Good Faith

Good Faith in United Kingdom

Definition of Good Faith

In accordance with the work A Dictionary of Law, this is a description of Good Faith : Honesty. An act carried out in good faith is one carried out honestly. Good faith is implied by law into certain contracts, such as those relating to commercial agency.

See also uberrimae fidei.

Negotiation of Contracts in Good Faith

The notion of positive obligations of ‘good faith and fair dealing’ in the performance of contractual obligations are common in other systems of law, including some common law systems, though they do not always extend to the negotiation stage. The concept had very limited recognition, however, under the classical law of contract. It is now being introduced through the influence of European directives, such as those concerned with unfair terms in consumer contracts or the rights of commercial agents. The regulations giving effect to these directives have used the language of good faith, and the English courts are therefore having to get to grips with it. As yet, this has not led to any general move to develop good faith principles in areas not directly covered by such regulations. In particular, in relation to pre-contractual statements, which are the main concern of this chapter, the obligation is in general not to tell lies, rather than to tell the truth.

Why should this be the case? Why did the classical English law of contract not impose an obligation on contracting parties to be open with each other in negotiations, and to reveal all information which is relevant to their contract? There are two main answers that may be given to this question. The first is that such a positive obligation would not have sat easily with the archetype of a contract which tended to form the basis of the classical analysis. This was of two business people, of equal bargaining power, negotiating at arm’s length. In such a situation, the court’s attitude, based on ‘freedom of contract’, is that they should as far as possible be left to their own devices. If one of the parties requires information prior to a contract, then that party should ask questions of the other party. If what is then said in response turns out to be untrue, then legal liability will follow, but if no such request for information has been made, then it is not the court’s business to say to the silent party ‘you should have realised that this information would have been important to the other side, and you should therefore have disclosed it’.

The second answer is based on ‘economic efficiency’. Information is valuable, and those in possession of it should not necessarily be required to disclose it. If, for example, a purchaser has spent money on extensive market research and is aware that there is a demand for a particular product in a particular market, it would not make economic sense (in a system based on capitalism and free trade) to require the disclosure of that information. The purchaser is enabled, by the use of the information, to buy goods at a price that is acceptable to the seller, and then resell them at a profit in the market that the purchaser has discovered. If the purchaser had to disclose the information to the seller in that situation, the point of having done the market research would be lost. In other words, disclosure would discourage entrepreneurial activity designed to increase economic activity, and thereby increase wealth.

There is obviously some strength in this argument, but two notes of caution should be sounded. First, it is now recognised that it is not always legitimate to make use of information that can be turned to economic advantage. In the area of share dealing, for example, the use of ‘insider information’ is now regarded as so undesirable that in certain circumstances to do so is treated as a criminal offence. Second, the archetypal model does not, of course, conform to the reality of much contractual dealing. Most obviously, many, if not the majority, of contracts are made between parties who are unequal – most obviously when the contract is business to consumer, but also in many business to business contracts. Withholding information that disadvantages the weaker party in such a situation may well be regarded as unacceptable. Moreover, even where business contractors are more or less equal partners, it does not necessarily make economic sense to conceal information from the other side.

Where the contract is a long-term, ‘relational’ one, or where it is expected that the two contracting parties will want to do business with each other in the future, acting in a way which the other side may see as ‘taking an unfair advantage’ is probably not a sensible policy.12 Even where there is no such continuing relationship, it may not be advantageous to gain a reputation for sharp dealing, since this is likely to discourage other potential contractual partners. It is likely, therefore, that business practice will in fact be more open than might be assumed from a rigid application of the ‘economic efficiency’ model. If that is the case, and the courts are professing to operate commercial law in a way that reflects the way in which business people actually conduct their relationships, a greater recognition of the value of openness would be justifiable.

Source: Richard Stone, The Modern Law of Contract, 2013, Routledge, London


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