What Can U.S. Legislators Learn from the European View of Good Faith?

The concept of “good faith” exists in most civil law jurisdictions but is frequently interpreted in different ways. Common law jurisdictions, such as the United States, however, generally have an uneasy relationship with the concept of a duty of good faith, as is illustrated by the case law and proposed legislation considered in the previous articles in this series, published in the January, February and March 2014 editions of this newsletter.

The General Common Law Approach

The traditional common law view of the concept of a duty of good faith between contracting parties was best summed up by the English Judge, Bingham, LJ, who commented (Interfoto Picture Library Ltd v. Stiletto Visual Programmes Ltd (1988) 1 All ER 384 at 352 (CA)):

[I]n many civil law systems, and perhaps in most legal systems outside of the common law world, the law of obligations recogni[z]es 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 down on the table.” It is in essence a principle of fair and open dealing.

There has been much debate whether good faith is the behavior of one who acts with a “pure heart and empty head” (Lord Kenyon in Sir John Lawson v. Weston, 170 ER 640 (KB 1801)) or merely the “prudence and causation of a reasonable man” (Gill v. Cubitt (1824) 3 B. & C. 466, 107 ER 806). However, the English courts do seem to agree that “the concept of a duty to carry on negotiations in good faith is inherently repugnant to the adversarial position of the parties when involved in negotiations” (Lord Ackner in Walford v. Miles (1992) 1 All ER 453 at 460), and that it is “as unworkable in practice as it is inherently inconsistent with the position of a negotiating party” (Lord Ackner, ibid at 461).

Although English law has not committed itself to any such overriding principle, it has developed piecemeal solutions in response to demonstrated problems of unfairness, which amount to a species of good faith. The law is suffused with good faith but does not use it as a general legal basis for intervention.

The English common law rules of mistake, misrepresentation and duress all require the fairness and honesty that are indicative of a general duty of good faith. The principles of equity are also similar to the concept of good faith. Their origins lie in the jurisdiction of the Chancellor, who would grant remedies to mitigate the harshness and rigidity of the common law. The rules of promissory estoppel, specific performance, injunctions, consideration, undue influence ' and, more recently, the notion of unconscionable bargains ' all focus on the need for honesty and fairness and so have all led to a whittling away of the common law principles.

In the United States, similar common law concepts of mistake, unconscionability and duress apply. These are very limited doctrines, however, and to prevail on such claims the facts of the matter would have to be egregious. These are not doctrines to be relied upon by a party who simply finds, after the fact, that it did not take care to think through all the potential legal issues that could arise out of its agreement.

Good Faith Impact Limited

Historically and continuously so, U.S. law follows the United Kingdom approach to the duty of good faith. While it is no longer true that parties to arms' length commercial contracts between businesses can disregard good faith when performing their contractual obligations, or exercise their rights, the doctrine of “good faith” continues to have a more limited impact than in civil law jurisdictions. The doctrine is a tool for interpretation of express contract provisions and is generally not an independent cause of action. A “good faith” doctrine that functions as a gap filler ' or that may even override express contract terms ' would undermine the commercial freedom of the parties to regulate their contractual relationship in accordance with a written contract, rather than by reference to an unwritten standard of commercial morality.

In next month's issue, we will discuss some of the lessons that American legislators might take from observation of other countries' application of the doctrine of good faith to franchise agreements.

Dr. Mark Abell, a member of our Board of Editors, is a partner at Bird & Bird LLP, London. Beata Krakus is an officer in the Chicago office of Greensfelder, Hemker & Gale, P.C. (www.greensfelder.com). Krakus is a member of the firm's Franchising & Distribution and Corporate Practice Groups and can be reached at [email protected] or 312-345-5004.

The concept of “good faith” exists in most civil law jurisdictions but is frequently interpreted in different ways. Common law jurisdictions, such as the United States, however, generally have an uneasy relationship with the concept of a duty of good faith, as is illustrated by the case law and proposed legislation considered in the previous articles in this series, published in the January, February and March 2014 editions of this newsletter.

The General Common Law Approach

The traditional common law view of the concept of a duty of good faith between contracting parties was best summed up by the English Judge, Bingham, LJ, who commented (Interfoto Picture Library Ltd v. Stiletto Visual Programmes Ltd (1988) 1 All ER 384 at 352 (CA)):

[I]n many civil law systems, and perhaps in most legal systems outside of the common law world, the law of obligations recogni[z]es 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 down on the table.” It is in essence a principle of fair and open dealing.

There has been much debate whether good faith is the behavior of one who acts with a “pure heart and empty head” (Lord Kenyon in Sir John Lawson v. Weston, 170 ER 640 (KB 1801)) or merely the “prudence and causation of a reasonable man” (Gill v. Cubitt (1824) 3 B. & C. 466, 107 ER 806). However, the English courts do seem to agree that “the concept of a duty to carry on negotiations in good faith is inherently repugnant to the adversarial position of the parties when involved in negotiations” (Lord Ackner in Walford v. Miles (1992) 1 All ER 453 at 460), and that it is “as unworkable in practice as it is inherently inconsistent with the position of a negotiating party” (Lord Ackner, ibid at 461).

Although English law has not committed itself to any such overriding principle, it has developed piecemeal solutions in response to demonstrated problems of unfairness, which amount to a species of good faith. The law is suffused with good faith but does not use it as a general legal basis for intervention.

The English common law rules of mistake, misrepresentation and duress all require the fairness and honesty that are indicative of a general duty of good faith. The principles of equity are also similar to the concept of good faith. Their origins lie in the jurisdiction of the Chancellor, who would grant remedies to mitigate the harshness and rigidity of the common law. The rules of promissory estoppel, specific performance, injunctions, consideration, undue influence ' and, more recently, the notion of unconscionable bargains ' all focus on the need for honesty and fairness and so have all led to a whittling away of the common law principles.

In the United States, similar common law concepts of mistake, unconscionability and duress apply. These are very limited doctrines, however, and to prevail on such claims the facts of the matter would have to be egregious. These are not doctrines to be relied upon by a party who simply finds, after the fact, that it did not take care to think through all the potential legal issues that could arise out of its agreement.

Good Faith Impact Limited

Historically and continuously so, U.S. law follows the United Kingdom approach to the duty of good faith. While it is no longer true that parties to arms' length commercial contracts between businesses can disregard good faith when performing their contractual obligations, or exercise their rights, the doctrine of “good faith” continues to have a more limited impact than in civil law jurisdictions. The doctrine is a tool for interpretation of express contract provisions and is generally not an independent cause of action. A “good faith” doctrine that functions as a gap filler ' or that may even override express contract terms ' would undermine the commercial freedom of the parties to regulate their contractual relationship in accordance with a written contract, rather than by reference to an unwritten standard of commercial morality.

In next month's issue, we will discuss some of the lessons that American legislators might take from observation of other countries' application of the doctrine of good faith to franchise agreements.

Dr. Mark Abell, a member of our Board of Editors, is a partner at Bird & Bird LLP, London. Beata Krakus is an officer in the Chicago office of Greensfelder, Hemker & Gale, P.C. (www.greensfelder.com). Krakus is a member of the firm's Franchising & Distribution and Corporate Practice Groups and can be reached at [email protected] or 312-345-5004.