The concept of good faith has been a subject of perennial controversy since it was derived from the Roman legal equivalent ‘bonas fides’. Juristic views on and the legal conceptualization of the idea of good faith may often vary across the cultural divides and legal traditions. At a higher level of abstraction there may be a semblance of understanding that it is a moral principle and is reflective of all good senses such as honesty, good conscience, fairness, equity, reasonableness, equitable dealing or fair dealing, etc., but its application may cause the divergence of opinions. This has caused some uncertainty about the nature of the concept itself and the consequent unpredictability of the outcome of its application.

When focused on the content of good faith, the courts in different countries as well as academic commentators seem to be often baffled. Nor in the sources of the lex mercatoria such as the UNIDROIT Principle of International Commercial Contracts, the European Principles of Contract Law, and the United Nations Convention on Contracts for the International Sales of Goods (CISG or the Vienna Sales Convention) can one find a clear definition of the content of the notion of good faith. In order to rationalise good faith jurists have proffered various legal theories ranging from efficiency arguments to formal entitlements in the spirit of solidarity to its conceptualisation in a more specific sense as ‘a true behavioural standard’. This dilemma pervades in international law, in general, and in the emerging case law of international investment law in particular. Therefore, it proves the international arbitrator’s task in an investment dispute all the more difficult as in any other field when it comes to define the concept and to render any decision on the basis of it.

It thus merits a fresh look at the concept of good faith in order to understand its scope and function in a contractual relationship which is the focus of this blog. In order to apply the concept to a particular context good faith could be considered a functional or objective one in the sense of a framework of relationship between the parties to a contract and cooperation being its underlying current. In this respect good faith is a framework concept based on cooperation as its philosophical foundation. In international business-contracting the consideration of mutual interests of the contracting parties in the spirit of cooperative dealing seems to get favour in some quarters as a manifestation of modern trend of collectivism as opposed to the nineteenth century legacy of individualism. Farnsworth, however, observes:

“Good faith performance has always required the cooperation of one party where it was necessary in order that the other might secure the expected benefits of the contract. And the standard for determining what cooperation was required has always been an objective standard, based on the decency, fairness or reasonableness of the community and not on the individual’s own beliefs as to what might be decent, fair or reasonable. Both common sense and tradition dictate an objective standard for good faith performance.” [E. Allan Farnsworth, Good Faith Performance and Commercial Reasonableness Under the Uniform Commercial Code, 30 U. CHI. L. REV. 666 (1963)].

It needs to be stressed that co-operation should not be understood in the sense of familial relationship such as motherly love or brotherly affections, but must be confined to the contractual relationship, hence the notion of good faith as a framework concept, i.e. fidelity to the bargain, as mentioned earlier. As far as the content of good faith is concerned the focus has to be specific in a particular context concerned in the contractual framework to see if the parties have acted in the spirit of cooperation, i.e. ‘good-faith cooperation’ [L Carvajal-Arenas, ‘Good Faith in the Lex Mercatoria: An Analysis of Arbitral Practice and Major Western Legal Systems’ (PhD thesis, University of Portsmouth 2011)]. In numerous domestic court decisions (e.g. United Group Rail Services Limited v Rail Corporation New South Wales and in international judicial (e.g. the North Sea Continental Shelf cases (ICJ), and arbitral decisions [e.g. Wintershall v Qatar (1990), Mechema Ltd. (England) v S.A. Mines, Minérais et Métaux (MMM) (Belgium) (1982)] there seems to be a tendency to give weight to the context in which the concept is to be meant. Article 31 (1) of the Vienna Convention on the Law of Treaties also points out the importance of the context of the terms of the treaty while interpreting it in good faith. Therefore, the content of the concept of good faith is more of a contextual nature than the concept itself understood in the abstract sense. The International Court of Justice observed: “(t)he principle of good faith is ‘one of the basic principles governing the creation and performance of legal obligations’; it is not in itself a source of obligation where none would otherwise exist.” [Border and Transborder Armed Actions Case (ICJ), (Nicaragua v. Honduras), Jurisdiction and Admissibility, Judgment, 20 December 1988, ICJ Rep 69, at 105 (1988)].

One may thus wonder if good faith can be understood in two senses, viz., ‘macro good faith’ and ‘micro good faith’. In respect of the former the abstract notion of good faith in the sense of honesty, fairness, reasonableness signifying its subjectivity may be meant, i.e. ‘macro good faith’ – a horizontal approach, a layer of idea which is generic (i.e. an idea at a higher level of abstraction) and may not be understood the same in different factual patterns as it will depend on its application to them. Thus, from the notional point of view good faith in the macro sense is considered to act as a major interpretative principle. While, on the other hand, it should be appreciated that what appears to be good faith in one context may not appear the same in another context with a different pattern of facts, situations or surrounding circumstances. Thus, the notion of good faith focusing on the particular context concerned – i.e. the vertical approach – may be understood as ‘micro good faith’ which brings with it the sense of objectivity rather than subjectivity understood in the horizontal sense, i.e. ‘macro good faith’. It should be appreciated that the pacta sunt servanda principle, being the foundation of all contracts, is the manifestation of ‘macro good faith’. But ‘micro good faith’ being applied in specific factual contexts may limit the application of the pacta sunt servanda principle in order to conform to it, even in changed circumstances that affect the contract. Therefore, the pacta sunt servanda principle in a contractual relationship may not be applied as an incantation or in the abstract sense, rather it should be assessed in terms of ‘micro good faith’.

In international investment law, substantive standards of treatment (investment treaty provisions) such as ‘fair and equitable treatment’, ‘full protection and security’, ‘protection of legitimate expectation’, ‘transparency’, ‘non-discrimination’, ‘national treatment’ and ‘most favoured national treatment’, etc., are considered fundamentally based on good faith, or manifestations or corollaries of good faith, but their content depends on the specific contexts in which they are applied. Here comes the crunch point when one asks: even if a state literally complies with the foregoing standards in respective cases, will it be always considered to have acted in good faith in its relationship to the other contracting party? Inversely, if a state acts in good faith to comply with its non-investment international treaty obligations relating to human rights, the environment or climate change that may interfere with investors’ rights, will it be implicated in bad faith vis-à-vis the foreign investors? It is difficult to give any straightforward answers to these questions; the answers, however, may be found specifically in the contexts in which the notion of good faith is to be examined. In investment arbitration jurisprudence such a contextual extrapolation seems to be increasingly endorsed rather than the simple meaning attributed to a standard of treatment (e.g., the S.D. Myers, Mondev, ADF, Loewen and Waste Management cases). Often, in order to reflect good-faith cooperation in an investment contract situation the aforementioned standards of treatment for foreign investors may have to be weighed against the state party’s competing public interests, such as the protection of the environment, the promotion and protection of human rights and the securing of the economic development of the host country. There seems to be a growing support for such a stance amongst various stakeholders such as host countries, NGOs, international organizations (the World Bank and the IMF, etc.) and others, though this aspect of international investment law is still in the early stage of development.

The scope and content of the standards of treatment for foreign investors may differ from contexts to contexts entailing the understanding of good faith in the micro sense. As the comments to section 205 of the U.C.C. also states, in a different domain of law though, that “[t]he phrase ‘good faith’ is used in a variety of contexts, and its meaning varies somewhat with the context.” To get a result then it would be advisable to look at the notion of ‘micro good faith’ – a context-based one with the objectivity that underscores the framework of relationship, co-operation being its philosophical foundation. Good faith in a particular situation should thus be understood not as an abstract concept but as a functional or objective one, i.e. in the micro sense, covering all stages of a contract.


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10 comments

  1. The application of good faith in contracts as an implied term always seems self-evident to a practical layman but for many years it was the proud boast of English lawyers that such an implied term was not known to English law. (Except in insurance, where uberrima fides is a term used in bad faith to avoid the payment of claims!)

    In commercial arbitration (insofar as may be known – most awards are, of course, confidential) there seems to be a tacit assumption of some degree of good faith or something like it in commercial custom.

    Perhaps the useful article by Prof. Maniruzzaman will encourage further thought about this.

  2. The concept of good faith is an empty vessel. It is a vacuous term that has meaning only because “authorities”, those with power to impose legal rules, provide meaning for it. It may be considered an ethical principle, embodying the idea of honesty in fact, but what does that mean [the subjective view]? This leads to the worn proposition: Pure in heart, empty in head [whatever that means]. Good faith also can be considered from a more objective view, that is, how would a hypothetical reasonable person have acted acted under like circumstances. Or put more simply, what is commercially reasonable behaviour in a particular field.

    In terms of investment contracts [FDI], I do not know why the State is portrayed as the victim. Often, the State creates rules about the environment, labour, tax, and licencing, to extract the last ounce of blood from the investor that is already subject to political and legal risk, and the spectre of a State raising Sovereign Immunity at the enforcement stage, if assets are seized illegaly.

    In my view, not original at all, non-legal disciplines, such as economics [but do not leave out finance and accounting], must shape what we mean by good faith. There is no such thing as an ontology of good faith. Indeed, so many scholarly articles have been written on the subject, you would think we have reached a point of conceptual exhaustion.

  3. Thanks to Professor Maniruzzaman (the author of certain articles I found extremely useful in completing a thesis some years ago!) for a most interesting article. The Professor referred to the NSW Court of Appeal decision in United Group Rail Services v Rail Corporation. There is another NSW Supreme Court decision in which there is an excellent discussion on good faith – Einstein J in Aiton v Transfield [1999] NSWSC 996. His Honour stated [at 132]that there may be certain core principles of good faith which could provide a framework for the common sense and experience of the court after considering all the circumstances of the case. This seems to accord with the Professor’s idea of the micro sense of good faith.

    1. In 2011, In Australia, the National alternative Dispute Resolution Advisory Council (NADRAC), the leading policy body in this area, discussed the issues relating to the imposition of a good faith requirement and decided that, on balance, such a requirement should be imposed in ADR processes:
      … the rule of law, and the public interest in the administration of justice, are better served by expressly recognising that participation in mandatory ADR should be undertaken in good faith.

      However, NADRAC did not reach a consensus view on the preferred formulation for this conduct obligation. There were two main alternatives considered in the context of behavioural standards: good faith and genuine effort.

      NADRAC noted that:
      “Good faith” appears to be the most widely prescribed conduct obligation in existing legislation (both in federal and in State/Territory jurisdictions).

      Examples of its use can be found in the Native Title Act, the Administrative Appeals Tribunal Act 1975 and the Civil Procedure Act 2005 (NSW). There is extensive and authoritative case law interpreting “good faith” standards, in a range of contexts, supporting the view that this standard appears to be working satisfactorily. Equally, however, “genuine effort” (which is the standard applying in Australia under the Family Law Act) appears to have worked well in that jurisdiction. It has appeal as a standard that focuses on subjective behaviour, and may therefore be particularly suited to the nuances of ADR processes.

      Ultimately, the majority view of NADRAC was slightly in favour of good faith.
      NADRAC also attempted to articulate good faith by reference to ‘genuine effort’ (the test used in the family area) and noted that ‘[o]ne option is to define “good faith” in terms which also capture the essence of “genuine effort”. For instance, “good faith” could be defined as including genuine effort to uphold various enumerated principles’ such as those previously identified by NADRAC.

      There has been quite a lot recently written about good faith in Australia which is think is partly related to the extensive mandatory pre litigation ADR environment that exists in Australia. I have recently written an article on this topic where I attempted to identify what behaviours might constitute ‘bad faith’ and have found it interesting to engage with this discussion with lawyers – bad faith, like beauty seems to be in the eye of the beholder!

    2. Many thanks for your comments. If your are more interested in the topic, please find an extended version of the article entitled “Cooperation as Philosophical Foundation of Good Faith in International Business-Contracting – A View Through the Prism of Transnational Law” which I have co-authored with my former PhD student Dr Lorena Carvajal-Arenas and is just published in Oxford University Comparative Law Forum (OUCLF), available in this link: http://ouclf.iuscomp.org/articles/carjaval_maniruzzaman.shtml

      I’ll be very much interested in your comments on it.

      1. A perfect storm? The recent English case of Compass
        Group v Mid Essex Hospital Trust [2012] EWHC 781 considered a ‘good faith’ provision in an outsourcing contract (http://www.bailii.org/ew/cases/EWHC/QB/2012/781.html)

        The contract obliged the parties to ‘cooperate with each other in good faith and [to] take all reasonable action as is necessary for the efficient transmission of information and instructions and to enable the Trust or, as the case may be, any Beneficiary to derive the full benefit of the Contract.”

        The court considered that the long term nature of the contract and performance of the obligations required continuous and detailed co-operation
        between the parties at a number of levels in order to ensure that the services ran smoothly. The purpose of the service credit clause was to minimise
        performance failure, not to be used as a “sword of Damocles” to hang over the head of the Supplier to reduce the cost of the service. The court held that the Trust’s conduct in calculating the service credits was arbitrary, capricious and irrational and as such it had committed a material breach of its duty to cooperate in ‘good faith’ with the Supplier. Although in this case, the High Court held that the Trust had not acted in ‘good faith’, the exact ambit of a general ‘good faith’ obligation remains unclear. Without clear drafting, it may be difficult to ascertain the required standard of conduct, and exactly what actions must be taken to meet the contractual ‘good faith’ obligation.

        Please see a commentary on the case in http://www.shoosmiths.co.uk/news/4115.asp

  4. Extremely grateful to Professor Maniruzzaman for his gesture in ‘good faith’ to provide us an opportunity to learn and express our understandings about this interesting legal discussion. I personally enjoyed to read about the reference to the NSW Court of Appeal decision in United Group Rail Services v Rail Corporation in which the essence of discussion revolves around by using the aperture of the ‘good faith’.
    Generally speaking the concept of ‘Good Faith’ comes in mind as sincere feelings which indicates sincere and honest intentions of the parties, irrespective of their belief or ultimate outcome of the dealings or the actions at large. In legal terms as it is understood in Latin ‘ Bona Fide’, which means the moral and/ or mental state of honesty based on the affirmation of ‘truth’ and certainty of a proposition or opinion.
    In the context of modern era of globalization the events are taken into account on ‘Good Faith’ specially in the contract law the ‘concept of good faith ‘is always maintained with a careful mind set, that’s why the clauses of ‘breach of contract’ are always incorporated to maintain this concept of ‘good faith’ which are in fact a certainty of precautionary measures to annul the contrary speculations’.

  5. A recent English case endorses the concept of good faith in the sense of ‘cooperation’:

    In
    a recent High Court judgment of Yam Seng Pte Ltd (a company registered
    in Singapore) v International Trade Corporation Ltd [2013] EWHC 111
    (QB) [ http://www.bailii.org/ew/cases/EWHC/QB/2013/111.html ] Mr Justice
    Leggatt explains the importance of implied good faith in long-term
    agreements requiring extensive cooperation, singling out
    joint ventures, franchise agreements and long-term distribution agreements.

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