New Zealand 3 October 2001 Court of Appeal Wellington (Bobux Marketing Ltd v. Raynor Marketing Ltd) (Babies' leather booties case)
[Cite as: http://cisgw3.law.pace.edu/cases/011003n6.html]
DATE OF DECISION:
CASE NUMBER/DOCKET NUMBER: CA 245/00
CASE HISTORY: 1st instance High Court, Auckland (CL 1/00) 10 October 2000
SELLER'S COUNTRY: New Zealand (plaintiff)
BUYER'S COUNTRY: United Kingdom (defendant)
GOODS INVOLVED: Babies' leather booties
NEW ZEALAND: Court of Appeal of New Zealand 3 October 2001
(Bobux Marketing Ltd v Raynor Marketing Ltd)
Case law on UNCITRAL texts [A/CN.9/SER.C/ABSTRACTS/131]
CLOUT abstract no. 1258
Reproduced with permission of UNCITRAL
The appellant and respondent entered into an agreement which required the former to supply babies’ leather booties to the latter, where the respondent had the exclusive right to distribute the booties in the United Kingdom. After a falling out over the product range, the appellant gave the respondent nine months’ notice of termination of the distribution agreement. Clause 19 of the agreement stipulated that it “may only be terminated…by the Supplier if the Distributor [has] failed to order at least the Minimum Quantity.” The respondent argued that the termination provisions were clear and unambiguous; the right to termination could only be exercised where the distributor failed to meet the minimum purchase requirements. As the respondent continued to meet its minimum quantity obligations the agreement could not be terminated on an implied term of reasonable notice as contended by the appellant.
The express terms of the agreement directly addressed the question of termination and the balance of the contract document contained no indications of a contrary intention to support an implication of a right to terminate without cause on reasonable notice. However, the judge dissenting considered that the Court would be prepared to import into the contract an obligation on the parties to perform the contract in good faith. It would be open to the appellant to allege that the respondent was in breach of that obligation. The Court drew support for the notion of a general obligation of good faith from Article 7(1) CISG and Article 1.7 UNIDROIT Principles. The Court relied on that notion to find that the respondent was in breach for failing to demonstrate the requisite good faith, however no further discussion was entered into concerning the interpretation or application of Article 7(1) CISG.
APPLICATION OF CISG: No, dicta reference to CISG
APPLICABLE CISG PROVISIONS AND ISSUES
Key CISG provisions at issue:
Classification of issues using UNCITRAL classification code numbers:
7A3 [Observance of good faith]
7A3 [Observance of good faith]
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(Bobux Marketing Ltd v Raynor Marketing Ltd)
 1 NZLR 506
Thomas, Keith and Blanchard JJ
Contract - Interpretation - Distribution agreement "for indefinite period" - Right of termination - Whether supplier can terminate on reasonable notice - Whether contract endures indefinitely where no breach.
Bobux Marketing Ltd (Bobux) manufactured babies' leather booties. Raynor Marketing Ltd (Raynor) was an English company owned by New Zealand expatriates. In March 1995 Bobux and Raynor entered into an agreement which required Bobux to supply booties to Raynor, which had the exclusive right to distribute the booties in the United Kingdom. Raynor agreed not to manufacture or distribute children's leather booties in competition with Bobux's products. The agreement stated that it would "continue for an indefinite period . . . and may only be terminated . . . by the Supplier if the Distributor [has] failed to order at least the Minimum Quantity" or by either party for material breach of the agreement. The agreement operated successfully for several years, before the parties disagreed over extending the product range to include booties for children older than two years. Bobux was reluctant to extend the product range, except under a licence agreement. Raynor manufactured a range of larger shoes which, it claimed, did not compete with the Bobux range. Bobux argued that Raynor was marketing the shoes in a way that traded on the goodwill of the "Bobux" brand. On 4 February 2000 Bobux's solicitors gave Raynor nine months' notice of termination of the distribution agreement. Bobux issued High Court proceedings seeking a declaration that the agreement was terminable on the giving of reasonable notice. The claim was dismissed and Bobux appealed.
1 (Thomas J dissenting) The question for the Court was whether the language used by the parties admitted of an implication or interpretation enabling the relationship to be terminated on reasonable notice. [page 507]
 I do not accept that, even if it is not open to Bobux to terminate the contract on reasonable notice, that company is without recourse against Raynor in the circumstances which it alleges in this case. The law should not be bereft of relevance in a situation which has become commercially unrealistic or intolerable.
 In my view, therefore, the Courts would be prepared to import into the contract in issue an obligation on the parties to perform the contract in good faith. It would be open to Bobux to allege that Raynor was in breach of that obligation. This being the case, the contract could be terminated for breach under cl 19(b).
 Before touching upon the concept of good faith, it is necessary to ascertain that there is a factual foundation for such a plea. As the facts have not been tested from this perspective any observation regarding the facts must necessarily be tentative. The objective, however, is not to reach a firm finding of fact, but rather to demonstrate that the Courts are not necessarily impotent in commercial circumstances which would seem to cry out for the assistance of the law. The law exists to serve the community, including in particular the needs of commerce, and there may be occasions, admittedly rare, where it is apposite to indicate the direction which the law is taking to discharge that function. I turn then to confirm that there is a sufficient factual foundation to justify this exercise. [page 512]
1. The performance of the contract
2. An obligation of good faith?
 As Lord Steyn has observed, the emphasis of English law on an objective approach to contractual issues tends to make England somewhat infertile soil for the development of a generalised duty of good faith in the [page 514] performance of contracts. (The Hon Mr Justice Steyn, "The Role of Good Faith and Fair Dealing in Contract Law: A Hair-Shirt Philosophy?"  Denning LJ 131 at p 132). Classical contract law is based on certain implicit paradigm cases, the most common of which is the contract for an identified commodity between two strangers operating in a perfect spot market. Contractual principles provide a relatively rigid offer and acceptance format and are intolerant of such issues as indefiniteness, agreement to agree, and agreements to negotiate in good faith. Principles of classical contract law like the bargain theory of consideration, the objective theory of interpretation, and the rule that silence is not acceptance are particularly apt for contracts of this kind. (See M A Eisenberg, "Relational Contracts" in Good Faith and Fault in Contract Law (J Beatson and D Friedmann, eds, 1995) at p 297.) Lord Wilberforce put it this way in New Zealand Shipping Co Ltd v A M Satterthwaite & Co Ltd  AC 154 at p 167:
"English law, having committed itself to a rather technical and schematic doctrine of contract, in application takes a practical approach, often at the cost of forcing the facts to fit uneasily into the marked slots of offer, acceptance and consideration."
 Thus, the traditional law of contract does not readily accommodate a general duty of good faith in the performance of contractual obligations. It was not, of course, always so. In 1766, the great Lord Mansfield proclaimed his famous description of good faith as "the governing principle . . . applicable to all contracts and dealings." See Carter v Boehm (1766) 97 ER 1162 at p 1164. But his vision was swamped by a law reflecting the laissez-faire economics and liberal individualistic theories of the nineteenth century. The classical theory of contract was seen to offer predictability and certainty, although, as Sir Anthony Mason has observed: "it later emerged, as is the case with many legal concepts rooted in formalism, that the element of certainty was illusory." (A F Mason, "Contract, Good Faith and Equitable Standards in Fair Dealing" (2000) 116 LQR 66 at p 70.)
 Despite its tradition, however, the law of England, and by derivation the law of this country, could not forever ignore the fundamental weakness of the classical conception of contract law. The formalistic approach was overtaken by the good sense of those Judges who recognised that the function of the law of contract is to provide an effective and fair framework for contractual dealings based on achieving the reasonable expectation of the parties. See J Steyn, "Contract Law: Fulfilling the Reasonable Expectations of Honest Men" (1997) 113 LQR 433 at p 434. The fundamental flaw of the classical conception of contract law was its empirical premise that most contracts are discrete. That premise is false. Most commercial contracts are in fact relational contracts. The great bulk of contracts either create or reflect relationships. It is discrete contracts that are unusual, not relational contracts. See Eisenberg at p 297.
 It is not surprising, therefore, that a considerable volume of commentary has been devoted to the question whether the law of contract should recognise a general duty of good faith in the performance of contractual obligations. Books on the topic have proliferated. See, for example, Good Faith and Fault in Contract Law esp ch 11; A D M Forte (ed) Good Faith in Contract and Property Law (1999); and R Brownsword, N J Hird and G Howells (eds) Good Faith in Contract: Concept and Context (1999). The chapter by M A Eisenberg in Good Faith and Fault in Contract Law is extremely helpful. [page 515]
 A selection of articles would include the following: H O Hunter, "The Duty of Good Faith and Security of Performance" (1993) Jnl of Contract Law 19; C J Goetz and R E Scott, "Principles of Relational Contracts" (1981) 67 Virginia L R 1089; H K Lücke, "Good Faith and Contractual Performance" in P Finn (ed) Essays on Contract (1987); The Hon Mr Justice Steyn, "The Role of Good Faith and Fair Dealing in Contract Law: A Hair-Shirt Philosophy?"; The Hon Mr Justice T R H Cole, "Law - All in Good Faith" (1994) 10 Building and Construction Law 18; V L Taylor, "Contracts with the Lot: Franchises, Good Faith and Contract Regulation"  NZLaw Rev 459; D Goddard, "Long-Term Contracts: A Law and Economics Perspective"  NZLaw Rev 423; J Steyn, "Contract Law: Fulfilling the Reasonable Expectations of Honest Men"; I B Stewart, "Good Faith in Contractual Performance and in Negotiation" (1998) 72 ALJ 370; Sir A F Mason, "Contract, Good Faith and Equitable Standards in Fair Dealing"; J Cheyne and P Taylor, "Commercial Good Faith"  NZLJ 245 and E Webb, "The scope of the implied duty of good faith - lessons from commercial and retail leasing cases" (2001) 9 Australian Property Law Journal 1. Of these articles, the seminal article of H K Lücke and the address by Sir Anthony Mason are outstanding contributions to this topic.
 Nor is it surprising that there have been judicial excursions into the subject. See, for example, Mr Justice Steyn (as he then was) in Banque Keyser Ullmann SA v Skandia (UK) Insurance Co Ltd  2 AC 249; Sir Thomas Bingham (as he then was) in Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd  QB 433; Philips Electronique Grand Public SA v British Sky Broadcasting Ltd  EMLR 472; and my own observations in Livingstone v Roskilly  3 NZLR 230 at pp 237 - 238.
 The notion of a general obligation to perform contractual obligations in good faith also received a boost from the fact it has been adopted in the United States and in international trade law without any evidence that commercial transactions have become unworkable or uncertain as a result. Section 1-203 of the Uniform Commercial Code in the United States provides an important milestone in the evolution of the principle. It states that "every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement". Initiated by the American Law Institute in 1970 and finally promulgated in 1981, Section 205 of the Restatement of Contracts, Second, which is applicable to all contracts, reads: "Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement". Then, art 1.7 of the 1994 UNIDROIT Principles of International Commercial Contracts provides that, "each party must act in accordance with good faith and fair dealing in international trade" and further that, "the parties may not exclude or limit this duty". Similarly, art 7(1) of the 1980 United Nations Convention on Contracts for the International Sale of Goods states that in the interpretation of the Convention regard is to be had, inter alia, to the "observance of good faith in international trade".
 Moreover, the concept of good faith is the latent premise of much of the law of contract relating to the performance of contractual obligations. (See Livingstone v Roskilly at pp 237 - 238.) Lücke suggests that obvious examples of principles of contract law palpably designed to bring about just and fair results are the doctrine of promissory estoppel, the rule which provides relief against forfeiture, the rule which invalidates penalty clauses, and some of the established rules of construction such as the contra proferentem rule and the [page 516] presumption that exemption clauses in contracts are not intended to confer immunity from the consequences of a fundamental breach. (Lücke, at p 158). Then, too, apart from fiduciary relationships, notions of good faith and fair dealing have left their imprint on English contract law in respect of contracts of insurance, suretyship, salvage and partnership, which are all characterised as contracts of the utmost good faith (Steyn, at p 136). Sir Anthony Mason lists a number of well-recognised unrelated situations in which a party is required to take account of the interests of another party, notwithstanding that the initial foundation of the relationship is that each is pursuing his or her own interests. (Mason, at pp 72 - 73). The learned jurist also canvasses the various means by which the Courts have sought to fill the void caused by the absence of a general good faith doctrine: the fiduciary principle, unconscionable bargains, estoppel and restitutionary relief (Mason at p 84).
 Certainly, the notion of a more explicit concept of good faith in the law of contract will continue to have its detractors. The principle is already beset by agonising inquiries into what is or can be meant by good faith. But these digressions need not detain us here. Good faith is closely associated with notions of fairness, honesty and reasonableness which are already well recognised in the law (Lücke, at p 161). Fried has correctly pointed out that good faith as honesty is quite compatible with the traditional "concept as promise" concept. (See Fried, Contract as Promise (1981) at p 85.) Underlying the concept, to my mind, is a perception of loyalty to the promise made which provides a standard, rather than a rule, and which does not require the abandonment of self-interest. The Official Comment to Section 205 of the Restatement of Contracts, Second rightly points out that the meaning will depend on its context. The basic ethic in good faith performance and enforcement of a contract is said to be "faithfulness to an agreed common purpose and consistency with the justified expectations of the other party". This ethic evinces my perception of good faith as loyalty to a promise. [page 517]
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Original language (English):  1 NZLR 506
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