Last Updated on April 3, 2024 by Ranking
Common law commercial lawyers have long resisted the temptation of “good faith” as a contractual concept. This article examines whether this situation is changing, focusing on two common law jurisdictions. In England and Wales and in the common law of Canada, case law over the last 10 years shows a move towards acceptance of express and implied duties of good faith.
The liberal rationale for common law appears to be based on the assumption that negotiating parties are more likely to reach a real agreement if they are not “hammered” by contractual obligations. Therefore, in a commercial context, the obligation to negotiate in good faith is perceived by ordinary lawyers as shaky in content, ineffective and giving too much power to judges.
“Characteristically, English law has not confined itself to the application of such an overarching principle [of good faith], but has developed piecemeal solutions to the problems of dishonesty that have emerged,” says Lord McKendrick. Parliament stepped in to regulate the imposition of release clauses and the form of certain hire purchase contracts.
The Court of Appeal held that the term should be interpreted in the context of the contract as a whole. English courts seek to distinguish vague and open-ended terms from those that can be interpreted as providing a sufficient degree of objective certainty. Recently, courts have gone further and acknowledged, to an extent that has not yet been established, that good faith obligations may be implied in commercial contracts.
27 Soper (2021: 582) describes expressed (and implied) bona fide terms in this sense as chameleonic, varying in content depending on context. In Yam Seng Pte Limited v International Trade Corporation Limited Leg-gatt J noted that many relationship contracts will require a high degree of communication, cooperation and predictable outcomes.
So, in 2022, can we say that English law has adopted an obligation to perform commercial contracts in good faith in certain situations? The answer is yes. Courts remain reluctant to recognize the duty of good faith in all commercial contracts. Scholars such as Whittaker (2013, p. 468) continue to warn that such an obligation will lead to an undesirable degree of uncertainty because it encourages “courts to go far beyond the proper function of judicial lawmaking”
In Bhasin v. Hrynew, the Supreme Court of Canada recognized the existence of an “organizational principle of good faith” in commercial contract law. This principle, she argues, underpins and shapes the fragmented common law position. It requires the parties to act reasonably, honestly, and honestly and directly.
At CM Callow Inc. v. Zollinger, the SCC decided to gradually expand Bha-sin’s duty of honesty in the performance of the contract. The Court argued that there was a need to align its commercial law with the law of its main trading partners. In Bhasin’s light, Canadian courts are more willing to protect the expectations of contracting parties than English courts.
The SCC found that Baycrest had breached its duty to act honestly. It lured Callow by deliberately misleading him into believing that the winter contract would not be canceled. The majority was willing to award damages equivalent to expected interest based on the defendant’s least burdensome means of performance.
Commentators drew attention to various techniques for the genesis of new legal provisions in accordance with the methods of common law and civil law. Brown J., speaking for the minority, clearly expressed these concerns in Callow. The majority chose to interpret the Bhasin Organization’s good faith principle as an obligation to “reasonably exercise discretion.”
GVS had complete contractual freedom to allocate the waste between disposal facilities at different destinations. The Quebec Civil Code recognizes a broad obligation of good faith that extends to the formation, performance and termination of a contract. The issue of any extension of good faith in negotiations is much more controversial.
Canadian law has a greater impetus for change than English law. Both systems must overcome a number of hurdles before the obligation to negotiate in good faith can be recognized in commercial contract law. In the Petromec case, English judge Longmore L.J identified three key objections that must be overcome before a court can consider enforcing an undertaking.
Petromec concerned an engineering contract containing a clause providing that the parties would negotiate in good faith to reach an agreement on certain additional costs of upgrading the oil production platform. In a recent judgment, May J confirmed that the validity of such a provision would depend on the court’s finding that the traditional objections to such clauses can be overcome.
“Unlike some civil law jurisdictions, there is no [general] duty to negotiate contracts in good faith at common law” “It will be difficult for a court to determine what the parameters of any duty of good faith and fair dealing will be when it cannot rely on prior interactions between the parties.”
The court in Callow was divided on the question of whether damages should be awarded based on expectations and liability. Expected damages – putting the plaintiff in the position he or she would have been in if the duty had been fulfilled105 – seems highly speculative in this context. There is a power whereby, where the expected compensation is too speculative, the court may limit the plaintiff to damages based on his or her dependency.
The real debate in which we should engage is whether courts should enforce de minimis duties in good faith, including, for example, the duty to act honestly. Under common law, you must proceed carefully and gradually. While Bhasin finds the duty of honesty easy to apply, McKendrick cautions that it may not be as simple as some commentators (or judges) seem to believe.
Good faith continues to divide the common law world. While the concept of duties of good faith in performance appears to be gaining ground, at least in relation to relational contracts, there is still considerable opposition to extending it to the negotiation period. The common law approach to the construction of contracts and the roles it assigns to the judge and the parties to the contract involves the court “revealing” the hidden assumptions of the contracting parties.
