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Section 2. Law of obligations
Ikonomi Ergysa, "Ismail Qemali" University, Vlorë PhD Candidate Private Law, Faculty of Law,
University of Tirana, E-mail: ergysa83@yahoo.com
Searching for the objective good faith in contract law
Abstract: Referring to a classical division of contractual good faith, in order to realize a full study, there are distinguished two senses of it: (1) subjective good faith and (2) objective good faith. The paper is realized as an overview of good faith in the objective sense, analyzing different legal provisions of some contractual laws. This paper aims to explain the meaning, characteristics, role and the application of objective good faith and to find and explain the differences between subjective good faith and objective good faith.
Keywords: good faith, objective good faith, subjective good faith, contract law, party behavior.
Introduction As subjective good faith is not the prime focus
It is now widely accepted that there is quite im- of this paper, I will try to further clarify some few possible to put Good Faith Principle inside a box. key issues relating to it. Subjective good faith means
The more you try to define it, the more you understand that its dimensions are not precise. The interest about good faith lives because of its nature: deep, human, mythical, moralistic and undefined and of those extraordinary carried values, which enter the contract. Probably good faith is easier to understand as a concept, but harder to find the right words to define it. Good Faith is quasi undefined, but no inexplicable. Discovering its meaning, which varies depending by the specific cases, is considered the duty of lawyers, scholars and mostly of courts.
The term good faith usually is mentioned dozens of times through the provisions of civil codes of some European states. At a glance it is possible to understand that under that term lay different meanings. Rightfully authors have developed a particular way to reach the heart of contractual good faith, by identifying at least two main distinct senses: (1) subjective good faith and (2) objective good faith. Actually, this is the classical way of studying good faith, given the fact that these two concepts express ontologically different legal figures, as they have different legal functions [1].
that a party in a legal relationship benefits law protection, when the party has been in a justified ignorance situation, despite the fact that if it were in a similar situation, but where there was no presence of good faith, the legal effects would have been unfavorable. More concretely, always depending on the specific case, it may result in the conservation of legal effects the subject has confided or the exclusion of negative effects or liability for this subject [2]. Professor Hesselink defines subjective good faith to be a subjective state of mind: not knowing or not being able to know a fact or an event [3, 620]. A person's ignorance behavior to damage legally protected state of others can be considered as subjective good faith [4, 2]. Professor Rosenberg [5, 2-3] has given another definition to describe a situation similar to what other authors have called good faith in subjective sense. He has defined this situation as "intellectual" good faith which may consist: "either of a "passive" ignorance in a state of affairs, or of an "active" erroneous behavior", supporting the idea that good faith protects those "who act in error or those who suffer because of their ignorance". However, this situation
doesn't exclude "taking adequate precautions against such ignorance" [6, 6].
The subjective good faith has a descriptive nature expressing the state of intelligence that is part of a situation envisaged and disciplined by law. So there is not subjective good faith which produces the legal effects, but the law. Only when the conditions provided by law are met, in this case: the presence of an intellectual state that corresponds to subjective good faith, there will be specific legal effects [1].
Objective good faith
As it is the main subject of the paper, let's put objective good faith in the spotlight. Good faith, in this sense, is often perceived as being: "the method used to moralize contractual relationship, and to temper the inequalities that could result from the dogma of the autonomy theory" [7, 156]. Thus, the contractual relationship should be guided by good values, avoiding the behavior which remains hostage of contractual party autonomy. This behavior should be characterized by justice, in order not to prejudice the interest of the other party in concluding a valid legal transaction [4, 3]. The objective good faith is similar to what Professor Rosenberg describes as "intentional" good faith [5, 2]. Good faith in this sense can be understood as: (1) parties "loyal behavior", mainly applied to the process of the formation of the contract and of its interpretation and (2) parties cooperating honestly and loyally with each other to achieve the reciprocal aims and purposes, applied to the contract performance and the obligations regime [8, 10].
The objective good faith is included by Brown-sword in the "good faith regime" model which imposes the parties the duty to cooperate because in this way they can have common benefits and reach the goal of the agreement. Regarding the duty of cooperation, it should not be considered as absolute. The party enters a contractual relationship mainly to realize his interests, despite their nature, as long as they are legally eligible. These interests have priority. Good faith requirement does not mean that such interests are to be given less importance than the other party interests, in order to be considered in good faith. Good faith requirement does not exclude the need of "competition" between the parties.
This objective sense of good faith usually includes the duty of honesty, loyalty, fairness, disclo-
sure and cooperation by the parties [9, 31]. This approach represents another role of objective good faith, the role which does not allow the appearance of dishonesty, fraud, concealment of information or misrepresentation.
One of the component elements ofobjective good faith is the honest behavior. Being a concept that carries within subjectivity it is necessary to clarify it through analyzing with care the behavior in each court case, in order to understand it. Here comes in help the doctrine of the reasonable man, whose behavior contains what is widely accepted by social morality, as honest behavior. According to Professor Corbino honestus man is not only the man of integrity or the one that looks like under an absolute valuation. It should be recognized as such even he who cares for his duties and does not harm to others, or who takes care of his profits [10, 123]. As a concept, honesty excludes lies and embraces virtuous and positive attributes. However, despite the remoteness from vir bonus concept, even a crafty person to a certain extent cannot be considered to be dishonest. Likewise, a person who seeks to affirm himself by using skills and knowledge in his possession, which give him the opportunity to prevail on those who is specifically compared to, is considered an honest person if not exceeds the tolerated limit [10, 124].
The objective good faith seems to set the standard of behavior, which imposes on the contracting parties a duty of mutual loyalty at all contractual stages; from negotiations until contract execution [2]. Professor Rosenberg, as calls it "intentional" good faith, "assigns" it three roles: (1) honesty and loyalty required in the execution of contracts, (2) honesty and loyalty required in the exercise of rights and (3) sense of equity that the judge must employ in the interpretation of contracts [5, 2].
Objective good faith expressed by legal provisions
So, good faith requirement itself, embodied in legal provisions, is nothing but objective good faith. As such, the behavior doesn't depend much on what the party perceives as honest, fair and right, but mostly from what is determined by the law. In fact, the law cannot foresees and describes the specific behavior. It usually appoints the boundaries within which the parties have to behave.
Through the provisions of the Albanian Civil Code it can be found the presence of the objective good faith: (l) debtor and creditor must provide due care and be accurate in fulfilling the obligation under its terms, [11, art. 455] (2) parties must act in good faith towards each other during the negotiations for drafting the contract, [11, art. 674] (3) parties must inform each other under good faith principle during the negotiations for franchising contract conclusion, [11, art. 1058] the contract must be interpreted in good faith by the parties [11, art. 682]. The Italian Civil Code provides good faith in different contractual situations: (1) the debtor and the creditor shall behave according to rules of fairness, [12, art. 1175] (2) parties must behave in good faith during the pre-contractual bargaining and contract drafting, [12, art. 1337] (3) the contract must be interpreted in good faith [12, art. 1366]. As the art. 455 of the Albanian Civil Code, even the art. 1175 of the Italian Civil Code must be considered not only as a vast application rule, but as the center ofa constellation of norms, all inspired by the same principle [13, 285].
Different from the Albanian contract law, the Italian contract law expressly requires good faith during contract execution as provided in art. 1375. Same provision can be found in the French Civil Code, article 1134, which states that the contracts must be performed in good faith and even in the German Civil Code provision on contractual objective good faith which is considered laconic, although is used in a broad sense by the judges and has inspired other Civil Codes in Europe. It is one famous provision, art. 242 BGB which states that an obligor has a duty to perform according to the requirements of good faith, taking customary practice into consideration.
There is a similar duty of good faith provided by the Restatement (Second) of Contracts in USA which states that every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement. [14, § 205] The similar provision in UCC, states that not only every contract, but even every duty within the Code imposes an obligation of good faith in its performance and enforcement [15, § 1-304].
Just like the UCC, even the Restatement (Second) of Contracts does not provide a requirement for good faith during the formation of contract, a type or a specific behavior ofparties during negotia-
tions. This is because Common Law systems, typically the English Law, don't accept that there is a need for good faith during the pre-contractual phase. Their laws are based on different principles as caveat emptor and freedom of contract and their focus is the maximization of benefits of the parties, competition supported by personal and professional skills, experience, knowledge and information. Taking advantage on the other party, this way is considered quite fair and normal. Nevertheless, bad faith, fraud and misrepresentation are subjects to liability and sanctions. In Common Law systems there are developed other doctrines and rules, such as promissory estoppel and reasonableness, which substantially are very similar to good faith, referring to their characteristics, carried values and effects. Although it cannot be said that good faith is totally excluded. There are contracts such as marine insurance contracts which is based on good faith: "marine insurance contracts are contracts of the utmost good faith" [16, s. 17].
Comparing to the USA trend of accepting good faith and applying it by courts, England seems to be quite slow and conservative, even though has implemented the Council Directive 86/653/EEC on the coordination of the laws of the Member States relating to self-employed commercial agents and the Council Directive 93/13/EEC on Unfair Contract Terms.
Objective good faith — subjective good faith: grounds to compare
The two senses of good faith can be found expressed in different legal provisions through contract laws, or may be laid down in the same provisions. According to Uniformal Commercial Code of USA (U. C.C.), the current definition for good faith is: "honesty in fact and the observance of reasonable commercial standards of fair dealing" [15, § 1-201 (20)]. This definition is a dual subjective-objective standard, as has both subjective and objective components: "honesty in fact" is subjective, i. e. whether the individual knew, as a factual matter, that the transaction was unauthorized; while "reasonable commercial standards of fair dealing" imposes an additional objective standard, i. e. whether the individual's actions were consistent with commercially reasonable standards of fairness [17, 2].
As it is quite impossible to find definitions through contract law for the two senses of contrac-
tual good faith, the content of legal provisions allows to understand and recognize them. This is generally speaking, but German contract law makes them clearly distinct, by denominating them differently such as: "Treu und Glauben" for objective good faith and "Guter Glaube" for subjective good faith. Under Dutch law, the two senses are really distinguished as "redelijkheid en billijkheid" for objective good faith, representing the standard by which the behavior of parties to an obligation is judged and "goede trouw" for objective good faith, mostly a doctrine of the property law, which means that a person is subjectively acting to the best of his knowledge or according to what he should have known [18, 192].
The two senses have not only different meaning, but even different functions and applications. Usually subjective good faith is found in the provisions relating to property expressing the state of ignorance of the party relating to the circumstances, like a title defect. On the contrary the objective good faith is found in the legal provisions relating obligations and contracts, expressing a duty ofbehavior for both the parties.
If he have to face the two senses it has to be said that there is accepted that good faith is presumed. This means that the person who claims the contrary or bad faith has to prove it. In fact this is true for the subjective good faith, because a person cannot be protected if he behaves clearly contrary to good faith. In the case of the objective good faith usually the presumption has not the same application.
Their nature is also different, because subjective good faith has a descriptive nature of the intellective condition, which turns back the interpreter in order to understand if the state of mind of the subject was similar to what is provided by the legal norm. The objective good faith has a normative nature, imposing the duty to behave according to a socially valuable model, in order to pursuit legal effects [1].
So the objective good faith has as referent a socially valuable behavior model which itself aims to enforce, giving it a binding nature, while the subjective good faith has as its referent a pre- existing historical situation [1].
Conclusions
As it is expressed by different legal provisions the duty of good faith, or more specifically the ob-
jective good faith is not defined. This means that there is no exhaustive list of behaviors that parties must know and perform. Each behavior must be evaluated according to its context. There lays the important task of courts. The judges should deal with each case as unique, examining the behavior according to the circumstances of the case, identifying the presence or not of the objective good faith. More likely the theory of Professor Summers [19, 200-201], which consider good faith as an "excluder", would help the judges. Good faith is a phrase without an accepted general meaning on its own and it may serve as an excluder of a wide range of heterogeneous forms of bad faith. Professor Summers based this excluder qualifying of good faith precisely on judges reasoning and their used terminology: (1) Judges sometimes write of lack of bad faith or absence of bad faith, as if it were the non-existence of something else that constitutes good faith. (2) When a judge uses the phrase good faith, one is frequently unable to attach a definite meaning to it without knowing what, in context, the judge means to exclude and (3) Even a cursory study of judicial usage reveals that the phrase is used to rule out a wide range of heterogeneous forms of conduct [19, 201].
There is a great importance of the objective good faith in contract law. Due to its nature as a general clause it imposes a standard of behavior, which is morally and legally accepted, but also not strict and rigid. The primary duty of the parties is the fulfillment of their obligations during the formation or the execution of the contract. The objective good faith just establishes the way the parties should behave. It disciplines them. The objective good faith seems to "improve" the law, by paving the road for those important values which enter the contract law. So the contract becomes, not only a powerful tool in realizing different interests of the parties, but also a relationship characterized by a set of values highly evaluated.
The presence of objective good faith leads to a healthy contractual relationship, which more likely will result in a valid contract. This is an important result because: (1) increases mutual confidence and appreciation of the parties, (2) consequently increases the possibility for other future collaborations between them, (3) avoids disagreement between
parties, (4) avoids pre- contractual or contractual (5) avoids court proceedings and arbitration and
liability, which arises from the lack of good faith and time and financial costs, arising from them.
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