Good faith (and fair dealing) explained

The principle of good faith may be considered as one of the fundamental legal concepts underlying the Unidroit Principles. The Unidroit Principles refer to the concept as “good faith and fair dealing”, as follows:

Article 1.7 (Good faith and fair dealing)

(1)      Each party must act in accordance with good faith and fair dealing in international trade.

(2)      The parties may not exclude or limit this duty.

By stating in general terms that each party must act in accordance with good faith and fair dealing, it is clear that even in the absence of special provisions in the Unidroit Principles, the parties’ behaviour throughout the lifecycle of a contract – including the negotiation process – is governed by the overriding principle of good faith (and fair dealing).

It is very difficult to grasp an abstract concept such as good faith and fair dealing. This concept is therefore thoroughly illustrated in the comments to the Unidroit Principles:

Illustration 1 (enabling the other party to perform duly).

A grants B forty-eight hours as the time within which B may accept its offer. When B, shortly before the expiry of the deadline, decides to accept, it is unable to do so: it is the weekend, the fax at A’s office is disconnected and there is no telephone answering machine which can take the message. When on the following Monday A refuses B’s acceptance A acts contrary to good faith since when it fixed the time-limit for acceptance it was for A to ensure that messages could be received at its office throughout the forty-eight hour period.

Illustration 2 (not avoiding responsibilities transferred to affiliates).

S contract for the supply and installation of a special production line contains a provision according to which S, the seller, is obliged to communicate to P, the purchaser, any improvements made by S to the technology of that line. After a year P learns of an important improvement of which it had not been informed. S is not excused by the fact that the production of that particular type of production line is no longer its responsibility but that of SAF, a wholly-owned affiliated company of S. It would be against good faith for S to invoke the separate entity of SAF, which was specifically set up to take over this production in order to avoid S’ contractual obligations vis-à-vis P.

Illustration 3 (not systematically and unjustifiably exercising discretional rights).

A, an agent, undertakes on behalf of B, the principal, to promote the sale of B’s goods in a given area. Under the contract A’s right to compensation arises only after B’s approval of the contracts procured by A. While B is free to decide whether or not to approve the contracts procured by A, a systematic and unjustified refusal to approve any contract procured by A would be against good faith.

Illustration 4 (no sudden and unjustified change in exercising contractual rights).

Under a line of credit agreement between B, a bank, and C, a customer, B suddenly and inexplicably refuses to make further advances to C whose business suffers heavy losses as a consequence. Notwithstanding the fact that the agreement contains a term permitting B to accelerate payment “at will”, B’s demand for payment in full without prior warning and with no justification would be against good faith.

 

A typical example of behaviour contrary to the principle of good faith and fair dealing is known in some legal systems as “abuse of rights”.[1] In particular in the Roman legal systems (and Swiss law), various manifestations that violate the principle of good faith are called “abuse of rights”. The term refers to a party’s bad faith, opportunistic or unjustifiable behaviour, for example when a party exercises a right merely to damage the other party, or to serve a purpose other than the purpose for which the right had been granted, or when the exercise of a right is disproportionate to the originally intended result.

Illustration 5 (from two options exercising the contractual remedy that is unnecessary and excessively burdensome).

T rents premises from L for the purpose of setting up a retail business. The rental contract is for five years, but when three years later T realises that business in the area is very poor, it decides to close the business and informs L that it is no longer interested in renting the premises. T’s breach of contract would normally lead to L’s having the choice of either terminating the contract and claiming damages or requesting specific performance. However, under the circumstances L would be abusing its rights if it required T to pay the rent for the remaining two years of the contract instead of terminating the contract and claiming damages from T for the rent it has lost for the length of time necessary to find a new tenant.

Illustration 6 (requiring a remedy where less burdensome options are available).

R rents premises from L for the purpose of opening a restaurant. During the summer months R sets up a few tables out of doors, but still on the owner’s property. On account of the noise caused by the restaurant’s customers late at night, L has increasing difficulties finding tenants for apartments in the same building. L would be abusing its rights if, instead of requesting R to desist from serving out of doors late at night, it required R not to serve out of doors at all.

[1]           In French abus de droit, in Italian abuso del diritto, in Spanish abuso del derecho, in German Rechtsmissbrauch, in Dutch misbruik van recht.

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