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Saggi, Conferenze e Seminari 2. Reproduced with permission of Centro di studi e ricerche di diritto comparator e straniero, diretto da M.J. Bonell

The Concept of "Good Faith" in English Law

Roy Goode
Roma (March 1992)

Good afternoon, ladies and gentlemen.

It is a great pleasure for me to be here, particularly because it is my first visit to this University.

What I intend to do is slightly unusual and even unfair: I will talk for a while about good faith, and then try to get your views on some specific problems which have been distributed. My reason for doing this is to give a picture of why we in England find it difficult to adopt a general concept of good faith. It may sound astonishing to you, but we do not know quite what it means, and I will try to tell you why.

We once had a general concept of good faith in the days of the old law merchant, that accumulation of mercantile customary law administered by the merchant courts where the merchants themselves were judges. These merchants would travel across Europe to the international fairs and they themselves would resolve in a rapid, businesslike fashion the disputes which inevitably arose. In those days we had to some extent a relatively uniform, if diffuse and uncodified, commercial law based on commercial custom and practice which the merchants would carry with them, and one of these customs was good faith. Of course, this is not to say that all merchants actually acted in good faith; but it is what they were required to do. This concept therefore formed part of the law merchant, an uncodified body of law quite separate from the ordinary common law administered by the King's courts. Gradually the merchant courts disappeared, their jurisdiction being usurped by the royal courts, and the principles of the law merchant became absorbed into the general common law, so that we had to learn all over again a number of the concepts which had been applied by the merchant courts for centuries.

Those of you who have looked at the English common law will no doubt have become aware of the peculiar phenomenon that we do not have either a civil Code or a commercial Code. Our law was built up case by case, and from this accumulation of cases over many centuries we deduced certain principles. If you want to discover what English law is on a certain point, all you have to do is to read through reports of half a million cases, going back to the 13th century -- because we like to keep our records in order -- and you will surely find the answer. Or else you can take a shortcut and look at a good textbook, which might be considered cheating but is a good deal easier as a starting point! You would regard this as a conceptual muddle, we in England call it pragmatism.

But it is the case that we do not have a Code of private law; and when the common law courts took over the jurisdiction of the old merchant courts, the principle of good faith disappeared for a while. The attitude of the old common law judges was that life in the business world is rough and tough and you should not get into it if you do not know what you are doing. We actually had a judge who said many centuries ago that even if the seller of goods is guilty of fraud, this does not entitle the buyer to get out of the transaction. This does not, of course, represent modern English law, but it gives you an indication that we used to take a fairly extreme position on the duties of parties to look after themselves and to stand, so to say, on their own two feet.

Eventually, as our law developed and became less formulary in character, courts came to consider this approach too ruthless. They began to try to help the weaker party, as by reducing the rigour of the caveat emptor rule in the sale of goods and by imposing certain duties of good faith in a range of other situations.

So today we do have a concept of good faith, but it is a limited one. First of all we treat a person as acting in good faith if he is acts honestly, even if he is negligent or even unreasonable. Thus section 61(3) of the Sale of Goods Act provides:

"A thing is deemed to be done in good faith within the meaning of this Act when it is in fact done honestly, whether it is done negligently or not."

Even legislation worded as simply as this can prove difficult, and this is not confined to the English. My American colleague will be familiar with the Kansas Statute which deals with trains meeting at a level crossing:

"When two trains meet at a level crossing, both shall stop and neither shall start up again until the other has moved away."

There have been two trains in Kansas observing this Statute for two hundred years! The Uniform Commercial Code contains the same test:

"Good faith means honesty in the conduct or transaction concerned."

But in dealings between merchants the Code also has what is called an objective test:

"Good faith in the case of a merchant means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade."

I am not quite clear how significant this distinction is, because it seems to me that "fair dealing" is not the same as reasonable dealing but means avoiding sharp practices or practices that would generally be regarded as dishonest. If a person's peculiar moral code makes him think that there is nothing wrong in taking a bribe to do an improper act, he would be regarded as dishonest even under our subjective approach. So at the end of the day there may not be very much difference between the subjective and the objective test of good faith.

Certainly it is true that approaches to good faith are entirely relative. In days when I was a practising solicitor I once instructed a lawyer in a country of the Middle East to act on our behalf in bringing proceedings against another party. After about a year, it came to my knowledge that the same lawyer was also acting for the party that we were suing. This in England would generally be regarded as fairly odd. I wrote a rather sharp letter and I received back a quite unapologetic reply, saying:

"Dear Mr. Goode,

The fact of the matter is that there is only one really outstanding lawyer in the Middle East, and that is me, so you would be very well advised to stick with me."

So we did, and it all worked out perfectly well!

As I have already said, English law does not have anything equivalent to the general concept of good faith found in the civil law; we require good faith in particular situations. For example, a party who opens negotiations leading to a contract has a duty not to deceive the other party by false statements or by any concealment of facts. You can keep quiet about things, but if you make a statement to induce somebody to enter into a contract, it must not be fraudulent. In some cases we require positive disclosure, particularly in contracts uberrimae fidei, such as insurance contracts. I may say in passing that our civil service is so keen on full disclosure that they used to have a form which had to be signed by old age pensioners, which said:

"I certify that I am still alive. Penalty for false declaration: ť400."

There are various situations in which a person can acquire a good title to a chattel even though his seller did not himself have title, but to do that he must act in good faith. If the buyer knows that his seller did not have title to the goods, of course he will not get a good title himself.

Perhaps more important is that we impose a general duty of good faith in particular types of relationship. We say that an agent owes a duty to subordinate his own interests to those of his principal. He must not accept secret commissions, nor promote his own advantage over that of his principal, and he must keep his principal informed of all facts which are relevant to the relationship. Likewise, a company director owes a duty of good faith to the company that employs him, and a trustee a duty of good faith to his beneficiary.

Duties of good faith are also required if the court is asked to grant what are called "equitable remedies". Time does not allow me to go into the peculiar distinction that our system draws between law and equity. The old common law was very rigid as I have indicated, and rules of equity, administered by the Chancellor, had to be evolved to mitigate the rigour of the common law by restraining common law remedies and by giving remedies which were not given by the old common law, such as specific performance or rescission of a contract for a non- fraudulent misrepresentation. In order to invoke these remedies one has to come to the court "with clean hands," which requires among things that the plaintiff shall have acted in good faith.

In some cases good faith is not relevant in English law where it is probably relevant in Italian law. One of them is when the situation is not considered to create any duty at all. We have never adopted Jhering's principle of culpa in contrahendo. We do have our own Latin -- and you can be sure that it bears no relationship to what the Romans would have used in the good old days -- but a reference to culpa in contrahendo will not normally be found in English textbooks. We do not therefore recognize that the opening of negotiations for a contract by itself creates any sort of duty relationship. We take the view that both parties are at risk until a contract is actually formed. Therefore we see nothing wrong in a party who is conducting negotiations arbitrarily breaking them off, even if he has brought the other party to the brink of the contract, just about to sign it. Also we see nothing wrong in a party conducting negotiations in parallel with several parties, without telling any party that he is negotiating with the others.

The reason we take this view is that when parties are invited to enter into negotiations, they do it with the knowledge that this involves a measure of risk, a certain amount of investment, which might actually be wasted at the end of the day if the contract falls through. For example, if a construction company is invited to tender for a building contract, it may spend a great deal of money preparing estimates, specifications, schedules, and drawings, and in the end it fails to win the contract. That is a part of the risk of competitive tendering. Of course it is different if one person invites another to enter into negotiations when the first person has no intention of ever concluding a contract with the other at all. That is dishonesty and even English law would give a remedy.

We take the view that legal rights can be exercised regardless of motive. In a case decided over fifty years ago, a seller contracted to supply a quantity of timber, which had to be of very precise dimension. Some of the timber which was supplied was slightly too short. It did not actually matter, because the buyer could have used it or resold it, but there was a falling market and the buyer wanted an excuse to get out of the contract. The ready-made excuse was that the timber was not in accordance with the contract specifications. The House of Lords held that a contract for timber one quarter of an inch thick does not mean about a quarter of an inch but precisely a quarter of an inch. There was a duty of strict performance. The reason why the buyer wanted to get out of the contract was irrelevant: having discovered that it was a bad bargain he was entitle to take advantage of non-conformity of the goods with the contract description even though the breach did not cause him any loss. I suspect that in Italy you may have a different rule.

One reason for the rigorous approach adopted by English law towards the observance of contractual undertakings is our view that in what we like to think -- perhaps wrongly -- is the world's leading financial center, the predictability of the legal outcome of a case is more important than absolute justice. It is necessary in a commercial setting that businessmen at least should know where they stand. The law may be hard, but foreigners who come to litigate in London -- and many foreigners actually do so even where their contract is not governed by English law and has no contact with England -- will at least know where they stand. We are worried that if our courts become too ready to disturb contractual transactions, then commercial men will not know how to plan their business life. (At the moment we are particularly keen on attracting business because as you may know the United Kingdom is not in a good economic state!) The last thing that we want to do is to drive business away by vague concepts of fairness which make judicial decisions unpredictable, and if that means that the outcome of disputes is sometimes hard on a party we regard that as an acceptable price to pay in the interest of the great majority of business litigants.

In many cases we arrive at the same answers as you but by a different route. Thus there are numerous situations in which we do not find it necessary to require good faith because we impose a duty which does not depend on good faith. For example, if a party is induced by a wrong statement to enter into a contract, then he can rescind it even if the other party made the statement entirely honestly: good faith does not matter, we have a different route to a remedy. Again, if a party suffers loss through a breach of contract, and fails to take reasonable steps to mitigate his loss, he cannot recover damages to the extent that he could have avoided his loss. This is not a rule of good faith, it is simply a strict rule which says: to the extent that the plaintiff has brought his misfortune on himself he cannot look to the defendant for compensation. If a seller of goods which are defective or otherwise not in conformity with the contract is sued, he is liable not because he did not disclose the defects, or because he acted in bad faith, but simply because he did not supply what he contracted to supply. A person who negligently fails to disclose dangerous defects in a product he is supplying is liable in tort for injury caused by the product to the person to whom it is supplied, and again the question of good faith does not matter: he is liable because he was negligent.

And now I invite you to consider the problems circulated for discussion. These involve a single, but important, aspect of good faith, namely the duty of a party negotiating a contract to disclose salient facts known to him but not to the other party. Each case concerns a contract between A and B and in each case A, before entering into the contract, was aware of facts not known to B which, if B had known them, might have led him either not to conclude the contract at all or to negotiate different terms. What I should like to discuss with you is whether, in each of these cases, A had either a legal or a moral duty of disclosure. The first problem for debate is one of long standing. It was posed by Cicero and, indeed, by other philosophers before and after him. I think we may find that the issues presented are not altogether easy to resolve.

Problems for discussion

1.   (1) There is a famine at Rhodes and the price of corn is extremely high. A, when selling a quantity of corn to B, is aware that numerous ships carrying large quantities of grain are on their way from Alexandria. B does not know this. Cicero, On Duties: III, section VI (Test Cases in Business).

      (2) Owing to a war between England and Urbania the London stock market is very depressed. A, who has an excellent intelligence network, learns that the Urbanian forces are on the verge of surrender. A thereupon buys a large quantity of shares from B without passing on to B the information he has received. Laidlaw v. Organ 15 U.S.(2 Wheat.), 178 (1917), referred to Atiyah, Introduction to the Law of Contract (4th edn.), 266; Smith v. Hughes (1871) L.R. 6 Q.B. 597.

2.   (1) A sells a car to B without disclosing the existence of serious defects which make the car unroadworthy. Sale of Goods Act 1979, s. 14

      (2) A sells his house to B without disclosing a survey report showing that the foundations have slipped and the house needs underpinning. Law Commission Standing Committee on Conveyancing, consultation paper Caveat Emptor on Sales of Land (1988), noted [1989] Conveyancer 69 (the proposals were dropped in the Committee's eventual report).

3.   When applying for life assurance A answers accurately all the questions in the proposal form about his medical history, but does not disclose that he has for many years suffered from asthma, since there is no question in the form about this. The policy is issued but upon A's death soon afterwards B refuses to pay the policy moneys on the ground of non-disclosure of a material fact. Banque FinanciŐre de la Cité SA v. Westgate Insurance Co. Ltd. [1989] 2 All E.R. 952 at 991-997.

4.   A, an estate agent, is instructed by B to find a buyer for his house. A introduces XYZ Ltd. as a buyer without revealing the fact that he is a majority shareholder of this company. B sells to XYZ Ltd. McPherson v. Watt (1877) 3 App. Cas.254

5.   (1) B buys a painting from A in the belief, known to A, that it is by Titian, when A knows that it was in fact painted by a minor artist of the school of Titian.

      (2) The facts are as in (1) except that B also thinks that A is contracting to sell the painting as being by Titian. Smith v. Hughes, above Bell v. Lever Bros. Ltd. [1932] A.C. 161.

©Pace Law School Institute of International Commercial Law - Last updated December 11, 2009
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