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26Juristas (2009. Nr.9).
16. Augaite D. Actio Pauliana. Jurisprudencija. 2004. t. 55 (47) P. 5-18.
THE PRINCIPLE OF GOOD FAITH IN DIFFERENT LEGAL SYSTEMS: COMPARATIVE
ASPECTS OF THE APPLICATION
Irena Dirgeliene
Master of Law Kazimieras Simonavicius University
ABSTRACT
The principle of good faith is not officially recognized in all countries, but its impact on contract law is undisputed. The principle of good faith is particularly important in continental law countries, which directly establish the provisions of this principle in statutebooks. Moreover it is also the basis of all institutes of civil law, while the obligation of good faith is acknowledged in all stages of contract law. The principle of good faith in the countries of common law is treated somewhat differently - its provisions apply only during the stage of the implementation of the agreement.
Keywords: legal principles, the principle of good faith, contract law, contractual relationship.
Introduction
What makes the principle of good faith significant on the international level is that it was included into the list of UNIDROIT principles. Article 1.7 of the UNIDROIT principles declares each country's obligation to act in good faith. Other international and national documents demand the obligation of acting in good faith too, although the agreement itself does not provide that. Although the contract does not oblige to refrain from any dishonest actions, those that could hinder the proper execution of the agreement are bound by the principle of good faith. One party of the agreement cannot use dishonest actions to reduce the contractual benefit of the other party. By fulfilling their obligations the parties must not explain the provisions of the agreement distorting contractual objectives. The application of the principle of good faith allows to terminate the contract only in cases when particularly relevant provisions of the agreement are infringed.
In Europe the principle of good faith has been established by the PECL formulated by the Commission of the Professor O. Lando.
This research is relevant, because academic works lack more detailed information on the comparative analysis of the application of the principle of good faith in different legal systems.
Novelty. The principle of good faith has recently been introduced to Canadian courts. France is also looking forward to changes in Civil Code, related to the application of the principle of good faith in contract law. These changes may influence not only contractual relationships between businessmen of these countries, but international contracts as well.
Research goal - to analyse the advantages and differences of application of the principle of good faith in various countries and its effect on contractual relationships.
Research object - the application of the principle of good faith in Lithuanian, English, French, Canadian and US law.
Research methods: the research was made using logical, descriptive and theoretical generalisation methods, which enable full disclosure of the essence of the principle of good faith in Lithuanian, French, English, Canadian and US law. The linguistic-legal explanation method was also used, which manifests itself in the literal analysis of judicial decisions.
1. The Concept and Meaning of the Principle of Good Faith
Many countries regard the principle of good faith as one of the major principles in contract law and some countries regard it as one of the major principles in the entire private law as well. J. Gernhuber states that good faith is regarded more like a specific concept, full of various political, religious or philosophical aspects rather than a human or legal category. He claims that good faith is a moral standard and a legal-ethical principle [15, 106]. Other authors of the legal doctrine emphasize that good faith should be regarded as the gate, through which moral values reach the law [11, 472].
What makes the principle of good faith significant on the international level is that it was included into the list of UNIDROIT principles [3]. Article 1.7 of the UNIDROIT principles declares each country's obligation to act in good faith. Other international and national documents demand the obligation of acting in good faith too, although the agreement itself does not provide that. Although the contract does not oblige to refrain from any dishonest actions, those that could hinder the proper execution of the agreement are bound by the principle of good faith. One party of the agreement cannot use dishonest actions to reduce the contractual benefit of the other party. By fulfilling their obligations the parties must not explain the provisions of the agreement distorting contractual objectives. The application of the principle of good faith allows to terminate the contract only in cases when particularly relevant provisions of the agreement are infringed.
In Europe the principle of good faith has been established by the PECL formulated by the Commission of the Professor O. Lando [4].
Contemporary law explains good principle as a measure of value and moral category. It is regarded as honesty, ethics, openness, morality and loyalty [14, 713]. The requirement for good faith obliges market participants to refrain from improper use of the methods of exercising rights conferred by contract law. It „...provides an opportunity to interpret, supplement and amend contracts and thus monitor the parties exercising their autonomy [21, 32]."
In her article The Principle of Good Faith in Contract Law, S. Muleviciute [22, 179] makes a conclusion that "the doctrine
of good faith, as an undefined legal-philosophical category, has positive and negative aspects". According to her, on one hand, the principle of good faith is a legal mechanism, which enables the law to remain dynamic and not fall behind the realities of life, on the other hand, the establishment of such (evaluative) norm in codified laws implies courts' ability to use an undefined right of discretion.
According to R. S. Summers, good faith is one of these concepts that do not have a fixed and clear content, and thus suggests defining the contents of good faith indirectly, i.e. via its antonym - dishonesty [18]. This opinion is supported by Lithuanian Supreme Court in the case 3K-3-15/2010: "From the legal perspective a person's honesty is measured according to personal information about certain facts. Knowing is understood as a person's possession of certain data, while being obliged to know is explained as a person's duty to act and inquire, and thus unjustified inaction is regarded as dishonest behaviour. Thus an honest acquirer can be regarded thus only if he/she has made an inquiry by means available, whether the person intending to enter into a contract does not have any creditors, or if the contract will not violate their interests (The decision in the civil case No. 3K-3-15/2010)."
2. The Application of the Principle of Good Faith in Lithuanian Contract Law
1 pt. of the Article 1.5 of the Civil Code indicates that by implementing their rights and duties, the subjects of civil legal relations must act according to the requirements of good faith. The civil law applies a presumption of good faith, according to which each person is regarded as honest if not proven otherwise. The Civil Code does not reveal the contents of the principle of good faith itself, but the content of this principle is explained in practice of Court of Cassation.
In the case No. 3K-3-44/2011 Lithuanian Supreme Court has provided a detailed explanation of the concepts of the principles of objective and subjective good faith: "Good faith is a value measure of the behaviour of the subject of legal relations, determined according to objective and subjective criteria. From the objective approach, good faith is explained as behaviour, which conforms to the requirements of reasonableness and fairness, i.e. careful, cautious and considerate behaviour. From the subjective approach, good faith defines a person's internal state in a specific situation, among other things, affected by the characteristics that make the subject individual, such as: in case of a physical person - his/her age, education, practical skills, etc., in case of legal persons - the type of activity, characteristics, business experience, etc. Both of these criteria are necessary in order to determine the person's honesty. In a specific situation honesty is a factual question. However, the requirements for its contents might differ, depending on the contracts concluded and the situation of the persons' environment (The decision in the civil case No. 3K-3-44/2011)."
A.S. Hartkamp, perceiving the concept of good faith as a legal category and value measure of a person's behaviour in the doctrine of continental law, reaffirms that "good faith is traditionally evaluated according two criteria - objective and subjective [17, 369]."
In conclusion, it could be stated that from the subjective point of view good faith reveals a person's metal state in a specific situation. It is determined by analysing the answer
to the question if the person could have known something, done something or not, considering his/her age, education, sophistication, life experience and factual circumstances of the case. Subjective honesty could also be regarded as factual honesty. Both objective and subjective criteria are necessary in order to determine if a person is really honest. A person can be regarded as honest only if he or she did not know or could not certain circumstances. A party claiming that another person is dishonest must prove that. The criterion of good faith is applicable not only to persons' behaviour, but also other legal areas.
According to the practice, formulated according to judicial precedents in specific cases (Case No. 3K-3-15/2008) by Lithuanian Supreme Court: "in case of a dispute regarding the contents and conditions of a contract, the contract must be explained by identifying the actual intentions of the parties of the contract, rather than solely considering their interrelation, the essence and goal of the contract, the circumstances of its conclusion, the negotiations of the parties regarding the contract, the behaviour of the parties after entering into contract and other significant circumstances. When interpreting a contract it is necessary to follow the general legal principles established in the Article 1.5 of the Civil Code. That means that the conditions of the contract must be interpreted in a way that the result of the interpretation would not be dishonest in respect of one of the parties (The decision in the civil case No. 3K-3-15/2008)."
In conclusion, the actions of the contracting parties must be prudent, the parties must agree regarding the contractual conditions and take responsibility arising out of the contract. The circumstances mentioned constitute the contents of the principle of good faith, yet none of these legal acts specifies how a person is identified as acting in good faith. Thus, good faith is a universally recognized and exemplary category, but at the same time it should be recognized as very abstract, therefore the contents of the principle of good faith should be specified by consolidating it in legal acts.
3. The Application of the Principle of Good Faith in French Law
The principle of good faith is not officially recognized in all countries, but its impact on contract law is undisputed. The principle of good faith is particularly important in continental law countries, which directly establish the provisions of this principle in statute-books. Moreover it is also the basis of all institutes of civil law, while the obligation of good faith is acknowledged in all stages of contract law. The principle of good faith in the countries of common law is treated somewhat differently - its provisions apply only during the stage of the implementation of the agreement.
Pt. 3 of the Article 1134 of the Civil Code of France provides that contracts must be carried out in good faith (de bonne foi). Good faith is a classical concept of French law, yet it raises a certain distrust due to the fact that judges sometimes interfere too much in contract terms. Despite a number of researches aimed at defining the limits of the principle of good faith, its meaning, areas of application and changes that were definitely affected by the legislation of the European Union, remains doubtful.
Seeking to define different roles of good faith, Prof. M. F.
Magnan of Sorbonne University, suggested a concept for each of the criteria of the principle of good faith. The concept of good faith limits differences, with regards to the standard of honest behaviour and if that behaviour affects the contents of the contract. According to the professor, the principle of good faith not only performs a procedural role, but also protects the trust of the other party. The role of good faith is important in certain circumstances, seeking to reduce the scope of the contract terms, limit the excessive obligation and separate implicit responsibilities, which differ from those laid down in the Article 1135 of the French Civil Code. Based on the additions of the principle of good faith, it is aimed at ensuring the sustainability of the contractual relations [19, 6].
P. Mayer states that good faith is an open concept, which allows the legislators to introduce the flexibility necessary to the operation of the contract law [20, 543]. The French court practice presents an example of a honest implementation of obligations, when in some cases the parties are obliged to re-negotiate the terms of contract. Such a duty occurs due to actions of one of the party, which prevent the other party from receiving a part or the entire benefit, which was expected after implementing the terms of the contract.
France has been preparing to introduce a reform of the law of contracts and obligations for already several years, and the culmination of its implementation is expected already this year (2015). The Article 38 of the Constitution of France enables Governmental power to take action in the legal area in order to ensure legal safety and the efficiency of application of the law. In order to implement these goals the Government of France is authorised to change the structure and contents of the third book of the Civil Code: to modernise, simplify, improve readability, increase the accessibility of the general contract law, define the system of obligations and evidence law.
The goal of the changes is to confirm the general principles of contract law, such as good faith and freedom of contract, also to define the major contract categories, explain rules related to the contract process and the provisions of negotiation, as well as contract proposal and acceptance, particularly considering the time and place. At the same time particular attention is focused on the concept of dishonest contract terms: there are intentions to adopt provisions which allow to punish the party, which abuses the incomprehension of the weaker party.
The draft amendment of the Civil Code of France includes additional provisions for the pt. 3 of the art. 1134, which state that contracts must be pecuniary and carried out in good faith, and that they are considered as one of the most important principles of contract law. According to the author, the amendments to the Civil Code of France will consolidate the implementation of the principle of good faith in the legal system of this country. It is also likely that the application of the provisions of this principle in court practice will be more flexible. The consolidation of the amendments to the Code is also welcome due to possibly better protection of the rights of the consumer as the weaker party.
4. The Application of the Principle of Good Faith in English Contract Law
A.S. Hartkamp notes that English legal system follows the principle of equity, which is often used in court precedents as an analogue of good faith [17, 350].
Historically the provision of the principle of good faith has been transposed to the system of the English contract law. According to F. Teubner, due to the fact that the development of the provision of good faith was unnatural, certain authors have a negative attitude towards the negative consequences of this principle [24, 17]. R. Goode's opinion about the consequences of the transposition is even stricter [16, 7]. He claims that the principle of good faith directly transposed into the English law could be detrimental rather than useful, because the English law has an individual understanding of the provision of good faith, which interprets the principle in a more restricted manner than it is done in the tradition of the continental law. For example, in England a party is regarded as honest if its actions are open.
R. Zimmermann and S. Whittaker also regard the concept of good faith as something causing a lot of danger: "...it is often claimed that the English contract law does not acknowledge the general concept of good faith. It tolerates a certain moral insensitivity, while the economic efficiency and legal result of the case is regarded as more valuable than the absolute justice. Based on the principle of good faith, the duty to negotiate was even defined as naturally incompatible with the adversarial position of the parties in the negotiation, as well as impossible to implement in practice" [25, 15].
English practice and legal doctrine in pre-contractual legal relationships does not recognize the duty to act in good faith overall and the principle of good faith is applied rarely and only during the implementation of the contract. This provision has been established by Walford vs. Miles [9, 138], a precedent of the British House of Lords in 1992. This precedent indicates that the obligation to negotiate in good faith is not effective in practice, because it completely does not comply with the position of the negotiating parties. Parties have a right to terminate the ongoing negotiations at any time, no matter the reason.
It is likely that the above-mentioned transposition in England and some other states of general legal system make the general category of the principle of good faith difficult to acknowledge. "The English law has not established general provisions of honest implementation of duties, but sometimes courts do not allow the parties to rely on certain provisions of the contract, if the court considers them different from the intention of the parties [12, 543]."
As it was mentioned, English legal system does not have a general requirement for the concept of good faith, but this provision can be found in legal norms, which regulate specific legal relationships. E. McKendric states that the fact that English courts do not acknowledge the doctrine of good faith makes the issue of the doctrine of good faith painful. Moreover, there is a number of examples of English contract law, when English judges give priority to strict application of contract provisions than revealing justice in the case [10, 19].
G. Sulija's opinion differs from the positions indicated above. According to him, evaluation of the good faith or reasonableness of contract provisions should consider not only the relative positions of the parties, but also the contract practice of a specific business area. In order to attract foreign investors and international corporations to Lithuanian capital market and promote our country's market to foreign entities, legal regulation must be focused on strengthening the principle
of the contract freedom. In this context it would be beneficial to evaluate and consider the legal experience of the states that rely on Anglo-Saxon legal tradition and work with a large part of the global financial corporations [23, 44].
S. Muleviciute rightly concludes: "The English law does not directly recognize the doctrine of good faith, but its influence on the entire legal system of the United Kingdom is obvious. The contents, meaning and application constructions of the principle of good faith may still become the object of dispute between the representatives of the legal doctrines [22, 179]."
5. The Application of the Principle of Good Faith in US and Canadian Law
Talking about the aspects of the application of the principle of good faith in the United States of America, E. A. Farnsworth emphasizes that USA is the only one among the countries of general law, which developed the principle of good faith and applies it at least for implementation of contracts (Farnsworth 1994). According to him, the principle of good faith in the legal system of the United States of America has three meanings. Good faith is explained as behaviour, which conforms to the fundamental principles of the contract law, only named differently. The second concept is based on the idea that the demand for good faith does not have content in itself, but it defines inappropriate behaviour, which may manifest in various forms, while according to the third concept, this principle keeps contract parties from using their contractual rights in a manner inconsistent with reasonable expectations of the other contractual party [13, 63].
In some states of the USA the principle of good faith has been widely applied in contract law for a long time, while there are also states, where it has become a precedent only recently.
The first time Canadian Supreme Court adopted a decision defining the precedent of the application of the principle of good faith in contract law was only in 2014, in the case Bhasin c. Hrynew 2014 SLS 71 [8]. This was the case when the general principle of good faith in implementation of contracts was acknowledged for the first time. This decision of Canadian Supreme Court was particularly important for local companies, because after this decision was adopted, courts consider not only the terms of contracts, but also the duty of the application of the principle of good faith. Companies will be obliged to take into the account the decision of the Supreme Court and consider, whether their contracts comply with the application criteria of the principle of good faith.
Canadian companies are advised to focus on the fact that if they fail to comply to contract terms in good faith, they may be required to pay the damages. The size of the remuneration depends on how the other party fulfilled their obligations. A party seeking to undermine the legitimate interests of contractual party cannot behave dishonestly.
According to the author, this resolution ofCanadian Supreme Court marks the beginning of a new era of commercial dispute resolution. It is assumed that the application of this principle in specific situations will gradually merge into Canadian law by acknowledging the freedom of personal choice in doing business. The parties' attempts to obtain compensation for damage could be expected, even if the terms of the contract wording are technically permissible, yet it could be so that the parties may doubt the application of the principle of good faith.
It is likely that companies will do their best to consider the principles of good faith when concluding contracts with their contractors or even concluding internal contracts, however such behaviour of the parties may be misleading and could increase the risk of disputes.
6. Conclusions
1. In Lithuania the actions of the contracting parties must be prudent, the parties must agree regarding the contractual conditions and take responsibility arising out of the contract. The circumstances mentioned constitute the contents of the principle of good faith, yet none of these legal acts specifies how a person is identified as acting in good faith. Thus, good faith is a universally recognized and exemplary category, but at the same time it should be recognized as very abstract, therefore the contents of the principle of good faith should be specified by consolidating it in legal acts.
2. The resolution of Canadian Supreme Court regarding the application of the principle of good faith marks the beginning of a new era of commercial dispute resolution. The parties' attempts to obtain compensation for damage could be expected, even if the terms of the contract wording are technically permissible, yet it could be so that the parties may doubt the application of the principle of good faith. It is likely that companies will do their best to consider the principles of good faith when concluding contracts with their contractors or even concluding internal contracts, however such behaviour of the parties may be misleading and could increase the risk of disputes.
3. The draft amendment of the Civil Code of France includes additional provisions for the pt. 3 of the art. 1134, which state that contracts must be pecuniary and carried out in good faith, and are considered as one of the most important principles of contract law. The amendments to the Civil Code of France will consolidate the implementation of the principle of good faith in the legal system of this country and the European Union. It is also likely that the application of the provisions of this principle in court practice will be more flexible. The consolidation of the amendments to the Code is also welcome due to possibly better protection of the rights of the consumer as the weaker party.
4. In English legal system there is no general requirement for the concept of good faith, but this provision can be found in legal norms, which regulate specific legal relationships. The English law does not directly recognize the doctrine of good faith, but its influence on the entire legal system of the United Kingdom is obvious. The contents, meaning and application constructions of the principle of good faith may still become the object of further disquisition of the representatives of the legal doctrines.
References
Legal acts
1. Constitution of the Republic of Lithuania.
2. The Civil Code of the Republic of Lithuania.
3. International Institute for the Unification of Private Law. UNIDROIT Principles of International Commercial Contracts. Rome: 2004. 1.7 str.
4. Principles of European Contract Law (Parts I, II and III). 2002. 1,201 str.
Court practice
5. The decision in the civil case No. 3K-3-15/2010, made on 2 February 2010 by the Panel of Judges of the Division of Civil Cases of Lithuanian Supreme Court.
6. The decision in the civil case No. 3K-3-44/2011, made on 08 November 2011 by the Panel of Judges of the Division of Civil Cases of Lithuanian Supreme Court.
7. The decision in the civil case No. 3K-3-15/2008, made on 28 January 2008 by the Panel of Judges of the Division of Civil Cases of Lithuanian Supreme Court.
8. Bhasin c. Hrynew 2014 SCC 71, 2014.
9. Walford v. Miles. 1992. 2 AC 128, 138.
Special literature
10. Baele H. G., et. al. 2004. Chity on Contracts. Volume 1. General Principles. Twenty-ninth edition. London: Sweet & Maxwell.
11. Barrière F., Basedow J., Berger K.P., et al. 2004. Towards a European Civil Code /red. Hartkamp A., Hesselink M., Hondius E. ir kt. Nijmegen: Kluwer Law International.
12. European Contract Law. 2008. Materials for a Common Frame of Reference: Terminology, Guiding Principles, Model Rules. Sellier: European law publishers.
13. Farnsworth E. A. 1994. Duties of good faith and fair dealing under the UNIDROIT principles, relevant international conventions, and national laws. Tulane: Journal of International and comparative law.
14. Garner B. A., et al. 2004. Black's Law Dictionary.
15. Gernhuber J. 1998. Bürgerliches Recht: ein systematisches Repetitorium. München: Beck.
16. Goode R. 1992. The Concept of Good Faith in English Law. Centro di studi e ricerche di diritto comparato e straniero. Roma.
17. Hartkamp A. S., et al. 2004. Towards a European Civil Code. The Hague, London, Boston: Kluwer Law International.
18. Houh E. M. S. 2005. The Doctrine of Good Faith in Contract Law: A (Nearly) Empty Vessel.
19. Magnan M. F. 2012. Le rôle de la bonne foi en droit des contrats Essai d'analyse à la lumière du droit anglais et du droit européen. Institut de Droit des Affaires.
20. Mayer, P. 1993. Le Principe de Bonne Foi devant les Arbitres du Commerce International, in: Festschrift Pierre Lalive, Basel, Frankfurt a. M.
21. Mak Ch. 2008. Fundamental rights in European contract law: a comparison of the impact of fundamental rights on contractual relationships in Germany, the Netherlands, Italy, and England. - Austin (Tex.): Kluwer Law International.
22. Muleviciûté S. 2013. S^ziningumo principas sutarciq teiséje/ Mokslinés Minties sventé. MRU.
23. Sulija G. 2012. Sutarties laisvés principas ir jo taikymo ribos: analizé tarptautiniq aviacijos sandoriq pavyzdziu. Teisés problemos, 4 (78).
24. Teubner G. 1998. Legal Irritants: Good faith in British Law or How Unifying Law Ends Up in New Divergences. Modern Law Review, 61.
25. Zimmermann R., Whittaker S. 2008. Good faith in European Contract Law. Cambridge: Cambridge University Press.
