters
intended to align good faith with customary practices by providing a yardstick of fair trading practices. When one party would deviate from these to an unreasonable extent, the terms will
become unenforceable.
On the overall, from an English perspective, the amendments proposed by the EP should be applauded. The amendments are clearly designed to restrict the far-reaching application of the principle of good faith, especially in B2B. The definition underlines, even more than the initial draft, the fact that contracting under the CESL does not amount to altruism wherein parties would have to favor the other party’s interests to the detriment of their own. Furthermore, the sword function has also been largely abandoned. Ultimately, despite the UK’s influence in modifying the CESL’s provisions, good faith is meant to stay and does not seem hampered by the amended draft. Good faith definitely remains a useful tool within the European community. Indeed, and as underlined by the Explanatory Statement, while the principle of good faith and fair dealing is a prominent tool to find equitable solutions on a case-by-case basis, it brings concerns from a
108 Reg-CESL, rec.31 as amended by the EP
109 See European Parliament Committee on Legal Affairs, note 10, section 5 of the Explanatory Statement: “The change is also relevant for Article 86 on B2B unfairness controls and should mitigate the related concern that parties to a contract might not be allowed to follow their own interests when they negotiate”
24 common law perspective “where this principle is not known”.110 Such a stereotypical argument
conflicts with the later view held by Leggatt J., who states that “In refusing, however, if indeed it
does refuse, to recognize any such general obligation of good faith [, English law] would appear to be swimming against the tide”.111
Chapter 3: Overcoming the obstacles
3.1 Yam Seng v CESL: potential interface issues
The case concerned a distribution agreement concluded between Yam Seng Pte Limited (the plaintiff), a company incorporated in Singapore, and International Trade Corporation Limited (the defendant). The written agreement was subjected to English law and jurisdiction. Under the contract, ITC granted certain rights to Yam Seng to distribute specific branded products in specified territories. Following a breakdown in the relationship, Yam Seng terminated the agreement and brought proceedings before the English High Court. The plaintiff claimed damages for various breaches of the agreement, including: failing to ship orders promptly, failing or refusing to supply all the specified products, undercutting prices and providing false information.
The court found that the plaintiff was entitled to terminate the agreement for repudiatory breach on the grounds that the agreement contained an implied term that the parties would deal with each other in good faith and that the defendant was in breach of that term in two respects: firstly by providing Yam Seng with false information on which it knew that the plaintiff would rely on in marketing the products, and, secondly, by authorizing sales by third parties in the markets of territories covered by the agreement at a lower retail price than the agreed duty-free retail price. Leggatt J. starts his reasoning by acknowledging that English contract law does not generally recognise a duty to perform the contract in good faith.112 After expressing some doubts on whether English law was ready to recognise a requirement of good faith as a duty implied in law into all commercial contracts, Leggatt J. saw, however, no difficulty in implying a contractual duty of
110 Ibid
111 Yam Seng, para.124 112 Ibid, para.120
25 good faith into any commercial contract, based on the presumed intention and shared understanding of the parties, using the established methodology for implying terms into contracts.113 He further adds that the presumed intention of the parties has to be assessed objectively; “whether in the particular context the conduct should be regarded as commercially
unacceptable by reasonable and honest people”.114
What is remarkable in this decision, is the lengthy analysis in which Leggatt J. challenges the traditional view that a doctrine of good faith is unworkable.115 He tackles the traditional arguments raised by opponents to a doctrine of good faith and fair dealing, by proving that such a concept does not contradict the technical reasoning of a common law judge, it does not necessarily undermine freedom of contract, and it is possible to define the ‘indefinable’.
First of all, by holding that the duty to perform in good faith depends on the factual matrix of the case and on the rules of construction,116 its recognition is entirely consistent with the case-by-case approach favored by common law. Similarly, the EP also found that the same function is fulfilled by the principle of good faith, which constitutes a prominent tool to find equitable solutions on a case-by-case basis.117 Given the legal methodology, English courts seem uniquely suited to the
task.
Cleverly, Leggatt J. reconciles freedom of contract and the duty to perform in good faith. Indeed, the basis of the duty is the presumed intention of the parties and the meaning of their contract. As a result, implying such a duty does not restrict their contractual freedom in pursuing their own interests, but gives expression to what they implicitly agreed to.118 Leggatt J. premised the duty of good faith on the presumed intention of the parties to bind themselves in order to cooperate to their mutual benefit.119 This reflects a striking move away from traditional English law which presupposes the parties’ relationship to be essentially adversarial in substance. On the other hand, this vision of contractual relationships aligns with the CESL, which not only imposes a duty on the parties to act toward each other in good faith, but also imposes a model of ‘co-operation’ in contractual relationships. Parties are obliged to cooperate for the performance of their contractual
113 Ibid, para.131 114 Ibid, para.144 115 Ibid, para.152
116 Ter, Good Faith in the Performance of Commercial Contracts Revisited, SAcLJ, 2014 26, p.116 117 See European Parliament Committee on Legal Affairs, note 10, section 5 of the Explanatory Statement 118 Yam Seng, para.148
26 obligations to the extent that can be reasonably expected. Nonetheless, a further consequence of freedom of contract is that parties are free to modify, and even exclude, the scope of the duty by providing express terms in the contract. This is clearly impossible under the CESL where the parties cannot derogate from the principle, even partially. As such, it clearly restricts freedom of contract since parties cannot expressly derogate from this duty. On the other hand, and as noticed by Leggatt J., it would not make so much sense for contracting parties to make use of their contractual freedom in order to expressly exclude such a duty.120 From an English perspective, it
remains however equivalently important, that if they wish, parties can exclude the application of a duty to perform the contract in good faith. Consequently, if the CESL were to be further amended in order to meet England’s expectations, it should probably allow parties in B2B the possibility to exclude the application of Article 2 when expressly stipulated.
Finally, when faced with the task of finding an acceptable definition of good faith in English law, Leggatt J. reiterates the position that under English law, a duty to negotiate in good faith in commercial contracts remains unnecessary, while in the case at hand, the parties had already entered into a contract and thus had undertaken obligations to each other.121 As a result, a duty to act in good faith may arise once the parties have entered into a contract, not during the negotiating phase (which is already the case under the CESL).122 In addition, once the scope of application is clearly delimited, Leggatt J. divides good faith into the twin duties of ‘honesty’ and ‘fidelity to the parties’ bargain’.123
Regarding the concept of ‘honesty’, which is also one of the characteristics of good faith and fair dealing under the CESL, Leggatt J. provides for three concrete examples where the core value of honesty is breached.124 Firstly, once the contract has been concluded, parties cannot deceive the other party by misrepresenting the facts.125 Secondly, if A gives information to B knowing that B is likely to rely on the information, and A believes the information to be true at the given time, but afterwards discovers that the information was, or has since become, false, a duty of honesty may
120 Ibid, para.149
121 Ibid, para.122
122 Because pre-contractual liability cannot become relevant with an optional regime that only becomes applicable when a contract is actually concluded
123 Ibid, para.137-140 124 Ibid, para.141
125 Ibid, “by making a statement of fact intending that other person to rely on it while knowing the statement to be untrue”
27 be breached if A does not disclose the proper state of affairs to B.126 Finally, dishonesty may arise when a party deliberately avoids giving an answer, or provides an evasive one, in response to a request for information.127 Honesty is exemplified a contrario. Stated positively, honesty can be seen as requiring parties to carefully assess the veracity and quality of the information provided to each other, while refraining from deceit. As a self-evident result: “it seems quite difficult to
envisage any contract which would not reasonably be understood as requiring honesty in its performance”.128
As the judge acknowledged, however, what is required by good faith is sensitive to context. This is also the case in the CESL, where a different degree of diligence is expected from parties in B2B and B2C.129 Leggatt J. further distinguishes two types of relationships: on the one hand, long-term or ‘relational’ contracts (such as the distributorship agreement in Yam Seng), where a high degree of communication and cooperation, based on mutual trust and confidence, is required (that is assumed to be the mutual understanding of the parties) and necessary to give business efficacy. Thus, in this situation, a failure to disclose certain information in performance of the contract might amount to bad faith. By contrast, such contracts are distinguished from shorter term contracts, or contracts involving a simple exchange, where it is unlikely that a duty to disclose information in performance of the contract would be implied.130 Thus, duty of honesty seems rather to be an exception than the main rule.
In addition, Leggatt J. states that the duty of honesty also imposes an obligation on parties to comply with “other standards of commercial dealing which are so generally accepted that the
contracting parties would reasonably be understood to take them as read without explicitly stating them in their contractual document”.131 As such, honesty contains a duty to engage in business that is both proper and commercially acceptable.132 Similarly, under the CESL, and as underlined in Recital 31, when assessing the requirements resulting from the general principle of good faith and fair dealing: “In transactions between traders, good commercial practice in the specific
126 Ibid 127 Ibid
128 Ibid, para.137
129 Reg-CESL, rec.31 as amended by the EP: “The concrete requirements resulting from the general principle of good faith and fair dealing should depend, amongst others, on the relative level of expertise of the parties and should therefore be different in B2C transactions and in B2B transactions”
130 Yam Seng, para.142 131 Ibid, para.138 132 Ibid
