Good Faith in Contract Particularly in the Contracts of Arbitration and Chartering

Transcription

1 i Good Faith in Contract Particularly in the Contracts of Arbitration and Chartering By: Prof. William Tetley, Q.C. McGill University Web: (published in (2004) 35 JMLC ) I. Introduction Good Faith is Essential to Contract II. III. IV. The Purpose of this Paper Good Faith is Necessary to All Society Definitions 1) Good faith 2) Bad faith V. The Application of Good Faith 1) The formation and performance of the contract 2) Non-contractual good faith 3) Where no contract is ever formulated VI. Is There a General Duty of Good Faith in Law? 1) Roman law, Lord Mansfield, the reaction, the revival 2) The civil law and good faith 3) The common law and good faith in the 19 th and 20 th centuries VII. Good Faith in the Common Law (Piecemeal Solutions) 1) Equity 2) Misrepresentation 3) Collateral promises, collateral warranties, collateral contracts 4) Mistake 5) Undue influence Professor of Law, McGill University; Distinguished Visiting Professor of Maritime and Commercial Law, Tulane University; counsel to Langlois Kronström Desjardins (Langlois Gaudreau O Connor) of Montreal. The author is indebted to Vanessa Rochester, a third-year student at the Faculty of Law of McGill University and to Robert C. Wilkins, B.A., B.C.L., for their assistance with the preparation and correction of the text.

2 ii 6) Duress 7) Warranties, conditions and innominate terms 8) Fundamental breach 9) Waiver and estoppel 10) Fiduciary obligations 11) Unjust enrichment and restitution 12) Other rules 13) Legislation a) Statute law b) Regulations VIII. Good Faith and the Common Law Today 1) The United Kingdom 2) The United States 3) Canada 4) Australia and New Zealand IX. Good Faith in International Law (International conventions, instruments and the lex mercatoria,) 1) The U.N. Convention on Contracts for the International Sale of Goods, 1980 (Vienna Sales Convention, 1980) 2) The International Institute for the Unification of Private Law, 1994 (UNIDROIT Principles, 1994) 3) The Vienna Convention on the Law of Treaties, ) The lex mercatoria X. The Contracts of Arbitration and their Advantages and Disadvantages 1) The arbitration contracts 2) The arbitration process a definition 3) A United Kingdom definition 4) Advantages of arbitration 5) Disadvantages of arbitration XI. Ad Hoc Arbitration vs. Institutional Arbitration 1) Ad hoc arbitration 2) Institutional arbitration 3) The ICC: International Court of Arbitration 4) The lex mercatoria, arbitration and good faith XII. The Law of Arbitral Proceedings

3 iii 1. The UNICITRAL Model Law on International Commercial Arbitration, The U.N. Convention on the Recognition & Enforcement of Foreign Arbitral Awards, 1958 a) The United States b) Canada c) The United Kingdom 3. Inter-American Convention on International Commercial Arbitration, 1975 (Panama Convention, 1975) 4. Inter-American Convention on the Extraterritorial Validity of Foreign Judgments and Arbitral Awards, 1979 (Montevideo Convention, 1979) XIII. XIV. Arbitration and Good Faith Appeals from Arbitral Awards 1) Is it proper to appeal the findings of an award? 2) The United Kingdom 3) The United States XV. The Distinctive Nature of Charterparties 1) Parochial jurisprudence 2) No binding international law on chartering terms 3) Charterers, however, want the benefit of international law 4) No strictly drafted uniform forms 5) Tanker charters 6) How many owners and charterers can dance on the point of a needle XVI. Good Faith and Charterparties 1) Lack of good faith in chartering 2) The historical basis for lack of good faith in chartering 3) Slow advance of good faith in the common law 4) Good faith in chartering through the back door

4 iv XVII. Arbitration and Chartering 1) Arbitration in London and New York 2) International enforcement 3) Arbitration and reasons XVIII. Is a Statute (Convention) for Charterparties Unthinkable? XIX. Conclusion Good Faith is Essential to Arbitration and to Chartering WT/Good Faith in Contract, January 26, 2004

5 1 I. Introduction Good Faith Is Essential to Contract Arbitration and chartering are both contracts, which must be negotiated, agreed upon and performed. It is the thesis of this paper that all contracts, including arbitration and chartering, should be entered into and performed in good faith. Viable arbitration requires that each party be in good faith; otherwise multiple proceedings, the questioning of every point of law, unnecessary procedures and appeals, inordinate delays and the resulting high costs only result in failure to arrive at a just solution in a reasonable time. Judges, on the other hand, as opposed to arbitrators, have more authority to deal with recalcitrant parties or their attorneys who may intentionally or unintentionally put a spoke in the wheel of expeditious and fair proceedings. In consequence, the practice of good faith by the parties, their attorneys and the arbitral tribunal is very important, if arbitration is to be more efficient and more effective than proceedings before the courts. Similarly chartering, which has its roots in the common law, which latter has never had a general doctrine of good faith, nevertheless would be better off with good faith as a basic principle in its negotiation and performance. Otherwise uncertainty in the performance of the charterparty is likely. And the present-day practice of solving chartering disputes principally by arbitration only exacerbates the problem exponentially.

6 2 II. The Purpose of this Paper The purpose of this paper is to define good faith and then to illustrate that the entering into, and the performance of a contract, including the contracts of arbitration and ship chartering, require good faith as a fundamental element of contract law. 1 Three questions will be asked. Firstly, does an obligation to act in good faith actually exist in the civil and the common law of contract? Secondly, is good faith essential to efficient and effective arbitration? Thirdly, is good faith an implied term in ship chartering or should it be? In effect, the paper is three opening salvos on three closely-related subjects: 1) good faith in general in the civil and the common laws, 2) good faith in arbitration, and 3) good faith in chartering. By reflecting on all of them at the same time, the paper is of relevance to the shipping man, the commercial man, the arbitrator, the lawyer and the professor. III. Good Faith is Necessary to All Society Good faith, of course, extends far beyond contracts and arbitration and chartering to all of society itself. Aristotle set out the broad parameters that "[i]f good 1 Arbitration, it must be also understood, is much more than a separate contract. Such separation has been referred to as the autonomy of the arbitration clause whereby an arbitration agreement is considered to be separated from the contract in which it is embedded. Redfern and Hunter explain the legal analysis of this separation as follows: The arbitration clause in a contract is considered to be separate from the main contract of which it forms part and, as such, survives the termination of that contract Another method of analyzing this position is that there are in fact two separate contracts. The primary or main contract concerns the commercial obligations of the parties; the secondary or collateral contract contains the obligation to resolve any disputes arising from the commercial relationship by arbitration., A. Redfern and M. Hunter, Law and Practice of International Commercial Arbitration, 3 Ed. (London: Sweet & Maxwell, 1999) para at 154. See also P. Sanders, Quo Vadis Arbitration?: Sixty Years Of Arbitration Practice: A Comparative Study (The Hague: Kluwer Law International, 1999) at See also the Québec Civil Code 1994 (enacted by S.Q. 1991, c. 64), art c.c.q., which similarly provides that an arbitration agreement contained in a contract is considered to be an agreement separate from the other clauses of the contract, and that the ascertainment by the arbitrators that the contract is null does not entail the nullity of the arbitration agreement.

7 3 faith has been taken away, all intercourse among men ceases to exist." 2 Thus, all social intercourse requires good faith. IV. Definitions 1) Good faith Defining good faith is a formidable task. Juenger noted that the term lacks a fixed meaning because [it ] is loose and amorphous. 3 Powers described it as an elusive term best left to lawyers and judges to define over a period of time as circumstances require. 4 Yet, Powers went on to define it as an expectation of each party to a contract that the other will honestly and fairly perform his duties under the contract in a manner that is acceptable in the trade community. 5 He went on to give it international authority as an international doctrine that requires parties to an international transaction to act reasonably, as they would expect the other party to act. 6 Another definition of good faith emphasizes the use of the principle by courts to constrain the discretion that the parties may have over a decision affecting the parties rights and duties. In this way courts hold that good faith requires the discretionexercising party to act fairly, in order to protect justifiable expectations arising from their agreement. 7 2 Cited by Hugo Grotius in De Jure Belli ac Pacis, Libri Tres (1625), and cited by J.F. O'Connor in Good Faith in International Law (Brookfield USA: Dartmouth Publishing Company Limited, 1991) at F.K Juenger, Listening To Law Professors Talk About Good Faith: Some Afterthoughts (1995) 69 Tul. L. Rev at P. J Powers, Defining the Indefinable: Good Faith and the United Nations Convention on the Contracts for the International Sale of Goods (1999) 18 J.L. & Com. 333 at Ibid. at 352. See also E.A. Farnsworth, Precontractual Liability and Preliminary Agreements: Fair Dealing and Failed Negotiations (1987) 87 Columbia L. Rev. 217, who intertwines the notions of fair dealing and good faith. 6 Powers, supra note 4, at S.J. Burton, Principles of Contract Law, 2 nd ed. (St. Paul, Minn.: West Group, 2001) at

8 4 Good faith has also been associated with the legal rules related to honesty, fairness and reasonableness. Hence, O Connor describes good faith as: a fundamental principle derived from the rule pacta sunt servanda, and other legal rules, distinctively and directly related to honesty, fairness and reasonableness, the application of which is determined at a particular time by the standards of honesty, fairness and reasonableness prevailing in the community which are considered appropriate for formulation in new or revised legal rules. 8 I, therefore, define good faith in contract as just and honest conduct, which should be expected of both parties in their dealings, one with another and even with third parties, who may be implicated or subsequently involved. Good faith requires that each party be fair and honest in negotiations and, once the agreement has been reached, that the parties also perform their respective obligations and enforce their rights honestly and fairly. 2) Bad faith Bad faith is perhaps easier to define. 9 It has been said that: Bad faith performance occurs precisely when discretion is used to recapture opportunities foregone upon contracting when the discretion-exercising party refuses to pay the expected cost of performance. Good faith performance, in turn, occurs when a party s discretion is exercised for any purpose within the reasonable contemplation of the parties at the time of formation to capture opportunities that were preserved upon entering the contract, interpreted objectively. The good faith performance doctrine therefore directs attention to the opportunities foregone by a discretionexercising party at formation, and to that party s reasons for exercising discretion during performance J.F. O Connor, Good Faith In English Law (Brookfield USA: Dartmouth Publishing Company, 1990) at Resorting to the examples of bad faith, in Summer s view, forms the best way to understand the doctrine of good faith, because good faith has no general meaning but serves to exclude a wide range of heterogeneous forms of bad faith. See R.S. Summers, Good Faith in General Contract Law and the Sales Provisions of the Uniform Commercial Code (1968) 54 Va. L. Rev. 195 at 201; also R.S. Summers, The General Duty of Good Faith: Its Recognition and Conceptualization (1982) 67 Corn. L. Rev S.J. Burton, Breach of Contract and The Common Law Duty to Perform in Good Faith (1980) 94 Harv. L. Rev. 369 at 373.

9 5 Similarly in Gateway Realty Ltd. v. Arton Holdings Ltd. and LaHave Developments Ltd. (No. 3) 11 Kelly J. held that: In most cases, bad faith can be said to occur when one party, without reasonable justification, acts in relation to the contracts in a manner where the result would be to substantially nullify the bargained objective or benefit contracted for by the other, or to cause significant harm to the other, contrary to the original purpose and expectation of the parties. In Crawford v. Agricultural Development Board (NB), 12 the New Brunswick Court of Appeal (Bastarache J.A.) held: I would agree with Belobaba, 13 that community standards are imprecise and will vary from trade to trade. Bad faith is nevertheless identifiable, as stated by the trial Judge, because it requires dishonesty, ill will, improper motive or other intentional conduct equivalent to fraud. V. The Application of Good Faith 1) The formation and performance of the contract The principle of good faith should apply not only at the formation of a contract, i.e. during negotiations, but during the performance. Good faith is also necessary during enforcement of a contract, if proceedings are necessary to enforce it. 2) Non-contractual good faith Pre-contractual good faith and non-contractual good faith tend to become indistinguishable in the common law. Juenger points out that the concept of good faith in law tends to blur the distinction between contractual and noncontractual obligations 14 and that [t]he idea of a precontractual duty to bargain in good faith 11 (1991) 106 N.S.R. (2d) 180 (N.S. S.C.T.D.); (1992) 112 N.S.R. (2d) 180 (N.S. C.A.). 12 (1997) 192 N.B.R. (2 nd ) 68 at 78; 489 A.P.R. 68 at 78 (N.B. C.A.). 13 E.P. Belobaba, Good Faith in Canadian Contract Law, Special Lectures of the Law Society of Upper Canada (Don Mills, Ontario: De Boo, 1985) 73 at Juenger, supra note 3 at 1254.

10 6. obliterates a dividing line long thought to be axiomatic in Anglo-American jurisprudence. 15 3) Where no contract is ever formulated Where the question of a pre-contractual obligation of good faith arises, however, a distinction must be made between where there is an enforceable contract or agreement and where there is no enforceable contract or agreement. In the absence of an enforceable contract or agreement, bad faith may actually give rise to remedies in delict or tort, but not in contract, because the liability arises from an extra-contractual obligation. In a recent comparative study between American and French law concerning precontractual good faith, N.E. Nedzel opined that [w]hen there is no contract or preliminary agreement, both French and American law agree that contract law is inapplicable. Thus, precontractual misbehavior must be sanctioned under tort or equity theories. 16 VI. Is There a General Duty of Good Faith in Law? 1) Roman law, Lord Mansfield, the reaction, the revival The concept of good faith (also called bona fides or bonne foi) has existed at least since the development of Roman law, 17 and is believed by some to have even preceded natural law. 18 Bona fides contracts were originally distinguished from stricti iuris (formal) contracts, which were enforceable only by satisfying certain legal 15 Ibid. 16 N.E. Nedzel, A Comparative Study of Good Faith, Fair Dealing, And Precontractual Liability (1997) 12 Tul. Eur. & Civ. L.F. 97 at N.W. Palmieri, Good Faith Disclosures Required During Precontractual Negotiations (1993) 24 Seton Hall L. Rev. at 70, 80. See also J.A.C. Thomas, Textbook of Roman Law (Amsterdam: North-Holland Publishing Company, 1976) at 228; W.W. Buckland, A Text-book of Roman Law from Augustus to Justinian, 3 rd ed. Rev. by P. Stein (London Cambridge University Press, 1963) at 416 sq., 679 sqq; M.J. Scermaier, Bona fides in Roman contract law in Good Faith in European Contract Law, Ed by R. and S. Whittaker (Cambridge: Cambridge University Press, 2000), W.T. Tête, Tort Roots and Ramifications of the Obligations Revision (1986) 32 Loy. L. Rev. 47 at 58.

11 7 requirements. 19 In line with the commercial development and with the advent of consensual notion of contracts, bona fides was conceived as a source from which new rules could be derived. 20 It was not a yardstick merely for interpretation, but rather it operated as a standard to create an obligation binding the parties and giving the Roman judge ample discretion to deal with informal contracts. 21 And good faith has been given an even more fundamental basis in natural law, which enlarged the narrow, pragmatic rule, otherwise known as pacta sunt servanda, 22 that promises and agreements must be kept. Cicero, in his treatise On Duties, attributed to promises such force that he called good faith the foundation of justice. 23 Bona fides /good faith in Roman law was based on an ethical concept [that] was applied in the form of specific rules, the most important of which were formulated in relation to the basic rule pacta sunt servanda. 24 In Roman society, good faith was always associated with trustworthiness, conscientiousness and honourable conduct. 25 The development of good faith into a more sophisticated principle, in the common and civil law from the 19 W. W. Buckland, supra note 17 at 413. In contrast to parties to a stricti iuris contract whose obligations were confined to what they had expressed, the parties to a bona fides contract were bound beyond their expression by equity; See also W.L. Burdick, The Principles of Roman Law and Their Relation to Modern Law (Rochester, N.Y.: The Lawyers Cooperative Publishing Co., 1938; reprinted 1989) ; T. Glyn Watkin, An Historical Introduction to Modern Civil Law (Aldershot, England: Dartmouth Publishing Company Limited, 1999) at 309. In bona fides contracts, remedy was denied by the praetor where the party seeking it was not in good faith, ibid. In such contracts, as opposed to stricti iuris contracts, there was a certain discretion to determine how much was due to the plaintiff after considering how much each party owed to the other in light of their mutual obligation of good faith. 20 S. Litvinoff, Good Faith (1997) 71 Tul. L. Rev at Ibid. 22 H.A. Rommen, The Natural Law, a study in legal and social history and philosophy (Thomas R. Hanley, trans.), St. Louis: B. Herder Book Co., 1947) at O Connor, supra note 2, at Ibid. at Ibid.

12 8 Roman times, began as an obligation of contracts, promises and agreements and then became more sophisticated. 26 After the fall of Rome, the concept of good faith as an implied principle in the performance of contracts appeared again in mercantile practice during the eleventh and twelfth centuries and was adopted generally throughout civil law regimes 27 The common law, too, was not immune from the concept which grew slowly with time. Thus, by the 18 th century, the high watermark of good faith in the common law was reached, so that in 1766 Lord Mansfield ( ), who served as Chief Justice of King s Bench from 1756 to 1788, could refer to good faith as the governing principle...applicable to all contracts and dealings. 28 2) The civil law and good faith commented: 29 In Interfoto Picture Library Ltd. v. Stiletto Visual Programmes Ltd., Bingham, L.J. 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. Civil law regimes take an expansive approach to the obligation of good faith, applying it to both the formation of a contract and its performance, whereas the common law enunciates the narrower view that good faith is at best only applicable to the performance of the contract and is most often only recognized by statute. The civil law 26 Ibid, at 118. See also G. Schwarzenberger and E.D Brown, A Manual of International Law, 6 Ed., (Milton: Professional Books Ltd., 1976) at 23, 36 and , on good faith as one of the seven fundamental principles of customary international law. 27 J.P. Anderson, Lender Liability for Breach of the Obligation of Good Faith Performance (1987) 36 Emory L.J. 917 at Carter v. Boehm (1766) 3 Burr. 1905; 97 E.R [1988] 1 All E.R. 348 at 352 (C.A.)

13 9 principle of good faith is based on the concept that contracts are a relationship between two parties; therefore the obligation of good faith exists during negotiations and even before a contractual relationship may exist, 30 (rather than at the commencement of a contract in the common law, which requires an offer, acceptance and a consideration). 31 Bad faith bargaining may result in extra-contractual responsibility in the civil law, for example, where a party feigns negotiating, without having any genuine intention of concluding a contract at the end of the day, but purely in order to obtain information which he may use for his own benefit or to harm a competitor or opponent, and then breaks off the bargaining abruptly. Such responsibility is easier to establish where the negotiations have reached a relatively advanced stage at the time they are broken off. 32 The French Civil Code, 1804, the mother of most modern civil codes, includes the principle of good faith in particular situations, 33 for example contracts at 1134 c.c. and prescription, at arts. 2265, 2268, The new Civil Code of Québec (ccq) in force as of is an excellent example of a modern civil code going much further, declaring good faith to be a basic principle of general application. 35 Thus art. 6 ccq reads: Every person is bound to exercise his civil rights in good faith and art. 7 ccq declares: No right may be exercised with the intent of 30 J. Ghestin, Traité de droit civil. La formation du contrat (Paris: L.G.D.J., 1993), para. 329 at 294; J.-L. Baudouin & P.-G. Jobin, Les Obligations, 5 Ed., (Montreal: Les Éditions Yvon Blais, 1998) paras at , who, in addition to discussing Québec civil law, also summarize French, Belgian and Dutch law on the obligation of good faith in pre-contractual bargaining. 31 Carter v. Boehm, supra, note See Baudouin & Jobin, supra, note 30, who also note (see para. 94 at 114) that in France, where the parties have made an agreement in principle whereby they expressly undertake to pursue negotiations, bad faith conduct of such negotiations may also entail contractual responsibility.. 33 J. Schmidt, «La sanction de la faute précontractuelle» (1974) R.T.D.C. 46 at 50-51; P. Jourdain, «Rapport français» in La bonne foi. Travaux de l Association Henri Capitant, Journées louisianaises 1992 (Paris: Litec, 1994). 34 S.Q. 1991, c. 64, in force January 1, See also Jean Pineau, Théorie des obligations in La Réforme du Code civil (Quebec: Les Presses de l Université Laval, 1993), para. 10 at Baudouin & Jobin, Les Obligations, supra, note 30, para. 90 at their note 22, state that good faith is a fundamental pillar, not only of Québec civil law of obligations, but of the whole of private law generally.

14 10 injuring another or in an excessive and unreasonable manner which is contrary to the requirements of good faith. In respect of contracts, good faith is required in both the negotiation and the performance of agreements. Art ccq reads: The parties shall conduct themselves in good faith both at the time the obligation is created and at the time it is performed or extinguished. Other modern codes are to the same effect. Art of the Louisiana Civil Code 36 declares that: Good faith shall govern the conduct of the obligor and the obligee in whatever pertains to the obligation. 37 The German Civil Code, at art. 242, also specifies that: The obligor must perform in a manner consistent with good faith taking into account accepted practice, as does the Italian Civil Code, which states at art. 1337, "[t]he parties, in the conduct of negotiations and the formation of the contract, shall conduct themselves according to good faith..." Effectively, in civil law regimes, a contracting party owes a pre-contractual duty of good faith to negotiate fairly and honestly. 38 The good faith obligation then extends to performance of the contract, requiring that the parties act reasonably. In other words, one should not breach the relationship of trust with persons, with whom one negotiates and then contracts. 39 3) The common law and good faith in the 19 th and 20 th centuries Despite the influence of Lord Mansfield 40 (who, in any event, was a Scot with a sound knowledge of civilian principles 41 ), the 19 th and early 20 th centuries, witnessed a 36 The Louisiana Civil Code of 1870 (itself the successor to earlier codifications in 1808 and 1825) has been virtually recodified piecemeal since Louisiana Civil Code, 2001 Edition, A.N. Yiannopoulos, ed. (St. Paul, Minn.: West Group, 2001). 38 J. Klein & C. Bachechi, Precontractual Liability and the Duty of Good Faith Negotiation in International Transactions (1994) 17 Hous J. Int'l L. 1, at Ibid. 40 Carter v. Boehm, supra note 28.

15 11 uniform reaction in the common law against Lord Mansfield s position on good faith with the rise of legal positivism and the pursuit of legal certainty, attendant on the growth of laissez-faire liberalism. 42 This resulted in the English concept of absolute freedom to contract. Nevertheless, by the end of the 19 th century, there was another swing of the pendulum when preventative legislation was adopted to avoid abuse of power by the rich and powerful. In maritime law, this evolution can be seen in the U.S. Harter Act of 1893, 43 on carriage of goods by sea, one of the earliest consumer protection acts, (albeit a maritime one) where the carrier could not contract out of many of its responsibilities. 44 In the twentieth century, good faith slowly gained some prominence in the common law, with the result that it is to be found in most national common law systems, although to a limited extent, and usually only in respect of the performance of the 41 See E. Heward, Lord Mansfield (Barry Rose (Publishers) Ltd., Little London, Chichester, West Sussex, 1979) at 10-13, who points out that, even as a young lawyer, Lord Mansfield had a good knowledge of Latin and of Roman Law, which he likely acquired at Oxford before reading for the bar in London. He also studied Scots law, in order to be able to assist his sponsor at Lincoln s Inn, William Hamilton, who, as both a Scottish advocate and an English barrister, was involved in pleading appeals from the Scottish Court of Session to the House of Lords. Lord Mansfield also spoke and read French and was familiar with French commercial law. 42 This has been commented on by P.S. Atiyah, The Rise and Fall of Freedom of Contract (Oxford: Clarendon Press, 1979) at 168: We should begin by noting that in the latter half of the eighteenth century there were signs of an emerging principle of good faith in contract law. The idea of good faith would, of course, have been completely congruent with the traditional morality, though it needed someone like Lord Mansfield to enunciate and apply the principle in a wide variety of cases. Mansfield began this task, but it was never completed, for the economic liberalism which he also favoured and helped to develop, ultimately proved fatal to anything as paternalistic as a general principle of good faith. 43 Act of February 13, 1893, chap. 105, 27 Stat , 46 U.S.C. Appx Legislation modeled on the Harter Act was subsequently introduced in Australia with the Carriage of Goods Act 1904; in New Zealand with the Shipping and Seamen Act 1903, 1908, 1911, 1912 and in Canada with the Water-Carriage of Goods Act Under this pressure from the U.S. and major member States of the British Empire, the United Kingdom itself eventually came to accept the need for a cargo liability regime more protective of weaker bargaining parties and supported the adoption of the Brussels Convention on the Unification of Certain Rules of Law relating to Bills of Lading, adopted at Brussels, August 25, 1924, and in force June 2, 1931, better known in English as the Hague Rules. In fact the U.K. adopted the Rules in its Carriage of Goods by Sea Act, 1924 before they were formally adopted by the diplomatic conference in Brussels.

16 12 contract. It is very often by statute as well. 45 Nevertheless, there is still considerable opposition to the doctrine of good faith 46 in common law jurisdictions. The opposition among common lawyers to a general good faith duty is generally rooted in the persistent anxiety that importing such an overriding principle into the common law, particularly as applied to pre-contractual bargaining (as opposed to postcontractual performance), would result in cases being decided on subjective standards of morality and fairness, thus giving rise to uncertainty, the bane of commercial law. The House of Lords, in Walford v. Miles, rejected the notion of a pre-contractual duty to negotiate in good faith, stating: 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 A duty to negotiate in good faith is as unworkable in practice as it is inherently inconsistent with the position of a negotiating party. 47 The House of Lords, in The Star Sea, a marine insurance decision, did illuminate the issue when it held that there was a post-contractual duty to exercise good faith. 48 It is important to note, however, that the Court added the following limits: 1) that good faith varies according to the point or stage at which it arises; 2) the duty in respect of claims is to only certain types of claims and before legal proceedings have commenced. 49 Thus, good faith has often had to enter the common law in some disguised form, and this is precisely what it has done. 45 R.A. Newman,"The General Principles of Equity," in R.A. Newman ed. Equity in the World's Legal Systems (Brussels, Belgium: Établissements Émile Bruylant, 1973) 589 at Sir R.Goode, Commercial Law in the Next Millennium (London: Sweet & Maxwell, 1998) at 19. See D. Clark, Some Recent Developments in the Canadian Law of Contracts, (1993) 14 Advocates Q Walford v. Miles [1992] 2 W.L.R. 174, at 181 (H.L.). For criticism of the decision see Lord Steyn Contract Law: Fulfilling the Reasonable Expectations of Honest Men (1997) 113 Law Quarterly Rev. 433 at 439, who argues that the notion of good faith is practical and workable, although unnecessary. 48 The Star Sea [2001] 1 Lloyd s Rep. 389 (H.L.). 49 Ibid. See also Bariş Soyer, The Star Sea a lone star?, [2001] Lloyd s M.C.L.Q. 428.

17 13 VII. Good Faith in the Common Law (Piecemeal Solutions) Historically, the common law of England did not recognize good faith. Thus John H. Baker, in his celebrated text An Introduction to English Legal History, 50 makes no reference to good faith in his history of the common law. Sir Roy Goode, in his equally celebrated text Commercial Law, confirms, there is, surprisingly, no general principle of English law that requires legal remedies to be exercised in good faith. 51 Comparing the attitude of the civil law with the common law of England on the question of a general principle of good faith, Bingham L.J., in Interfoto Picture Library Ltd. v. Stiletto Visual Programmes Ltd., observed: 52 English law has, characteristically, committed itself to no such overriding principle but has developed piecemeal solutions in response to demonstrated problems of unfairness. Many examples could be given. Thus equity has intervened to strike down unconscionable bargains. Parliament has stepped in to regulate the imposition of exemption clauses and the form of certain hirepurchase agreements. The common law also has made its contribution by holding that certain classes of contract require the utmost good faith, by treating as irrecoverable what purport to be agreed estimates of damage but are in truth a disguised penalty for breach, and in many other ways. Among the many other piecemeal solutions which English courts have used to police the fairness of contracts and their performance, in the absence of a general good faith doctrine, are the common law rules on mistake and misrepresentation, duress (including economic duress) and undue influence, the objective interpretation of contracts, the concept of unconscionability, implied terms, waiver and estoppel. 53 A few of these concepts will be reviewed here. 1) Equity 50 J.H. Baker, An Introduction to English Legal History, 4 th ed. (London: Butterworths, 2002). 51 R. Goode, Commercial Law, 2 nd ed. (Harmondsworth: Penguin Books, 1995) at [1988] 1 All E.R. 348 at 353 (C.A.). 53 R. Bradgate, Commercial Law, 3 Ed. (London: Butterworths, 2000) at 27 [ Bradgate, Commercial Law, 3 Ed., 2000 ] mentions several of these common law principles and concepts.

18 14 Equity has played a major role as a stand-in for good faith in English commercial law. As Bradgate explains: 54 In the law of contract, since equity guards against unconscionable conduct, many of the piecemeal solutions by which the law seeks to promote good faith are equitable. They include the right to rescind for misrepresentation, the concept of undue influence and, of course, promissory estoppel, which tempers the rigour of the doctrine of consideration and, by preventing the revocation of a promise once relied on, prevents unconscionable behaviour. Perhaps the clearest example of the role played by equity in introducing a good faith element into English law is the prohibition on unconscionable bargains. Early on, catching bargains entered into in order to take advantage of the weakness or inexperience of expectant heirs were struck down as inequitable and therefore unenforceable because they were found to be either actually or presumptively fraudulent. 55 This concept was eventually extended to include the protection of poor and ignorant persons generally against exploitation by stronger parties through patently unfair contract terms. 56 2) Misrepresentation Misrepresentation of facts made by one party in order to induce another party to enter into a contract, and on which the representee relies in doing so, is sanctioned by rescission of the contract and/or by damages at common law and under the Misrepresentation Act The law on misrepresentation also includes various features reflecting an unacknowledged, but implicit, concern for good faith. For example, 54 Ibid. at See, for example, Earl of Chesterfield v. Janssen (1751) 2 Ves. Sen. 125 at 157, 28 E.R. 82 at See, for example, Cresswell v. Potter [1978] 1 W.L.R. 255, where it was suggested that the modern equivalent of poor and ignorant persons was members of lower income groups. On unconscionable bargains generally, see Halsbury s Laws of England, vol. 31, 4 Ed., Reissue (London: Butterworths, 1998) at paras U.K. 1967, c. 7. The specific remedies available for misrepresentation depend on whether the misrepresentation was fraudulent, negligent or innocent. Where the misrepresentation is other than fraudulent, courts and arbitrators are granted discretion to impose damages in lieu of rescission of the contract, having regard to certain equitable considerations specified at sect. 2(2) of the Misrepresentation Act, 1967.

19 15 although the common law lacks any extensive requirement of full disclosure in precontractual bargaining, there is some authority to the effect that misrepresentation may occur where a contract comes into existence because one party, before the contract is concluded, makes a statement relied upon by the other, which, although true as far as it goes, is incomplete or misleading, 58 or where he makes a statement which, although true when made, later becomes false due to changed circumstances and the statement goes uncorrected. 59 One may also cite misrepresentations as to future intentions or opinions. While the common law is normally concerned only with representations as to facts, statements as to the future intentions or opinions of one party to a contract may also engender liability for misrepresentation in some situations. For example, where a party has special knowledge or expertise, so that his opinion on a particular matter is one upon which the other party can be expected to rely, liability for misrepresentation may ensue if the party did not in fact hold the opinion that he expressed and the other party relied on the opinion to his detriment. 60 The quite obvious intent of these rules is to restrict certain forms of dishonest or bad-faith conduct by contracting parties, even in the pre-contractual context. 3) Collateral promises, collateral warranties, collateral contracts Pre-contractual representations that become terms of a contract may found an action for breach of contract, where those representations are subsequently found to be untrue. But even where they are not incorporated expressly into the agreement, they may nevertheless constitute collateral promises which courts will enforce. In English maritime law of chartering, for example, purely oral misrepresentations as to the vessel s 58 See, for example, Dimmock v. Hallett (1866) 2 Ch. App With v. O Flanagan [1936] Ch. 575, [1936} 1 All E.R. 727 (C.A.). 60 See Smith v. Land and House Property Corporation (1884) 28 Ch. D. 7 (C.A.).

20 16 cargo capacity, draught and intended route, although not embodied in the text of the charterparty, if breached, have been sanctioned by awards of damages. 61 The same concept of collateral contracts or collateral warranties has also been invoked, as well as the doctrine of fraudulent misrepresentation, to by-pass the parol evidence rule and overcome superseding clauses in bills of lading. 62 In this way, courts have been able to consider and analyze evidence other than the bill of lading per se (e.g. the booking note, the carrier s advertisement and freight tariff, and oral and written communications between shipper and carrier) in ascertaining the full terms and conditions of a contract of carriage of goods by sea. 63 Here again, courts in England have intervened to protect the legitimate expectations of shippers, by relieving them of the burden of a clause imposed by the superior bargaining power of contracting carriers, thus demonstrating an implicit judicial preoccupation with good faith and fair dealing in carriage by sea law. 4) Mistake At common law, mistakes by contracting parties, in many cases, give rise to no cause of action, because of the venerable principle of caveat emptor. Each party is expected to take care of his own interests in contracting, and each is entitled to rely on the apparent agreement of the other. In consequence, errors as to the terms of a contract often have no effect on the enforceability of the agreement. Nevertheless, if one party agrees to terms of a contract to which he never intended to agree, and the other 61 See S.C. Boyd, A.S. Burrows & D. Foxton, eds., Scrutton on Charterparties and Bills of Lading, 20 Ed. (London: Sweet & Maxwell, 1996) [hereafter cited as Scrutton on Charterparties and Bills of Lading, 20 Ed., 1996 ], art. 56 at and authorities cited there. 62 A superseding clause in a bill of lading (referred to in the United States as a supersession clause ) provides that all agreements or freight engagements for the shipment of the goods are superseded by the bill of lading itself, which contains the entire contract between the parties. The parol evidence rule precludes testimony and other extrinsic evidence from being used to contradict or vary or add to, a written instrument. 63 See Esso Petroleum Co. v. Mardon [1976] 1 Q.B. 801 at 817, [1976] 2 All E.R. 5 at 13 (C.A.); J. Evans & Sons v. Andrea Merzario [1976] 1 W.L.R. 1078, [1976] 2 All E.R. 930 (C.A.); Tetley, Marine Cargo Claims, 3 Ed. (Montreal: Les Éditions Yvon Blais, 1988) at