Christina Perry talks to us about her new book, Good Faith in Contract Law, published by Edward Elgar (2024).
Combining detailed legal analysis with commercial guidance, this book examines the law relating to good faith in commercial contracts and the practical, procedural and legal issues that arise in respect of this often contentious area. Whilst there is no general duty of good faith in contracts in England and Wales, there are many sub-categories of contracts and related agreements in which issues of good faith may be present, and/or at a minimum must be carefully considered. The book explores the issues of express and implied terms in common law and civil law contracts, duties in negotiation, relational contracts, Braganza duties of rationality, insurance contracts, employment contracts, partnership and agency agreements, and consumer contracts.
The book compares various areas of the law which are not often studied together. It provides in-depth evaluation of recent case law in relation to good faith in commercial contracts. It discusses the obligation to exercise contractual discretion in good faith, following the leading case of Braganza v BP Shipping Ltd [2015]. It assesses the treatment of good faith in contracts in common law jurisdictions such as the United States, and in civil law jurisdictions such as France and Germany.
I was fortunate enough to sit on the Financial Markets Law Committee’s Working Group on Good Faith in Financial Contracts from 2021-22. I had the very great honour of learning from many eminent colleagues on that group during that time. That is where the idea for this book began. Of course, good faith has probably been the single most discussed subject in English contract law over the past decade, since the enormously significant judgment of Leggatt J (as he then was) in Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB). As an initially US-trained lawyer, I am perhaps more sympathetic to the inclusion of a good faith duty in commercial contracts than many English law academics and practitioners. In writing this book, I have come to appreciate anew its enormous complexity, both in common and civil law jurisdictions, and across many different areas of commercial practice.There have been a number of books and journal articles dedicated to the idea of good faith in commercial contracts, both before and after the Yam Seng decision. However, most of those have focused either on a purely academic audience or an audience made up predominantly of practitioners. This book makes an effort to be of use to both audiences and I hope very much that will be the case. I have attempted to set out the law itself as clearly as possible. I hope that I have not neglected theoretical concerns, but the primary focus of the book is intended to be of use to those who wish to understand how a situation is likely to be interpreted, in light of the law as it is at present.
This book addresses the law relating to good faith in contracts and other agreements, and the practical, procedural and legal issues that arise in respect of this growing and often contentious area of law. This book is designed to assist lawyers negotiating and drafting various types of contracts and other agreements in respect of express and implied terms, and academics and students engaged in the study of contract law. Given the explosion of case law in England and Wales devoted to the issue of good faith over (roughly) the past decade, it is clear that an understanding of good faith is crucial to an understanding of the operation of English contract law and the law of other agreements, such as insurance, partnership and agency agreements.
It has long been established that there is no general doctrine requiring parties to act in good faith in contract law in England and Wales. English law has instead developed, as Lord Justice Bingham stated, ‘piecemeal solutions in response to demonstrated problems of unfairness’.[1] However, good faith affects commercial contracts in a number of ways, including with respect to the Braganza duty (duty of rationality), express obligations to enter into a contract in good faith, and implied good faith obligations, particularly with respect to relational (long term) contracts. This latter point has been the subject of a number of recent cases, such as the High Court’s initial decision in Yam Seng v International Trade Corporation (Yam Seng)[2] and the Supreme Court’s recent decision in Pakistan International Airline Corporation v Times Travel,[3] in which Lord Hodge stated that ‘English law has never recognised a general principle of good faith in contracting’.
In addition to the general commercial principles explored above, the book discusses duties of good faith arising during contract negotiations, and those affecting particular types of contracts, such as agency agreements, insurance contracts, employment contracts, partnership agreements, consumer contracts and those affecting the financial markets. The book also includes comparative analysis with respect to other jurisdictions, including the United States, Canada, Australia, France, Germany, and Spain.
The term ‘good faith’ is widely used in contract law in virtually all civil and common law jurisdictions. However, there is no generally accepted meaning of the term even within the confines of either the civil law or the common law, let alone universally. It can be argued that a requirement to act in good faith, within the confines of contract law, means to act honestly, and/or in a way that is fair and/or reasonable in the circumstances in which a contractor is operating. In Director General of Fair Trading v First National Bank[4] Lord Bingham found that good faith ‘looked to good standards of commercial morality and practice’.[5]
In the United States, the comments to the Restatement (Second) of Contracts require that ‘[e]very contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement’.[6] The Commentary by the American Law Institute (ALI) describes these duties as ‘good faith performance or enforcement of a contract emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the other party’ and ‘[good faith] excludes a variety of types of conduct characterized as involving “bad faith because they violate community standards of decency, fairness or reasonableness’.[7] The Uniform Commercial Code (UCC) defines good faith as ‘honesty in fact and the observance of reasonable commercial standards of fair dealing’.[8]
In civil law systems, the requirements in respect of good faith are enshrined within the relevant statutes. Article 1104 of the French Civil Code states: ‘Les contrats doivent être négociés, formés et exécutés de bonne foi’ (Contracts must be negotiated, formed and executed in good faith).[9] The German Civil Code, the Bürgerliches Gesetzbuch (BGB) states, in § 242: ‘Der Schuldner ist verpfichtet, die Leistung so zu bewirken, wie Treu und Glauben mit Rücksicht auf die Verkehrssitte es erfordern’ (An obligor has a duty to perform according to the requirements of good faith, taking customary practice into consideration).[10] The Spanish Civil Code provides, in Article 1258: ‘Los contratos…obligan, no sólo al cumplimiento de lo expresamente pactado, sino también a todas las consecuencias que, según su naturaleza, sean conformes a la buena fe, al uso y a la ley’ (Contracts… bind the parties, not just to the performance of the matters explicitly covenanted therein, but also to all consequences which, according to their nature, are in accordance with bona fide, custom and the law[11]).
There are many other means by which the behaviour of contractors is regulated, in both civil and common law jurisdictions. The doctrine of estoppel is particularly significant for English law, as this is not dissimilar to the civil law doctrine of ‘venire contra factum proprium’, which is in German law, for example, aligned with the good faith requirement of BGB §242. Other areas of English law in which the behaviour of contractors is regulated in ways that might be similar to good faith in other jurisdictions are misrepresentation (regulated both by the torts of fraud and negligence, and by statute), implied terms, the operation of exclusion clauses, economic duress, and undue influence.
In contrast to the law of other jurisdictions, such as New York, France and Germany, there is no generally applicable duty of good faith in English law. This is particularly significant in the negotiation of contracts. In Walford v Miles,[12] Lord Ackner said, ‘the concept of a duty to carry on negotiating in good faith is inherently repugnant to the adversarial position of the parties when involved in negotiations’. However, where there are express obligations to negotiate documents in good faith (not uncommon in financing trans- actions, i.e., with respect to commitment letters attaching term sheets), the courts have come to varying conclusions. In Petromec Inc v Petroleo Brasileiro SA Petrobas[13] the Court of Appeal indicated that in certain circumstances, an express obligation to negotiate in good faith could be binding. However, in more recent lower court decisions such as Barbudev v Eurocom Cable Management Bulgaria,[14] Dhanani v Crasnianski,[15] and Shaker v Vistatjet Group Holding SA,[16] the courts declined to enforce the agreement to agree, on the grounds that the obligations were too uncertain. However, the courts are often willing to uphold an agreement to negotiate in good faith in a binding agreement, if upholding the obligation will permit the parties to retain an agreement rather than abandon it, as can be seen in Associated British Ports v Tata Steel UK Ltd[17] and Brooke Homes (Bicester) Ltd v Portfolio Property Partners Ltd.[18]