Doubting Good Faith, 11 NZBLQ 426

11 NZBLQ 426

New Zealand Business Law Quarterly

Paper

Doubting Good Faith

Michael Bridge
Professor of Law, University College London

Copyright © 2005 by Brookers Ltd; Michael Bridge

This paper doubts the need for a general, legally imposed duty of good faith and fair dealing in English
contract law. It explores the meaning and implications of such a duty in relation to the formation, performance,
and enforcement of contracts, asking, with the use of specific examples, how “good faith” might apply in each
of those contexts. The author also briefly considers the future of English law in a European Union whose law is
driven primarily by civil law influences and the role that good faith might play in the harmonisation of
transnational law. He asks whether English law can survive in its present form under the weight of those
influences.

1 INTRODUCTION

From time to time, the call goes out that good faith should become a recognised category of the common law of
contract.1 That simple statement, with all of its ambiguity, captures much of the difficulty of this intractable
topic that we call good faith. It gives rise to a number of questions.

First, there is the question of what good faith means. So far as it surpasses mere honesty, how much further does
good faith go into the realm of fair dealing? Does it compel the suppression of self-interest? If one accepts that
fiduciary obligations are not absolutes, but rather of varying content, 2 do all contracts, in consequence of a good
faith requirement, more or less give rise to fiduciary obligations? Does a duty to act in good faith lay down a
subjective or an objective standard of behaviour? Can an improper motive invalidate contractual behaviour
otherwise lawful? Is good faith just another way of expressing reasonableness, which the common law
recognises at frequent intervals though not in all contexts?

Secondly, what does it mean to say that we should recognise good faith? Should good faith amount to a
thematic subject cutting across established categories, or chapters, of contract law, such as misrepresentation
and contractual interpretation? If so, it would form part of the backcloth of contract law, in the same way as the
principles of pacta sunt servanda, freedom of contract, and the protection of contractual expectations. One
consequence of this thematic approach is that, like these other principles, good faith would have to yield to
necessary exceptions. It might amount to little more than a moral *427 compass guiding the development of the
law or, if not achieving even the guiding effect of a compass, act as a ship’s log in showing how the law has
developed after the fact.

A more ambitious recognition of good faith would be to treat it as a category of contract law in its own right, in
which subcategories of interpretation and implied terms might be present. The vast subject of good faith in
German contract law, clustered around §§157 and 242 of the German Civil Code, cannot be presented without
organisation and subdivision. If we went down this road, we should have to consider how such a reorganisation
of contract law might be accomplished in a non-codified system of law or what measure of codification or

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 1

restatement might be necessary to accommodate good faith. More ambitious still, and going beyond taxonomy,
would be to launch good faith into the common law of contract with the aim of reforming and recasting the
values of contract law. Some theorists have seen good faith as an engine for the introduction of community
values -- whatever these might mean -- into contract law: if the State provides the apparatus for implementing
contracts, then it can stipulate on what terms it will allow such implementation to occur. If the State were to
insist upon the incorporation of good faith, then this would suggest that the obligatory requirements of good
faith might not be subject to exclusion and limitation clauses. Redress for breach might in addition not be
contained within the limits of compensatory damages. The recognition of good faith as a category in its own
right has massive implications for the role of the judge and the future of contract law. Anyone seriously
interested in arguing the case for good faith must have a very clear idea of why good faith as a separate category
of contract law is needed and what practical changes its recognition would bring about. It is not obvious to me
that the community of good faith advocates are anywhere near to being united on the why of the matter, or
indeed anywhere near agreement on the questions that have to be asked.

Thirdly, what do we mean by the common law? The abolition of appeals to the Privy Council amounts to a
formal recognition that the universality of the common law has been ruptured. Can it be assumed that what is
good for English common law is equally good for the common law in Australasian countries? The influence of
transnational commercial contracts on the development of English contract law has been great but incalculable.
Has it skewed the development of an English contract law that might have evolved in a different form to deal
with a daily fare of contract disputes more typical of those coming in front of Australasian courts? Despite this
necessary geographical differentiation, it remains difficult to avoid universal references to the common law,
which can be justified on the ground that the differences among English, New Zealand, and Australian law are
very much less than the features that unite them, notably the philosophy and method of a shared law.

A further aspect of the meaning of common law concerns the law that is administered in the courts and the law
that is administered through alternative dispute settlement procedures, such as arbitration. Although the
confidentiality of arbitration3 renders exact comparisons difficult, the greater propensity of arbitrators to find
business-sense solutions to disputes,4 coupled with the diminishing judicial controls on the substance of the law
that they apply,5 poses hard questions about the plurality of law within a given country. My focus therefore has
to be on the law as administered in the courts.

*428 Fourthly, what do we mean by contract law? Does our concern embrace the formation of contracts as well
as their performance?6 Furthermore, are we happy to continue with the organising simplicity of a unitary
contract law or should we confront the reality that there are as many contract laws as types of contract? The law
of employment contracts, for example, departs in a number of important ways from general contract law. Would
the introduction of a general standard of good faith, modulated to fit various contractual environments, provide
merely a spurious semblance of unity in contract law? By types of contract, I refer not just to the particular
transaction -- the sale of a business as opposed to a drycleaning contract -- but also to the formality and length,
and the precontractual involvement of legal advisers -- for example, a multicurrency syndicated loan, where the
legal ground is thoroughly prepared, versus a letter of credit contract, where it is not.

As a sceptic when it comes to good faith, I should summarise my own previous utterances on the subject. In the
first half of the 1980s, my concerns included the startling variety of academic views about the meaning and
scope of good faith; the reductionist character of a doctrine that seemed to add nothing to existing tools and
principles of the common law, such as estoppel and implied terms; and the likely injection of uncontrolled and
uncontrollable judicial discretion into the legal system.7 Unbridled judicial discretion is of doubtful legitimacy
and unsettles commercial expectations.8 More recently, I have expressed concern about the procrustean
character of a one-size-fits-all doctrine of good faith and about the disruptive effect that it would have on
contractual certainty in market-sensitive contracts.9 The City of London in its financial dealings accounts for
just over 5 per cent of the United Kingdom gross domestic product; the figure rises to just over 8 per cent if
supporting matters, such as legal services and insurance, are included. It is very clear indeed that the actors in
this marketplace attach a very high value to legal certainty. Contract law in the markets especially is too
important and too complex to be subjected to a vague doctrine of uncertain scope.

Yet, even these concerns might seem overstated. A good case can be made for the introduction of good faith as
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Doubting Good Faith, 11 NZBLQ 426

amounting to no more than a rebadging of what courts already do. Advocates of good faith might argue here
that an explicitly applicable standard of good faith would allow courts to do directly what otherwise they would
achieve by subterfuge or contrivance.10 The response to this argument is to point to the lack of any need to
introduce good faith if it were not going to change the practical outcomes of contractual disputes. Writing
extrajudicially, Lord Steyn has remarked: “But I have no heroic suggestion for the introduction of a general
duty of good faith in our contract law. It is not necessary. As long as our courts always respect the reasonable
expectations of parties our contract law can satisfactorily be left to develop in accordance with its own
pragmatic traditions.”11

*429 In this paper, I shall explore the meaning and implications of good faith, assess what it might add to
existing doctrines and principles of contract law, consider its merits as a driving influence behind the
developments of other doctrines and rules (English law does not stand still), and ask how it might apply in the
different cases of contractual formation, performance, and enforcement. So far as it concerns formation and
performance, this investigation will be conducted primarily against the background of an examination of a
number of recent cases on contractual formation, implied terms, and interpretation. The good faith doctrine has
sometimes suffered because of a lack of context and specifics.

The subject of contractual enforcement lies at the heart of concerns expressed about the capacity of good faith
to upset contractual certainty and risk calculation. This is because the introduction of good faith here assumes
that a party has certain contractual rights but that these rights, for reasons of good faith, should not in the
circumstances be exercised. I shall look in particular at one statutory attempt to prevent the exercise of
termination rights, expressed in terms similar to good faith, 12 and at whether it would be appropriate to introduce
a general principle that rights might not be enforced so far as their enforcement would amount to an act of bad
faith.

Finally, I shall make reference to the future of English law in a European Union whose law is driven primarily
by civil law influences and to the role that good faith might play in the harmonisation of transnational law. Can
English law survive in its present form under the weight of those influences?

2 MEANING OF GOOD FAITH AND CONTRACTUAL FORMATION

If good faith were confined to its long-standing meaning of honesty in fact, which is the meaning captured in
sale of goods and factors legislation, there would be no debate about the role of good faith in contract law.
Fraud is a vitiating factor, liability for which cannot be excluded in the contract. 13 Taking the approach of the
United States Uniform Commercial Code and Restatement of Contracts (Second), it is not the truck -- “good
faith” -- but the trailer -- “and fair dealing” -- that represents the challenge. What does fairness mean? Faced
with the challenge of defining it, Professor Summers14 took refuge in the excluder analysis of the Oxford
philosopher, John Austin. Good faith was the absence of bad faith, and we all know what bad faith means.
There is an attractive simplicity about this approach, but the support it offers may be less than meets the eye.
The really difficult cases are those where the obligor is passive. Consider these two cases.

2.2 Two Problem Cases

First, there is the famous case of Smith v Hughes15 where, on one possible version of the facts that were never
established, the seller of oats was aware that the racehorse manager wanted old oats and thought that he was
getting old oats. Mere passive acquiescence in the self-deception of another, according to Lord Cockburn, will
not allow that other to avoid the contract. The second case is mentioned by Professor Fried 16 and it concerns the
oil company that, having conducted extensive petroleum surveys, *430 purchases a farmer’s land without
deceiving him17 but without informing him that it has good reason to believe that his land is rich in oil and
therefore worth much more than the oil company is offering. 18

Despite Lord Cockburn’s statement in Smith v Hughes, it is unlikely in the modern age that the seller would be
permitted to retain the benefit of the contract in the event of a finding that he knew that the buyer had no use for

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 3

new oats. This would not be because the sale of goods contract has become one of the utmost good faith or that
the seller has become a fiduciary who has undertaken to act in the interests of the buyer and to repress
self-interest.19 It is more likely that the court would find a representation by conduct that the oats were old or
were usable for the buyer’s purpose. Contracts, especially informal ones, are not concluded by dumb show.
Now, such an outcome could plausibly be criticised by good faith advocates as achieving by indirect means a
result that could be more directly and, in an intellectual sense, honestly by the express invocation of good faith.
The real issue here lies in containing the scope of a general standard of good faith. The case presented here is a
somewhat simple one. The use of accepted tools and principles, such as misrepresentation, sometimes stretched
to the limit of their resources, amounts to a guarantee that courts will not go too far in suppressing the spark of
self-interest that is the driving force in market operations. So long as we wish to retain a commitment to the free
market as opposed to the planned economy, courts have to exercise restraint when dealing with contracting
parties during the bargaining phase of their relationship.

An easier case to handle is that of the oil company. The farmer has acquired the land as agricultural land, has
operated it as agricultural land, and is selling it as agricultural land with a price to match. The oil company has
invested resources in exploring the area, quite possibly taking a risk about the size of oil deposits. Moreover, the
land is being turned over to its highest value use and there seems little prospect of constructing, by disclosure or
otherwise, an artificial bargain that would give the farmer an uplift whilst also rewarding or even compensating
the oil company for its exploration investment. The offer of an overgenerous price for agricultural land would
show the oil company’s hand. It is all very well placing one’s cards face up on the table, as we shall see one
senior English judge advocating,20 but it not a good way to play poker or any other card game for that matter.
The case for disclosure or price adjustment is therefore weak, but the upsetting effect of any introduced duty of
good faith is not inconsiderable. How would good faith apply in a case like that if the oil company were making
a profit greatly in excess of its exploration outlay? Any judicial intervention driving a line between a fair profit
and an excessive profit would call for a rewriting of the contract. 21

Cases of this kind demonstrate a particular sensitivity in the application of good faith in the formation of
contracts. There is no such duty in the American Restatement (Second).22 Lord Bingham, nevertheless, has
stated that English law does not formally recognise good faith but provides piecemeal *431 solutions consistent
with it, in an oft-recited dictum that focuses rather more on contractual formation than it does on performance: 23
“In many civil law systems, and perhaps in most legal systems outside the common law world, the law of
obligations recognises and enforces an overriding principle that in making and carrying out contracts parties
should act in good faith. This does not simply mean that they should not deceive each other, a principle which
any legal system must recognise; its effect is perhaps most aptly conveyed by such metaphorical colloquialisms
as ‘playing fair’, ‘coming clean’ or ‘putting one’s cards face upwards on the table.’ It is in essence a principle of
fair and open dealing ... English law has, characteristically, committed itself to no such overriding principle but
has developed piecemeal solutions in response to demonstrated problems of unfairness.”

It is perhaps no accident that the sharpest judicial rejection of a general doctrine of good faith has been in a
formation case. I refer to the judgment of Lord Ackner in Walford v Miles, where he stated in somewhat
provocative terms that “the duty to carry on negotiations in good faith is inherently repugnant to the adversarial
position of the parties when involved in negotiations”.24 Not merely is Lord Ackner rejecting any suggestion of
the suppression of self-interest and thus of a fiduciary flavour to the parties’ relationship. The parties are not
just at arm’s length but are adversaries.25 Walford v Miles concerned the sale of a business, a type of contract
that is worth exploring in a little detail for the light it throws on disclosure and arm’s length transactions.

2.2 Sales of Businesses

The sale of a business can take place as a sale of the assets, including the goodwill, or as the sale of the share
capital of the company running the business. For present purposes, it does not matter which form of sale is
adopted. Since a business is a complex and unique affair, consisting of a rich blend of different types of
property, human capital, goodwill and market positioning, it does not lend itself to the type of buyer protection
introduced by statutory means in sale of goods contracts in the form of implied terms of quality and fitness. The
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Doubting Good Faith, 11 NZBLQ 426

seller has all the information; the buyer has to take active and rapid steps by conducting a due diligence inquiry
to obtain that information. The law does not impose a positive obligation on the seller to supply information to
the buyer; that would be to convert the contract into one of the utmost good faith. Nor, as Lord Ackner’s words
demonstrate, has the law yielded to the introduction of a general duty of good faith and fair dealing that would
surely impose a duty to inform. Contract practice based upon the will of the parties has rendered contracts of
this type workable by two principal means. First, there is the due diligence inquiry conducted by the buyer’s
lawyers and accountants. Secondly, there is an important feature of the contractual relationship that has
surprisingly been neglected in the general contractual literature. I refer to the practice of giving express
warranties and then cutting down the scope of these warranties by means of a so-called disclosure letter. I shall
discuss this latter feature before reverting to the former feature through a discussion of Walford v Miles26 itself.

*432 The very lengthy precedents used by City lawyers for business sales contain certain warranties of a
standard kind. There are, for example, the standard warranties that the accounts of the target company represent
a true and fair view of its financial position and that there has been no material adverse change in the affairs of
the company between the date of the last accounts and the date that the contract is completed. It is the practice
in both cases to qualify the warranties by reference to a disclosure letter. This letter diminishes the warranties so
far as the seller provides information in the letter that shows the accounts as not providing a true and fair view
or that there has indeed occurred a material adverse change in the affairs of the company. The significance of
this express coupling of warranty and disclosure letter is that the contract for the sale of a business has been
devised by City practice, not to impose a duty to disclose or inform as such but to give the seller a keen
incentive to do so. It is not a case of the law stepping in to impose on the seller a list of information duties or a
single duty of good faith disclosure. The seller, by agreement, gives a number of warranties which effectively
define what the seller has to do in the disclosure letter. The sale of a business is as much an arm’s length
transaction as there is ever likely to be, so it is an entirely rational response of the law to leave matters to the
parties and to legal practice. In the light of any disclosure made, the buyer can decide to proceed and renegotiate
the price or to withdraw from the transaction. Of course, there are litigation issues connected with what
constitutes disclosure, which must be fair disclosure if the relevant warranty is to be cut down, but that is a
matter of informed interpretation based upon what the buyer may reasonably discover and understand from the
disclosure that has been made.27

The other arm of a buyer’s protection is the buyer’s own due diligence. The process is of course an expensive
one, but the buyer can obtain some protection from the breakdown of negotiations if the parties have agreed on
a break fees clause in the event of negotiations coming unstuck. Restrictive provisions on financial assistance 28
mean that only a limited sum can be offered by the seller, which leaves the buyer needing further assurance. A
“lock-out” clause of defined duration provides such further assurance; a suitably drafted clause would have
satisfied the House of Lords in Walford v Miles29 because, whilst giving a seller an incentive to continue
negotiations with the particular buyer, it would not have compelled the seller to do so and would not therefore
have needed to be policed by the courts. This was indeed the way the buyer initially put its case in Walford: the
buyer alleged that the seller, further to a subject to contract agreement between them, had undertaken to
terminate negotiations with any third party in return for a comfort letter from the buyer’s bank. By an
amendment to the statement of claim, the buyer argued that there was an implied term of a collateral agreement
between the parties, necessary to give it business efficacy, for the seller to continue to negotiate in good faith
with the buyer.

Given the difficulty of making a business efficacy case for the implication of a term, the Court could have
disposed of the buyer’s case by simply ruling that there was no necessity for such a term. The House of Lords,
however, went further and ruled that, just as there could be no binding agreement to agree, so too could there
not be a binding agreement to negotiate. An agreement to negotiate was not the same thing as an agreement to
use best endeavours.30 This is questionable. If the parties were *433 expressly to agree to negotiate, then why
should that agreement not be enforced? 31 Negotiation is a process that lends itself to description and does not
have to result in an outcome. Similarly, an agreement to negotiate in good faith ought to be enforceable. Whilst,
technically, an agreement to negotiate may be analytically distinct from an agreement to negotiate in good faith,
as a practical matter the two things amount to the same. How can one be said to be negotiating if one’s heart is
not in it. Negotiation implies a genuine attempt to engage with the other party, even if a negotiator is not
required to give ground in the process. 32 A judicial willingness to enforce express agreements to negotiate in
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Doubting Good Faith, 11 NZBLQ 426

good faith is not a concession to the introduction of a general standard of good faith and fair dealing in contract
law when the parties have not expressly or impliedly asked for it. My objections to good faith are to the
imposition of good faith on contracting parties so as to interfere with their contractual sovereignty.

Now, if the buyer’s legitimate interests can be effectively addressed by a combination of lock-out clause and
break fees, the argument in favour of rendering enforceable agreements to negotiate, still more agreements to
negotiate in good faith, loses much of its force. Buyers of businesses benefit from legal advice and a careful
survey of the ground. A commitment to restraint in the development of contractual doctrine, in the face of no
demonstrable need for change, would quell any call for innovation.

2.3 Rectification

The utility of good faith in contractual formation is tested also in respect of the limits of the equitable
jurisdiction to order rectification in certain cases of unilateral mistake. This jurisdiction represents an alternative
approach to the ruling in Smith v Hughes that a contract is concluded on the “mistaken” party’s terms where that
party mistakenly believes that the contract contains a particular term and the other party is aware of that
mistake.33 In Riverlate Properties Ltd v Paul,34 the owner of a building leased on 99-year terms35 a maisonette
within the building without realising that it had retained the entire responsibility for the exterior and structure of
the building. It was however the lessee’s understanding that she was not to be responsible for these matters, but
neither she nor her solicitor were aware of or had contributed to the lessor’s mistaken understanding. The Court
of Appeal declined to grant equitable relief in the form of either rescission of the lease or rectification. In the
trenchant language of Russell LJ:
“If reference be made to the principles of equity, it operates on conscience. If conscience is
clear at the time of the transaction, why should equity disrupt the transaction? If a man may
be said to have been fortunate in obtaining a property at a bargain price, or on terms that
make it a good bargain, because the other party unknown to him has made a miscalculation
or other mistake, some high-minded men might consider it appropriate that he should agree
to a fresh bargain to cure the miscalculation or mistake, abandoning his good fortune. But if
equity were to enforce the views of those high-minded men, we have no doubt that it would
run counter to the attitudes of much the *434 greater part of ordinary mankind (not least the
world of commerce) and would be venturing on the field of moral philosophy in which it
would soon be in difficulties.”

It is hard to imagine a clearer statement that it is not the function of the courts to lead in matters of morality and
the law of contract. This passage does however leave open the possibility of a change in judicial attitude in the
event of a change in public and commercial sentiment, though it will take much to overcome judicial attitudes
that rectification imposes upon a party a contract that he did not intend to make, 36 which is a criticism that could
also be levelled at good faith and fair dealing if introduced in this area of the law. As far as commercial life
goes, any such change is likely first to be manifested or evidenced in arbitral awards, which is one reason why
the confidentiality of awards is so frustrating to those who seek to monitor the development of and changes to
the law in practice. In commercial matters, large organisations are likely to continue to be expected to look after
their own interests and not to expect assistance from the other contracting party. 37

If equity in the field of rectification is not prepared to impose moral outcomes directly, it should be asked if
there is any loosening up of the remedy of rectification. The short answer is that there is -- it depends upon what
we mean by the knowledge of the unmistaken party -- which is a cue for those who criticise the law for its
manipulation of categories as an alternative to an open recognition of good faith. The answer to this, as given
earlier, is that it is conducive to the coherent development of the common law that it proceed incrementally and
that it respond to the restraint imposed by using accepted principles up to the limits of their elasticity. This is
preferable to a heavy-handed invocation of good faith and fair dealing. As far as the notion of knowledge has
been stretched, it has been extended to wilfully closing one’s eyes to the obvious and wilfully and recklessly
failing to make inquiries.38 It is not likely that the last word has been said on this particular matter.

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3 GOOD FAITH AND THE PERFORMANCE OF CONTRACTS

The role of good faith in contract law is most often encountered in the field of contractual performance. When,
some years ago, I looked at American case law on good faith, 39 I was impressed by the way that the bulk of the
cases fell within the area of interpretation and implied terms. 40 As an alternative to a free-standing obligation to
act in good faith, it could instead be asked what exactly it was that the contracting parties had undertaken to do.
An examination of recent developments in these areas is useful for the light it throws on the common law’s
ability to develop dynamically without any explicit commitment to a doctrine of good faith and fair dealing. So
far as the common law’s response might be seen to be inadequate, the question is whether the principle of good
faith would be more effective in reaching the right result.

*435 3.1 Implied Terms

It is arguable that the subject of implied terms has failed to attract the degree of academic attention that its
importance warrants. Implied terms come from a variety of sources, including statute. In some cases, they have
become attached to particular types of contract as characteristic features 41 and no doubt would, if the rules for
such contract were ever codified, be enacted in the way that the implied terms of fitness and quality are set out
in the Sale of Goods Act 1979.42 There is a well-known category of implied terms, usually associated with
informal contracts, that are so obvious that they do not need to be mentioned. 43 So far as they can ever be
identified, they seem mainly to serve a rhetorical rather than a practical purpose. 44

The vital core of implied terms spans the length of judicial interventionism in contracts and so presents itself for
comparison purposes with good faith. This core consists of the well-known category of implied terms that are
necessary for business efficacy. To this category can be added the very similar category of one party’s
obligations that are simply omitted from a contract form dictated by that same party, where the task of the court
is to give effect to the bilateral character of the contract by filling in the empty spaces. 45 The abiding feature of
judicial conduct in this area is its restraint and its sensitivity to the principle that judges should not be doing for
parties what they are well able to achieve for themselves. It should be no surprise that the implication of a
business-efficacy implied term is significantly less difficult in an informal contract setting, such as the
circumstances prevailing in the old leading case of The Moorcock,46 than in detailed contracts where the parties
stand on an equal footing and benefit from legal advice. 47 It remains true that the success rate of claimants citing
that case is low.48

In a recent decision, the House of Lords has repelled a claim for the implication of a term in a case concerning
the issue of bonds, where the outcome was by no means self-evident. This case repays quite close examination
to see whether the outcome is satisfactory and whether, if it ought to be changed, a commitment to good faith
would represent a better way to achieve this than any adjustment to the basis upon which terms are implied on
the ground of business efficacy.49

In Concord Trust v Law Debenture Trust Corp,50 the principal question was whether a trustee for bondholders
was contractually bound in the loan contract not to give notice of an event of default 51 by *436 the borrower if
no such default had in fact occurred. The giving of notice is serious: it accelerates obligations and triggers
cross-defaults in other agreements to which the borrower is party if those other agreements so provide, which
they usually do.52 The giving of a notice is a formal matter and is not lightly undertaken, so there would be little
risk of such an implied term giving rise to serious financial consequences for the trustee because of a casual or
ill-considered act. The House of Lords, following the courts below and like those courts treating the matter as
being of relatively little moment, concluded that no such term was to be implied in the loan contract. In the
words of Lord Scott:53
“The proposed implied term cannot satisfy [the] test [of business efficacy]. The Trust Deed
works perfectly well without the implied term. It is open to [the borrower] to challenge the
existence of an alleged Event of Default or the validity of a notice of acceleration. If the
challenge succeeds neither the alleged Event nor the invalid notice will be of any
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Doubting Good Faith, 11 NZBLQ 426

contractual significance.”

As it stands, the case sits well with the rule that a party, taking a view of its rights and liabilities that is based
upon a mistaken reading of the contract, does not thereby commit a repudiatory breach of contract. 54 But it does
deal with a serious point in a somewhat dismissive way. The very existence of interlocutory relief demonstrates
how much harm can occur before the trial of an action, to establish the lawfulness or otherwise of action, and
how it is not always prudent to await the outcome of a successful trial dealing with the taking of that contested
action. In the present case, the existence of an implied term contended for on behalf of the borrower55 would
have restrained the issuing of an invalid acceleration notice, because the trustee could have refused to issue the
notice without an appropriate indemnity from the funding banks.

The question for present purposes, however, is whether a duty of good faith and fair dealing would have made a
difference to the outcome. If this type of duty had to be implied on a case-by-case basis, then an argument for
its existence should be no more effective on the facts of this case than a Moorcock-implied term. Nevertheless,
if there were a standing duty of good faith and fair dealing in contracts generally, not dependent upon a
business-efficacy justification, then there is a bare possibility that it might make a difference. It would all
depend upon whether a party asserting an event of default did so for extraneous reasons, which is most unlikely
in contracts of this nature. A much more likely possibility is that a party was genuinely mistaken about its
position under the contract. In this latter case, the borrower would no better off with the assistance of a general
duty of good faith and fair dealing. An improved approach to business efficacy based upon a more sensitive
appreciation of the financial environment and the repercussive consequences of contractual notices is therefore
a better response to problems of the sort raised in Concord Trust. Courts sometimes make mistakes with the
tools they possess; this is no reason to change the toolbox.

3.2 Interpretation of Contracts

As is now well-known, the decision of the House of Lords in Investors Compensation Scheme v West Bromwich
Building Soc56 on one view introduced a sea change in the approach of the English courts to *437 contractual
interpretation.57 Lord Hoffmann’s speech in particular, which lays down authoritative guidelines, has received
multiple citations. The importance of these many citations, however, ought not to be overestimated, because
most frequently they are the judicial equivalents of map references by courts that have no desire to see their
judgments overturned; interpretation, after all, is a question of law and therefore susceptible to review by a
higher court.58 Prior to this decision, English contract law had opened up the subject of interpretation by its
departure from literalism and its insistence upon examining contracts in their factual matrices, 59 whilst
nevertheless dismissing as unhelpful evidence of negotiations and of the parties’ individual aims and
objectives.60

The significance of the West Bromwich case lies in the way Lord Hoffmann asserted that admissible evidence
was “absolutely anything which would have affected the way in which the language of the document would
have been understood by a reasonable man”61 and that the meaning of a document was not the same thing as the
meaning of words in that document. Lord Hoffmann said a number of perfectly acceptable things in this case,
but these observations introduce an unwelcome degree of uncertainty and subjectivity in an important subject.
They come close to an assertion that contracts should always be understood in a reasonable way, which cannot
be squared with the rule that terms should not be implied in a contract just because it is reasonable to do so. 62
Lord Hoffmann’s approach threatens to obliterate the careful distinction in English law between interpretation
and implied terms:63 why struggle with the demanding business-efficacy test for an implied term when a looser
approach to the interpretation of the contract would yield the same result? It also imperils the difference
between interpretation and rectification and, in all, is a thoroughly reductionist judgment. Although Lord
Hoffmann himself is careful to say that evidence of prior negotiations and aims and objectives remains
inadmissible, though it would be admitted in a rectification action, the result in West Bromwich demonstrates
amply that, under the guise of interpreting a contract, the House of Lords in effect rectified it.

Now, is Lord Hoffmann’s approach to interpretation just good faith and fair dealing under another name?
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Doubting Good Faith, 11 NZBLQ 426

Arguably it is, given its reductionist character, which should give advocates of good faith pause if they take
seriously the overwhelming body of City opinion that West Bromwich has had a destructive impact on
commercial certainty: what is the point of careful drafting if a reviewing court is going to look at the document
through pebble glass lenses? The approach could as easily be put down to the overwhelming tide of
reasonableness which, when undefined, is as lacking as good faith in predictive definition. A realist might
however say that, when the dust has settled, the new dispensation is unlikely to reach into the great mass of City
precedents but is much more likely to be confined to semi-formal contracts and to contracts where it is not the
practice to have lawyers sitting in on negotiations. The contract form in West Bromwich was presented to misled
investors on a take-it-or-leave-it basis, which is one reason why it could not have been rectified in an orthodox
fashion. How could it be *438 demonstrated in such a case what the continuing and common intention of the
parties was, running down to the execution of a document that did not accurately reflect that common
intention?64 To summarise, Lord Hoffmann’s interpretative approach is similar to the direct application of a
good faith standard and possesses the same destructive impact on contracts. West Bromwich presents a
cautionary tale for advocates of good faith, however palatable the result in the case itself might have been.

4 GOOD FAITH AND THE ENFORCEMENT OF CONTRACTS

In this section, I shall be dealing with the imposition by a good faith principle of restraints on the exercise of
contractual rights. Good faith in enforcement is not so easily explained as good faith in performance as acting in
parallel with existing rules or rationalisations. Now, the enforcement of contracts is not easy to define or even to
separate sharply from their performance, but it is important to try to do so. For example, suppose that, by
whatever means, the common law were to commit itself to the incorporation in contracts of a duty of good faith.
If such a duty existed at the level of an implied term, then it would be open to the parties to agree on express
terms that were inconsistent with such an implied term. Express terms repel the implication of contrary implied
terms. In a similar vein, however relaxed the approach of the courts might be to the interpretation of contracts,
interpretation is not a process to be used for rewriting a contract deemed to be unfair.

4.1 Exclusion Clauses

If good faith were to be employed to assert a State interest in the enforcement of a contract over and above the
interest of either contracting party, it would have to function as an overriding principle that might not be
excluded by the parties, which would spell out a return to the fundamentalism in contract law rejected by the
House of Lords a quarter of a century ago.65 A comparison with the law on exclusion clauses is apt. In English
primary legislation controlling the operation of exclusion and limitation clauses in contracts,66 those controls,
when applicable, either render clauses void or else render them ineffective to the extent that they transgress the
standard of reasonableness.67 The range of terms caught by the legislation is, despite the expansive title of the
Unfair Contract Terms Act 1977 (UK), rather limited. In this respect, the Act is narrower in its scope than
secondary legislation, the Unfair Terms in Consumer Contracts Regulations 1999 (UK),68 transposing an EU
Directive on unfair terms in consumer contracts. It is worth examining this secondary legislation for two
reasons. First, though it is confined at present to consumer contracts, the English Law Commission has
recommended69 that it be fused with the 1977 Act to create an instrument that would give the broader protection
currently in the secondary legislation to small businesses. Secondly, this secondary legislation explicitly
invokes good faith as an instrument in gauging the lawfulness of contractual terms.

The Regulations provide that an unfair term is not binding on the consumer 70 and define an unfair term as one
that “contrary to the requirement of good faith, causes a significant imbalance in the *439 parties’ rights and
obligations arising under the contract, to the detriment of the consumer”.71 On one view, the reference to good
faith is merely a rhetorical value judgment passed on a term that causes a significant imbalance. The
Regulations focus for the most part, but not exclusively,72 on the offending term and not upon the process
leading to its inclusion in the contract or even upon the circumstances of its invocation by the proferens. The
application of the good faith standard to the product and not the process is odd. Good faith qualifies conduct and
not inanimate contractual objects. The Regulations leave untouched the substance of the contract73 except to the
extent that the contract offends the requirement that the contract be expressed in plain, intelligible language. 74 It

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 9

should therefore have come as no surprise that no reference to good faith was made in French transposing
legislation. So far as these provisions add nothing to the concept of unreasonableness in the Unfair Contract
Terms Act, then good faith can pass into English contract law with barely a ripple on the water.

The Regulations came under review in Director General of Fair Trading v First National Bank,75 which
concerned a term in a lending contract that permitted interest to run over and above an instalment repayment
plan approved by the Court in the case of a defaulting debtor, the consequence of which was that debtors
complying with the plan were surprised to discover that they still owed money to the bank. The House of Lords,
reversing the Court of Appeal, concluded that the term was not unfair, but it is the views expressed about good
faith that are mainly of interest. Lord Bingham noted that the member States of the European Union had “no
common concept of fairness or good faith”,76 a sobering observation in view of the comfort drawn by advocates
of good faith from other legal systems when promoting the case for good faith in English law. His Lordship
went on to say that good faith was concerned with openness and fair dealing, supported on this point by Lord
Steyn, and explained the former in terms consistent with the encouragement given by the Regulations to plain
drafting.77 Moreover, it was all about “good standards of commercial morality and practice” and thus was not a
concept “wholly unfamiliar to British lawyers”. Lord Steyn, who was more focused on the product rather than
the process, drawing from the Principles of European Contract Law, quoted the latter’s reference to
“community standards of fairness and reasonableness in commercial transactions”. He saw a significant overlap
between good faith and substantial imbalance. Lord Millett was more preoccupied with process in pointing out
that the lender did not act in bad faith by “taking advantage of the borrower’s weakness of bargaining power or
lack of professional advice” by insisting upon a term causing a significant imbalance. In sum, this case leaves us
no nearer to understanding good faith and the way it works, and exhibits some degree of judicial discomfort in
having to enforce legislation designed for a multiplicity of legal systems. It is not at all easy to see how the
concept of good faith in these Regulations will have an infectious effect on English commercial law. The
probability is that good faith will be kept in its closed statutory box.

*440 4.2 A Statutory Curb on Termination Rights

I shall turn now to cases where attempts have been made, successfully and unsuccessfully, to curb the
enforcement of contract rights. The first of these is a legislative provision, s 15A of the Sale of Goods Act 1979
(UK),78 which provides that a commercial buyer may not reject goods where there has been a breach of one or
more designated implied terms in the Act but the breach is so “slight” that it would be “unreasonable” for
rejection to take place. As expressed, the section could as easily have referred to good faith without affecting
any practical outcomes arising from its operation. What is its purpose? First of all, it is not designed to act
against consumer buyers, who are deemed to need all the leverage they can use against more powerful sellers.
Secondly, it is not designed to combat opportunistic behaviour generally in sales contracts. It does not prevent
any abusive calling into play of express contractual conditions. Nor does it extend to all statutory implied
conditions in the Sale of Goods Act.79 Thirdly, it does not apply to a wide range of provisions that, by settled
case law, practice, and commercial custom, have been settled as implied conditions. These provisions include a
wide range of duties connected with documents and timely performance where, in the world of commodity sales,
strategic behaviour is rife.

Section 15A appears to hark back to a time when the English courts gave an expansive meaning to description
in s 13 and to one or two decisions where sellers’ moral behaviour might not have stood up to close scrutiny.80
Since that time, the courts have signalled a more stringent interpretation of s 13 that attacks the problem at
source. What then is the point of s 15A? Note that if the provision had been expressed in terms of good faith
and fair dealing, it would have had a much more far-reaching effect than s 15A and would have entered a world
that is largely free from regulation, namely, cross-border sales.81 So, the provision is carefully circumscribed in
order that it do no harm to commercial dealings. It is unlikely that the provision will have any practical impact;
it makes a dangling moral point. Sam Goldwyn is reported to have said about film-making: “When I want to
send a message, I use Western Union.” There is a lot to be said for that philosophy.

4.3 Case Law Curbs on Termination Rights

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A judicial challenge to the autonomy of the parties was effectively mounted in the unremarked decision of the
Court of Appeal in Rice v Great Yarmouth Borough Council,82 one of those cases that confront party autonomy
under the guise of interpretation and supply significant support for those who claim that the common law
recognises good faith sub modo.83 It concerned a local authority that for a term of 4 years had outsourced the
upkeep of its parks, gardens and playgrounds to a small-scale gardener.84 The gardener had submitted a low bid
in a tender competition, on terms that included the following clause: “[I]f the contractor commits a breach of
any of its obligations under the Contract, the council may ... terminate the Contractor’s employment under the
Contract by notice in writing having immediate effect.” Two things are clear about this provision: first, it is
draconian, and secondly, its meaning is plain. A further provision of the contract permitted the authority to
serve notices of default on the contractor, specifying remedial action where this was possible. After the contract
had been *441 running for just over 4 months, the authority served notices on numerous occasions in the
following 2 to 3 months before it served a notice of termination a short time afterwards.

The Court of Appeal’s decision that the quoted clause did not permit the authority to terminate for any breach
was reached on the following grounds: first, it was draconian, and could apply to trivial and serious breaches
alike; secondly, it was very general in its application, like the obligation of seaworthiness in the time charter
case of Hongkong Fir Shipping v Kawasaki Kisen Kaisha;85 and thirdly, it offended commercial common sense.
The responses to these arguments are as follows. First, if that is what the parties have contracted for in an arm’s
length contract, then so be it. It has been recognised since at least Lord Blackburn’s day 86 that the parties are
sovereign in the determination of contractual terms as conditions whose every breach gives rise to the right to
terminate the contract. Secondly, the characterisation of the seaworthiness obligation in Hongkong Fir as an
intermediate stipulation was possible precisely because the contracting parties there did not give any indication
of the status of the seaworthiness term. The point was therefore irrelevant in the Great Yarmouth case. Thirdly,
the lack of commercial sense in treating the clause as a condition was a matter of reflexive rather than reflective
judicial reaction: a clause does not lack commercial sense just because a judge does not like the look of it.

Contracting parties take comfort from knowing that they have the unimpeachable right to terminate a contract
for breach and strive through the bargaining process for negotiated contracts to achieve this. This does not mean
that they will press the destruct button as soon as they identify a breach. The authority in this case can hardly be
faulted for intemperate action; it served a lot of default notices before it purported to terminate the contract.
Lord Diplock, whose support for party sovereignty in the treatment of terms as contractual conditions is shaky
at best, in words drawn upon by the Great Yarmouth Court has said: “[I]f detailed semantic and syntactical
analysis of words in a commercial contract is going to lead to a conclusion that will flout commercial
commonsense, it must yield to business commonsense”.87 This statement is of a piece with Lord Hoffmann’s
approach to contractual interpretation but is of doubtful relevance in the Great Yarmouth case. It would not
have taken any detailed semantic and syntactical analysis to give the termination clause the meaning it plainly
had.

The outcome in the Great Yarmouth case could just as easily have been reached if good faith and fair dealing
had been substituted in the judgment of the Court for commercial common sense. The contractual autonomy of
the parties is abridged in a way that does not signify any difference between major commercial entities and a
one-man gardening company. And that is the problem with the case. It makes it very difficult indeed for any
legal draftsman to give confident advice that a termination clause is watertight. Unquantifiable risk inhibits the
making of contracts especially in a financial world where every percentage point matters.

A different assault on the autonomy of contracting parties to designate a contractual term as a condition was
however unsuccessful in Ilanchelian v Esso Petroleum Co Ltd.88 The case concerned the tenant of a filling
station who sought to prevent the exercise of an oil company’s right to terminate his franchise for breach of
contract, on the ground that it was unreasonable under the Unfair Contract Terms Act 1977 (UK). The oil
company had terminated a tenancy agreement on the ground that the tenant had failed to comply with
contractual terms requiring him on occasion to lower his prices. His *442 response was that the termination
provision was unreasonable and that the Act came into play because he had contracted with the oil company on
the basis of its written standard terms of business and the company was claiming “to render no performance at
all” in respect of its contractual obligations. This statutory provision was nevertheless designed to deal with
wide-ranging exclusion clauses reducing a contract to a mere declaration of intent and was not apt to deal with a
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Doubting Good Faith, 11 NZBLQ 426

termination entitlement arising out of the other party’s breach. The tenant’s claim therefore received short shrift.

Ilanchelian, like Great Yarmouth, which also involved a small business, might now, if the Law Commission’s
proposals are adopted,89 be dealt with under the fused successor to the Unfair Contract Terms Act 1977 (UK)
and the Unfair Terms in Consumer Contracts Regulations 1999 (UK). The fused instrument would catch a much
wider range of contract terms than that currently falling under the 1977 Act. The virtue of this approach is that it
permits the courts to stand aside from cases where the parties have equal, or approximately equal, bargaining
power90 and so does not diminish commercial certainty where it really matters. Furthermore, this provision is
preferable to s 15A of the Sale of Goods Act 1979 (UK). If substantial commercial organisations enter into a
contract that allows one of them to terminate in the event of a slight breach, then they should be allowed to do
so.

Once specific protection for consumers and small businesses (where there is an imbalance of bargaining power)
has been provided for, the way is clear to taking an altogether more dispassionate approach to commercial
contracts conducted at arm’s length between parties of equal bargaining power. I have on a previous occasion
stressed the need for courts (and, I might add, the legislature) to refrain from dealing in market-sensitive
commodities dealings. I shall therefore make just a few observations here. The world of commodities is
dominated by major commercial organisations with immense resources. As stated above, strategic behaviour in
these contracts is rife. Should the law enter this world to impose a standard of moral behaviour in contract
dealings? I believe not. In the world of dry commodities, the players are both buyers and sellers of commodities,
so in any case they have an acute sense of the other party’s point of view. Furthermore, they invariably do
business on standard trading terms. Difficulties arising in the conduct of the trade can be dealt with by an
amendment to the standard form, which are often being overhauled in the light of experience. If one party steps
over the line, there are informal sanctions that can exercised in subsequent dealings between these same parties
in this enclosed world. And if the question arises whether this enclosed world should be opened up to
competitive forces that would facilitate market entry by outsiders, the enactment of a general contract duty of
good faith and fair dealing is not the way to do it. The major factor in commercial behaviour is the grinding
stone of market forces.

4.4 Hard Cases and Good Faith?

I propose now to look at two examples that might be seen as presenting a case for good faith. The first of these
is Union Eagle Ltd v Golden Achievement Ltd,91 where, under a contract for the purchase of a flat in Hong Kong,
the purchaser was 10 minutes late in tendering payment, the consequence of which was that the vendor
terminated the contract of sale and forfeited the purchaser’s 10 per cent deposit. The contract provided clearly
that time was of the essence and that the vendor had a right to forfeit upon termination for the purchaser’s
breach. Hence, the Privy Council had little difficulty in holding that the vendor was entitled to terminate the
contract. It did not matter that the vendor had not expressed its decision to terminate by the time that tender of
performance was made 10 minutes after time by the purchaser, for all that the purchaser was doing was to offer
a performance other than the *443 one called for by the contract. The greater part of the Board’s advice
concerned the vendor’s right to forfeit the deposit. Lord Hoffmann noted the “attractive breadth” of the
proposition that “equity will restrain the enforcement of legal rights when it would be unconscionable to insist
upon them”. He went on nevertheless to say that:92
“[I]n many forms of transaction it is of great importance that if something happens for
which the contract has made express provision, the parties should know with certainty that
the terms of the contract will be enforced. The existence of an undefined discretion to refuse
to enforce the contract on the ground that this would be ‘unconscionable’ is sufficient to
create uncertainty. Even if it is most unlikely that a discretion to grant relief will be
exercised, its mere existence enables litigation to be employed as a negotiating tactic. The
realities of commercial life are that this may cause injustice which cannot be fully
compensated by the ultimate decision in the case.”

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 12

I cannot put it better than that. It is a convincing rebuttal too of any general doctrine of good faith in the
enforcement of contracts.93 The words could just as easily have been said by the Court of Appeal in Great
Yarmouth if it had come to the correct decision in that case. Lord Hoffmann, perfectly aware that land in Hong
Kong is a highly liquid commodity, also went out of his way to note that it could not be treated as though it fell
outside the bounds of commercial dealings: “Land can also be an article of commerce and a flat in Hong Kong
is probably as good an example as one can find.”94 His Lordship’s words about the use of litigation as a
negotiating tactic are similar to language used in the House of Lords in Bunge Corp v Tradax SA95 when
asserting the merits of treating certain contractual terms as conditions, on the ground that this abbreviated and
simplified trials and encouraged settlements. It is one of the dominant characteristics of modern English civil
procedure that it discourages delay and encourages settlements before cases go to trial. This policy goes against
the modern tendency to inject law with a substantial measure of discretion and is not consistent with the
introduction of a general duty of good faith and fair dealing in contract law. There does, at present, seem to be
something of a mismatch between procedural and substantive English law.

My second example concerns the case of compliance with documentary letters of credit. These are payment
instruments that serve the very valuable purpose, especially in transnational contracting, of encouraging sellers
to commit to performance in what would otherwise be commercially hazardous conditions. The problem with
them is that the assurance function they serve is to a substantial degree undermined by the ease with which even
the best intentioned and prepared seller can tender a documentary package to the nominated bank that is in one
or more respects defective. It has indeed been noted in one survey that almost three-quarters of documentary
tenders to banks are defective. 96 Because of the principle of strict documentary compliance, each and every one
of those tenders is open to rejection, though some of them -- by no means all -- could be cured in time for a
second tender. This seems to put the seller at the mercy of the buyer and render in effect these contracts as
discretionary on the buyer’s part. If this were indeed the case, one might expect to see the use of *444
documentary credits to fall away, which is far from being the case, or pressing calls for a radical review of the
customs and practices governing documentary credits,97 which are incorporated into the great majority of letter
of credit contracts. Again, this is far from being the case. The introduction of a general principle of good faith
and fair dealing would be like letting a bull loose in a china shop. The question of documentary compliance is
far better settled through improvements to the uniform rules and through reference to international standard
banking practice when setting the standard of documentary compliance. The former approach is manifest in a
provision that does not permit the banks to refer documentary packages to buyers, 98 which would merely
encourage certain buyers to pick over them to discover nonconformities. The latter source exists to assist banks
in determining how far they might depart from exact documentary compliance when making payment. 99

5 CONCLUSION

My response lacks the grand theoretical sweep that can be adopted by those advocating good faith, since it is
content with common law development by incremental processes. It rests upon a thoroughly pragmatic view of
the world and an acceptance of not going too far in pushing the law forward. It is for very good reasons that
appeal judges generally restrict the scope of their judgments to the issues directly before them and reserve other
issues for another day. This is a necessary element in the flexibility of the common law which, not locked into
the closed structure of a code, permits legal experiment and change as far as the occasion strictly warrants. It is
by no means a novel observation that the inductive processes of the common law dispense with any need for
general clauses like the “treu und glauben” clauses of the German Civil Code. Hugh Collins has written about
“the continuous opportunity to revise the formulation of the rules themselves”100 afforded thereby to the
common law.

A further criticism that might be levelled at my approach is that it underplays the law’s own inconsistency. For
example, the Great Yarmouth case cannot readily be reconciled with United Eagle. The strict approach to
commercial contracts does not sit well with Lord Reid’s statement that a party completing performance so as to
be able to sue as for a debt, in the face of the other’s unlawful repudiation, must have a “legitimate interest” in
so doing if it is not to be confined to a damages action for breach of contract. 101 Yet, however far English law at
times falls short of its own commitment to freedom of contract and certainty, this is no reason for the wholesale
abandonment of these values in favour of the uncertainties and subjectivism of good faith. English law is the
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Doubting Good Faith, 11 NZBLQ 426

applicable law of choice in a very wide range of contracts, many of which have singularly little connection with
England. There may be a number of reasons for this, but one is certainly that its commercial friendliness is
popular with foreign business parties. Banks with head offices in Paris and Frankfurt feel no patriotic need to
insist on their own national law, even in the case of transactions to be carried out in their home country.

There are significant moves afoot in the European Union to move towards a measure of unification of contract
law. The European Commission has issued a number of communications and an action plan on the subject and
is moving towards a so-called common frame of reference that would define concepts in a way that would
facilitate the work of the European legislator. There is a distinct though hard to *445 calculate possibility that
work will move on to an optional cross-border instrument that can be selected as the applicable law, even
though it may not be grounded in the territorial legislation of individual member States. Instruments that could
play this role already, especially in arbitration agreements, are the Principles of European Contract Law and the
Unidroit Principles of International Commercial Contracts. Both of these collections recognise a mandatory
principle of good faith and fair dealing.102 A limited duty of good faith also exists in the Vienna Convention on
the International Sale of Goods.103

There is no general duty of good faith and fair dealing in English contract law 104 and there is no reason why
there should be. This does not prevent contracting parties from stipulating expressly for good faith if they so
wish; it will then be up to the courts to give practical effect to such an intention. 105 It would be an excessive
response to good faith, as well as a judicial failing, if a court felt itself unable to give such an express clause
meaning on the facts of a given case. English law is perfectly able to compete in the international legal services
marketplace despite this deficiency. It will be interesting to see which markets and contracting parties continue
to express a preference for it instead of one of the various cross-border instruments that are committed to good
faith and fair dealing. Good faith and fair dealing may be a suit that fits some contracts and contractors; it will
not fit all.

This paper was accepted for publication on 3 November 2005

Footnotes

1 See generally M Furmston (ed), The Law of Contract (2nd ed), Butterworths, 2003, paras 1.78ff (R Brownsword).
On the subject of good faith, see also E McKendrick, “Good Faith: A Matter of Principle?”, in A Forte (ed), Good
Faith in Contract and Property Law, Hart Publishing, 1999; H Lücke, “Good Faith and Contractual Performance”, in
P Finn (ed), Essays in Contract Law, Sydney, Law Book Co, 1987; P Finn, “Commerce, the Common Law and
Morality” (1989) 17 Melbourne University Law Review 87; M Clarke, “The Common Law of Contract in 1993: Is
There a General Doctrine of Good Faith?” (1993) 23 Hong Kong Law Journal 318; R Brownsword, “Two Concepts
of Good Faith” (1994) 7 Journal of Contract Law 197.

2 See R P Meagher, J D Heydon and M J Leeming, Meagher, Gummow and Lehane’s Equity: Doctrines and
Remedies, Butterworths, 2002, para 5-005.

3 This is generally, though not invariably, the case. Under the International Chamber of Commerce (“ICC”)
Arbitration Rules, there are doubts about the ICC itself being bound by the confidentiality requirement in the arbitral
process (see Art 6), given the absence of a general confidentiality provision in the Rules.

4 Sometimes explicitly permitted by the parties to the extent that they empower the arbitrator to act as an amiable
compositeur.

5 I refer to the restrictions on domestic appeals against arbitrators’ awards (see, for example, the abolition of the case
stated procedure in the Arbitration Act 1979 (UK)) and, in the case of recognition and enforcement of foreign
awards, the absence of incorrect application of the law as a ground for refusing recognition and enforcement (see Art
5 of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the New

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 14

York Convention).

6 The American Restatement, as well as Canadian reform proposals that were never implemented, extend the scope of
good faith to the enforcement of contracts too. It is not at all clear what this extension would add to the scope of
good faith.

7 M Bridge, “Does Anglo-Canadian Contract Law Need a Doctrine of Good Faith?” (1984) 9 Canadian Business Law
Journal 385.

8 See R Bradgate, R Brownsword and C Twigg-Flesner, The Impact of Adopting a Duty to Trade Fairly, Report to the
Department of Trade and Industry, July 2003 (available at <http://
www.dti.gov.uk/ccp/topics1/pdf1/unfairreport.pdf>), para 2.26: “At one level, if judges are acting according to their
own lights, there is a question about the legitimacy of their decisions”. It is also a matter of concern that judicial
decisions on the reasonableness of exception clauses in England, under the Unfair Contract Terms Act 1977 (UK),
are reviewable only in very limited circumstances: see George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd
[1983] 2 AC 803.

9 M Bridge, “Good Faith in Commercial Contracts” in R Brownsword and G Howells (eds), Good Faith in Contract:
Concept and Context, Dartmouth, 1999, pp 139-64.

10 See R Powell, “Good Faith in Contracts” (1956) 9 Current Legal Problems 16; R Summers, “‘Good Faith’ in
General Contract Law and the Sales Provisions of the Uniform Commercial Code” (1968) 54 Virginia Law Review
195.

11 J Steyn, “Contract Law: Fulfilling the Reasonable Expectations of Honest Men” (1997) 113 Law Quarterly Review
433, 439.

12 Section 15A of the Sale of Goods Act 1979 (UK), as added by the Sale and Supply of Goods Act 1995 (UK).

13 S Pearson & Son v Dublin Corp [1907] AC 351. According to Bingham LJ, all legal systems recognise the principle
that contracting parties should not deceive each other: Interfoto Library Services Ltd v Stiletto Visual Programmes
Ltd [1989] QB 433, 439 (CA).

14 R Summers, “The General Duty of Good Faith: Its Recognition and Conceptualization” (1982) 67 Cornell L Rev
810.

15 (1871) LR 6 QB 597.

16 C Fried, Contract As Promise, Harvard, 1981, pp 79-80.

17 Ibid p 79: “It did not send its agent around dressed in overalls and chewing on a straw.”

18 A similar case is the art expert who, after a lifetime of expensive education, spots an unrecognised old master in a
second-hand shop or on the occasion of an estate clearance.

19 See Hospital Products Ltd v US Surgical Corp (1984) 156 CLR 41; Lac Minerals Ltd v International Corona
Resources Ltd (1989) 61 DLR (4th) 14 (SCC).

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 15

20 Lord Bingham (see text below).

21 Compare s 7(3)(c) of the Contractual Mistakes Act 1977 (NZ), which permits the court to grant relief, in cases of
mistake, taking the form of a variation of the contract.

22 Explained, partly at least, to the author by the Reporter Professor Allan Farnsworth as being due to good faith
emerging on the agenda of the American Law Institute only when the formation provisions had been completed.

23 Interfoto Library Services Ltd v Stiletto Visual Programmes Ltd [1989] QB 433, 439 (CA).

24 [1992] 2 AC 128, 138.

25 This evokes the rhetoric of certain late 19th century judges, such as Lord Coleridge CJ who, in a conspiracy case
(Mogul Steamship Co v McGregor Gow & Co (1889) 23 QBD 598), spoke of the “hand-to-hand war of commerce”
and of the impracticality of following the example of Sir Philip Sydney who, dying on the filed of Zutphen in the
Spanish Netherlands in 1592, offered his cup of water to a dying common soldier with a greater need.

26 [1992] 2 AC 128.

27 Compare New Hearts Ltd v Cosmopolitan Investments Ltd [1997] 2 BCLC 249 (CS (OH) and Infiniteland Ltd v
Artisan Contracting Ltd [2005] EWCA Civ 758.

28 Sections 151ff of the Companies Act 1985 (UK).

29 See now Pitt v PHH Asset Management Ltd [1994] 1 WLR 327.

30 See below. Yet an agreement to negotiate and an agreement to use best endeavours alike provide no guarantee of a
concluded contract.

31 If contract law can embrace an implied duty, arising in a collateral contract to consider tender bids submitted on time
(see Blackpool and Fylde Aero Club v Blackpool Borough Council [1990] 1 WLR 1195), then it ought to be able to
enforce on terms a duty to negotiate. A much more difficult question concerns the level of damages for breach of
such a duty.

32 As for example the negotiator who opens with an offer said, and meant, to be final.

33 The commitment of the common law to an objective interpretation of the contract, through the eyes of the reasonable
co-contractant, poses the question whether the mistaken party is mistaken in the first place.

34 [1975] Ch 133.

35 The ground rent was a nominal £25 per year.

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36 See Agip SpA v Navigazione Alta Italia SpA (The Nai Genova) [1984] 1 Lloyd’s Rep 353.

37 George Wimpey UK Ltd v VI Construction Ltd [2005] EWCA Civ 77, para 67, per Peter Gibson LJ: “If ever a party
was entitled to assume that its opponent (sic) knew what it was doing, it was [the respondent] in its negotiations with
one of the country’s largest construction and development enterprises.”

38 See Commission for the New Towns v Cooper (Great Britain) Ltd [1995] Ch 259; George Wimpey UK Ltd, above n
37.

39 M Bridge, “Does Anglo-Canadian Contract Law Need a Doctrine of Good Faith?” (1984) 9 Canadian Business Law
Journal 385.

40 When I asked the Reporter Allan Farnsworth some years later why then a duty of good faith in the performance of
contracts was introduced, he told me that it created among the delegates an atmosphere of “happy campers”.

41 For example, the duty of the agent to carry out his mandate and the duty of a principal to indemnify an agent who
does so.

42 In the case of agency, examples would include the agent’s duty to carry out his mandate and the principal’s duty to
indemnify the agent for doing so.

43 Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206.

44 A rare example might be Bank of Credit and Commerce International SA v Ali (No 1) [2002] AC 251, where no
doubt both parties would have testily suppressed any officious bystander interjecting that presumably the employer
bank would not conduct its business in a corrupt and dishonest fashion; whether the bank would subjectively have
meant it would of course be a different question.

45 Liverpool City Council v Irwin [1977] AC 239.

46 (1889) 14 PD 64 (CA).

47 See Trollope & Colls Ltd v North West Regional Hospital Board [1973] 1 WLR 601.

48 A characteristic that it shares with that other symbol of lost causes, Amalgamated Investment & Property Co Ltd v
Texas Commerce International Bank Ltd [1982] QB 84 (CA), which deals with estoppel by convention (or active
acquiescence).

49 See Bingham MR in Phillips Electronique Grand Public SA v British Sky Broadcasting Ltd [1995] EMLR 472.

50 [2005] UKHL 27.

51 There were 14 listed in the bond terms.

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52 It is therefore less than satisfactory to say, as was said in the Court of Appeal, that the giving of an invalid notice of
default accelerates nothing. In the House of Lords, Lord Scott, delivering the only judgment, was prepared to accept
the premise that giving the notice might cause serious financial or commercial loss to the borrower: [2005] UKHL
27, para 31.

53 Ibid, para 37.

54 See Woodar Investment Development Ltd v Wimpey Construction UK Ltd [1980] 1 WLR 277.

55 The proceedings involved the trustee for bondholders and one of the funding banks; the borrower was not a party to
the proceedings.

56 [1998] 1 WLR 896.

57 See generally E McKendrick, “The Interpretation of Contracts: Lord Hoffmann’s Re-Statement”, in S Worthington
(ed), Commercial Law and Commercial Practice, Hart Publishing, 2003, pp 139-162; G McMeel, “The Rise of
Construction in Contract Law” [1998] Lloyd’s MCLQ 382; C Staughton, “How Do the Courts Interpret Commercial
Contracts?” [1999] Cambridge Law Journal 303.

58 Bunge Corp v Tradax Export SA [1981] 1 WLR 711.

59 Controversially, Lord Hoffmann, in the West Bromwich case, refers to Lord Wilberforce’s matrix of fact as “if
anything, an understated description of what the background may include”: [1998] 1 WLR 896, 912.

60 See Prenn v Simmonds [1971] 1 WLR 1381.

61 [1998] 1 WLR 896, 912-13.

62 Liverpool City Council v Irwin [1977] AC 239 (rejecting the contrary view of Lord Denning MR in the Court
below).

63 See, for example, C Itoh & Co Ltd v Cia de Navegacao Lloyd Brasiliero [1999] 1 Lloyd’s Rep 115 (affirming Clarke
J).

64 For the test, see Joscelyne v Nissen [1970] 2 QB 86.

65 Photo Production Ltd v Securicor Transport Ltd [1980] AC 827.

66 The Unfair Contract Terms Act 1977 (UK).

67 It is in fact not easy to describe the effect of the Act on the offending term in this latter case. The Act largely targets
the proferens and provides that he may not rely upon such an offending term.

68 SI 1999 No 2083.

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69 Law Com Report No 292 (2005), paras 2.23ff.

70 Regulation 8(1).

71 Regulation 5(1).

72 See Lord Bingham in Director General of Fair Trading v First National Bank [2002] 1 AC 481. Lord Steyn
explicitly repudiated the bank’s view that the indicative list of unfair terms in Schedule 2 to the Regulations showed
that the Regulations were “predominantly concerned with procedural defects in negotiating procedures”.

73 Namely, the “definition of the main subject matter of the contract” and the “adequacy of the price or remuneration,
as against the goods or services supplied in exchange”. (The latter formula is odd: it is the adequacy of the goods or
services that might give rise to concerns.)

74 Regulation 6(2).

75 [2002] 1 AC 481.

76 See also Lord Hope who referred to the differential way in which good faith had penetrated the various legal systems
of the European Union: ibid p 502.

77 “Openness requires that the terms be expressed fully, clearly and legibly, containing no concealed pitfalls and traps”:
[2002] 1 AC 481, 494.

78 As added by s 4 of the Sale and Supply of Goods Act 1994 (UK).

79 It does not apply to s 12(1) (seller’s right to sell).

80 Re Moore and Landauer [1921] 2 KB 519 (CA); Arcos v EA Ronaasen & Son [1933] AC 470.

81 The Unfair Contract Terms Act 1977 (UK) is disapplied in such cases: see ss 26-27.

82 The Times, 26 July 2000.

83 See also Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235.

84 As well as its sports facilities under a separate contract.

85 [1962] 2 QB 26.

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86 Bettini v Gye (1876) 1 QBD 183.

87 Antaios Compania SA v Salen Rederierna [1985] AC 191, 201.

88 Unreported, 28/9/98 (Rimer J) (QB).

89 Law Com Report No 292 (2005).

90 Apart from consumers, the Law Commission’s proposals extend to very small businesses: ibid, paras 2.30ff
(“‘micro’ businesses”) of nine employees or fewer.

91 [1997] AC 514.

92 Ibid p 519.

93 See too the well-known words of Lord Radcliffe in Campbell Discount Co v Bridge [1962] AC 600, 626:
“‘Unconscionable’ must not be taken to be a panacea for adjusting any contract between competent persons when it
shows a rough edge to one side or the other ...”.

94 [1997] AC 514, 519.

95 [1981] 1 WLR 711.

96 In an article published in an ICC newsletter in winter 2000, Professor Ronald Mann, having conducted a survey of a
cross-section of banks, found that in only 27 per cent of cases was there exact documentary compliance with the
letter of credit, and in many cases there were “surprisingly serious” discrepancies.

97 International Chamber of Commerce, Uniform Customs and Practice for Documentary Credits 1993 (“UCP 500”).

98 See UCP 500, Art 14(c), modifying Bankers Trust Co v State Bank of India [1991] 2 Lloyd’s Rep 443.

99 See Crédit Industriel et Commercial v China Merchants Bank [2002] 2 All ER (Comm) 427; International Chamber
of Commerce, International Standard Banking Practice for the Examination of Documents under Documentary
Credits (“ISBP”) (No 645, 2003).

100 H Collins, “Formalism and Efficiency: Defining European Contract Law” [2000] European Review of Private Law
211, 229.

101 White & Carter (Councils) Ltd v McGregor [1962] AC 413.

102 Article 1.106 of European Principles, and art 1.7 of Unidroit.

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103 Article 7(1) (interpretation of the Convention in accordance with good faith).

104 James Spencer & Co Ltd v Tame Valley Padding Co Ltd, 8/4/98, per Potter LJ: “There is no general doctrine of good
faith in the English law of contract. The [contracting parties] are free to act as they wish provided that they do not act
in breach of a term of the contract.”

105 Lord Ackner’s strictures against good faith in Walford v Miles [1992] 2 AC 128, 138, concerning its repugnance to
the negotiation process in a world of arm’s length contracting, should be kept confined to cases of contractual
formation.

11 NZBLQ 426
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