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Good Faith Notes

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GOOD FAITH This seminar will take a final look at the concept of good faith in contract, which has hitherto been explored in the context of pre-contractual duties, implied terms, and unfair terms, among other subjects. In the seminar, the issues of the meaning of good faith and whether a concept of this kind can serve any useful purpose will be raised once more, having particular consideration to its application outside the areas already discussed.

Reading:

(1) For the European background see Towards a European Civil Code, 3rd edn (2004), ch 26 (M. Hesselink); or H Kötz, 'Towards a European Civil Code: The Duty of Good Faith', in Essays in Honour of John Fleming (OUP, 2002), ch.9; or R Zimmermann and S Whittaker, Good Faith in European Contract Law (CUP, 2000), pp. 7-62, 653-701. (2) For Scotland, England and the Common Law tradition Good Faith in Contract and Property Law, ed. A D M Forte (Hart Publishing, 1999), especially the contributions of ** MacQueen, Thomson and McKendrick. (3) For a Mixed Systems comparison see - H L MacQueen, "Good Faith" in MacQueen & Zimmermann (eds.), European Contract Law: Scots and South African Perspectives (EUP, 2006), pp 43 - 73. (4) For recent developments in construction law, see:
* J Mason, "Contracting in good faith - giving the parties what they want", (2007) Con LJ

436. Also, so far as time allows - G Teubner, "Legal irritants: good faith in British law or how unifying law ends up in new divergences", (1998) 61 Modern Law Review 11 M Bridge, "Good faith in commercial contracts", in Good Faith in Contract: Concept and Context (1999) A Mason, "Contract, good faith and equitable standards in fair dealing", (2000) 116 Law Quarterly Review 66 J Stapleton, "Good faith in private law", (1999) 52 Current Legal Problems 1 DRAFT COMMON FRAME OF REFERENCE (DCFR) Book 2, Article 1:102: Party Autonomy (1) Parties are free to make a contract or other juridical act and to determine its contents, subject to the rules on good faith and fair dealing and any other applicable mandatory rules. (2) Parties may exclude the application of any of the following rules relating to contracts or other juridical acts, or the rights and obligations arising therefrom, or derogate from or vary their effects, except as otherwise provided. Book 1, Article 1:102: Interpretation and development (1) These rules are to be interpreted and developed autonomously and in accordance with their objectives. (3) In their interpretation and development regard should be had to the need to promote: (a) uniformity of application;

(b) good faith and fair dealing; and (c) legal certainty. Book 3, Article 1:103: Good Faith and fair dealing (1) A person has a duty to act in accordance with good faith and fair dealing in performing an obligation, in exercising a right to performance, in pursuing or defending a remedy for non-performance, or in exercising a right to terminate an obligation or contractual relationship. (2) The duty may not be excluded or limited by contract. (3) Breach of the duty does not give rise directly to the remedies for non-performance of an obligation but may preclude the person in breach form exercising or relying on a right, remedy or defence which that person would otherwise have. Book 3, Article 1:104: Co-operation. The debtor and creditor are obliged to co-operate with each other when and to the extent that this can reasonably be expected for the performance of the debtor's obligation. For a sceptical view of the good faith provisions of PECL, which are very similar to the DCFR provisions noted above, see H Beale, "General clauses and specific rules in the Principles of European Contract Law: the 'good faith' clause", in S Grundmann & D Mazeaud (eds.), General Clauses and Standards in European Contract Law (Kluwer Law, 2006), at pp 205 - 218.
* The JCT Constructing Excellence Model Form Contract 2006 Contains an "overriding principle" of collaboration specifying that the parties must work together with each other and all other Project Participants in a co-operative and collaborative manner in good faith and in the spirit of mutual trust and respect.

Cases:

White & Carter (Councils) Ltd v McGregor 1962 SC (HL) 1; 1962 SLT 9; [1962] AC 413; 2 WLR 17; [1961] 3 All ER 1178 Interfoto Picture Library v Stiletto Visual Programmes Ltd [1989] 1 QB 433; [1988] 2 WLR 615; 1 All ER 348 Union Eagle Ltd v Golden Achievement Ltd [1997] AC 514; 2 WLR 341; 2 All ER 215
* Smith v Bank of Scotland 1997 SC (HL) 111; 1997 SLT 1061; 1997 SCLR 765 Macari v Celtic Football Club 1999 SC 628; 2000 SLT 80
* Socimer International Bank Ltd (in liquidation) v Standard Bank London Ltd (No 2) [2008] EWCA Civ 116; [2008] 1 Lloyds's Rep 558 (this case is largely about the implication of terms, but note the references to good faith)
** EDI Central Ltd v National Car Parks Ltd [2010] CSOH 141 - note especially Lord Glennie's remark that 'It is, of course, no part of Scots law that, in the absence of agreement, parties to a contract should act in good faith in carrying out their obligations to each other' (para. 23) - how does this square with the view taken in Smith v Bank of Scotland?
* G4S Cash Centres (UK) Ltd v Clydesdale Bank plc [2011] CSIH 48 - note the contract term requiring, for the future, that the parties "negotiate in good faith to agree such Services Fees based on the results of the review" - was this enforceable?

Questions to Consider:

1. "There is also an underlying principle of good faith in the Scottish law of contract although it is difficult to find a clear and comprehensive statement of it." Do you agree?

2. Can you give examples of this principle at work in contract law, or of situations where the court upholds a situation which is contrary to good faith?

3. What does the principle or doctrine of good faith mean? In general terms, what work does this principle do in the Scottish law of contract? Does the principle have direct or indirect application?

4. Is good faith different from public policy, unconscionability, reasonable expectations or reasonableness? How objective a standard is good faith?

5. Is deliberate pursuit of self interest excluded by good faith?

6. Is good faith really only relevant to consumers? Or to employees? Or to the performance of the contract?

7. What role, if any, should good faith play in the Scottish law of contract?

8. How practicable will it be to enforce good faith obligations, like that in the JCT Model Form referred to above?

9. Should a requirement of good faith be part of any future European contract law?

Links to Other Seminars

Formation Pre-contractual Negotiations Theory Implied Terms Remedies

Definition

What functions do we want Good Faith to form?
What is the reason for the law given the prominence of Good Faith?

Thought to have a role to play at different stages of contract. Definition must try to encompass each sage. Minimalist v. Maximalist Minimalist

• "honesty", "fairness", "reasonableness" OR are these concepts in their own right?

• Middle ground between total self-interest v. lack of self-interest.

• Behaving decently.

• A person should keep to his word. Attractiveness

• Quick definition

• Gives basic idea

• Puts concepts into laymans language. PROBLEMS:

• Lacks substance

• Vague

• Subjective: Less room from introducing objective standard. o Property Law - Subjective Good Faith What did that person know?
Should remain separate from contract law

• Cannot be applied by courts in any coherent way.

Uncertainty (vagueness)

Maximalist

• Seeks to define Good Faith at various stages of the contract

• Trying to make definition as comprehensive as possible.

• Middle ground between total self-interest v. lack of self-interest.

• Hogg "A duty to act honestly and openly in one's dealings with another contracting party, which includes not seeking to take unfair advantage of the other party, which includes not seeking to take unfair advantage of the other party, disclosing all such information to the other party the failure to disclose which would distort an honest and open contractual relationship, and treating the other party not simply as an adversary but as a co-operative agent".

Beale

Good Faith should have a variable definition No set definition Gives four different definitions:

• Not acting in bad faith;

• Party should put the other party's interests ahead of his own;

• Party should NOT act against interests of other party. Not much difference between REASONABLENESS v. Good Faith Subjective v. Objective Subjective

• What did the buyer know?
e.g. Sale of Goods 3rd party buyer in Good Faith

• Prevent dishonest, snatching at a bargain etc. Objective

• WIDER

• Bring in norms from society

MacQueen

Interpretative Supplementive Corrective

Hesselink

Interpretative What is correct interpretation of contract?
Supplementative Imposing extra duties upon parties. Implied terms to supplement express terms.

Corrective (Limitative) What needs to be done to correct contract?
What needs to be done to limit contract?

Arguments FOR Good Faith Justification & explanation for existing rules

Making sense of existing rules 'Golden thread' Connection between some doctrines

Introduces rationality and coherence into piecemeal solutions

'Golden thread'

Prevents bad behaviour/encourages good behaviour

Provides a standard to aim for

Creative Norm

Gap-filler Smith v RBS MacQueen "The cradle where new rules are born" Spectrum of creativeness - some proponents go further than others.

Prevents exploitation

Protects weaker parties UCTA and UTCR BUT Economic argument that contracts are based on unequal bargaining power.

Simply giving legal recognition of normal behaviour of contracting parties Aids European harmonisation

Arguments AGAINST Good Faith Doesn't reflect adversarial position of contracting parties

BUT You can still respect their interest Difficult to recognise this whilst trying to get best deal. o Moving towards co-operative relationships.

Uncertainty

Vagueness  lack of precision = uncertainty HOWEVER Same thing could be said about other concepts in law e.g. reasonableness

Limit on Freedom to Contract/Freedom to Contract

Good Faith over-stepping the mark?

Requires parties to give up competitive advantage

Stagnates economy Germany and US economy = NO stagnation BUT Why do so many international parties chose English law to govern contracts?

No different from existing concepts

E.g. reasonableness

Already sufficient protection

We already have rules that penalise bad faith Is this sufficient?

Unworkable in practice

Expecting too much from people Expecting flawed humanity to be angelic Can't expect people to be perfect.

Effect on right to terminate

Lindley v Hibernian Can challenge express terms that were agreed upon by parties where whole contract could be terminated by minor technicality.

MOVEMENT OTWARDS GOOD FAITH IN RECENT YEARS…
Appearance in Standard Form contracts. It IS possible to identify manifestations of Good Faith in Scots law

MacQueen

Specific principles of Good Faith in Scots law.

Cases
White & Carter (Councils) Ltd v McGregor 1962 SC (HL) 1; 1962 SLT 9; [1962]
AC 413; 2 WLR 17; [1961] 3 All ER 1178 Party proceeded with contract when other party wished to withdraw. Was this action reasonable?
Lord Reid Contractual rights do NOT need to be exercised reasonably. Contractual rights do NOT need to exercised in Good Faith. If performance NOT allowed. Could leave innocent party WORSE OFF. STILL GOOD LAW

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