Good Faith in Contract Law

• Good Faith helps parties and courts to impose solidarity in limiting party autonomy and freedom of contract.

Derogative / Corrective Function

• Good faith modifies, limits, or corrects strict application of contractual terms to prevent unfair outcomes.

• Allows courts to adjust obligations in cases where enforcing the contract as written would be excessively harsh or against fair dealing principles.

• Abuse of rights is an example.

• Applies to all types of contracts.

• Good Faith helps parties and courts consider additional measures during negotiation and performance.

• Supplementing function means duties need to be followed.

• Duty to inform and advise when necessary

• Duty to safeguard confidentiality of ongoing negotiations (loyalty)

• Duty to cooperate and re-negotiate in unforeseen circumstances

• Good faith is applicable to all persons and contractual relationships in all contract stages.

Common Law

• Lord Denning: English courts should intervene when:

• A person enters unfair contract.

• Property is sold for an extremely low price.

• Weaker party lacks independent legal advice and has desperation, ignorance, or mental weakness.

• A stronger party takes advantage by imposing unfair terms.

• Undue influence is not considered wrongdoing.

• Not followed by peers.

• Longmore argues that obligations to negotiate in good faith are too uncertain for legal enforcement.

• Necessary to negotiate in good faith is an agreement to agree and thus uncertain to enforce.

• It is difficult to determine if negotiations were rightfully terminated.

• Since it's impossible to know if good faith would have led to an agreement, assessing losses is difficult.

• Walford v. Miles states that the duty to negotiate in good faith contradicts parties' opposing natures.

• Parties can pursue their own interests as long as no misinterpretations occur.

• Lord Bingham: English law is not committed to good faith.

• They develop piecemeal solutions in cases of unfairness.

UK Approach to Good Faith

• No implied term to perform a contract in good faith so no supplementing/complementing obligations exist for the sole reason of good faith.
• The doctrine of good faith, as argued by Lord Denning, was not followed.
• However, courts and legislators implicitly act on good faith principles.
• Piecemeal solutions provide equity (fairness) to parties.
• Promissory estoppel enforces promises that lead to reliance.
• Implied duty exists for the inviter to conduct a tender process in good faith.
• An unfair relationship-test exists.

Interpretation - Main Theories

• Interpretation is agreeing on something/a certain contract, but conflict exists between intentions.

Difficulties When Reading A Contract

• The word meaning indicating the intention of the parties is not always clear.
• Parties can't predict development in the future.
• Interpretation methods differ.
• Foreign Legal concepts in contracts complicate interpretation.
• Contract between French and Dutch is written in English.

Methods of Interpretation

• Subjective ('will theory') focuses on the true subjective and common meaning of what parties intended.

• Relevant elements includes the negotiation process, agreements in the draft, correspondence and internal affairs.

• Parties' conduct ex post & ex ante.

• There is no hindsight bias so post-contractual behavior doesn't necessarily equal intention.

• Objective ('declaration theory'): meaning of a contract is based on available info for a third person.

• One must consider word meanings, not guesswork.

• Relevant elements includes textual interpretation, preamble (reasons behind the contract) and plausible legal consequences.

• Contra proferentem: interprets against the party who wrote the contractual clause (offeror).

• Interpretation of a term against the supplying party is to be preferred when the meaning of a term is not individually negotiated.

• If contract terms are unclear, an interpretation against that party is preferred.

• Consumer law always favors a consumer.

Rules of Contract Interpretation

• Preference is for negotiated terms that include things like explicit prices agreed on.
• Contracts should be intepreted as a whole as opposed to clause by clause.
• Those terms that give the contract effect are favored.
• In language difficulties, the original draft is favored.

Unexpected Circumstances

• The possibility of unforeseen events existing in the future.

• Valid agreement, but something happens during performance.

• Force majeure and hardship exists in civil law.

• The doctrine of frustration, which include both existing in common law.

• Force Majeure - Impossibility performance becomes impossible due to external unforeseen event

• General idea: pacta sunt servanda means sanctity of contracts

• Parties are bound by their contract and free to determine content, so equality in values is immaterial.

• A situation in which performance becomes absolutely impossible.

• Relief is given to the affected party, mostly.

Conditions To Give Relief

• Non-performance excused if proven due to an impediment beyond control and not reasonably expected to be accounted for at conclusion, avoided, or overcome.
• Burden of proof is on the affected party.
• The impediment is beyond the affected party's control.
• The affected party must give notice.
• There are unforeseen circumstances when the contract concludes.
• Risk was not allocated in contract

Consequences for definite and temporarily impossibilities

• Definite impossibility excuses non-performance (full relief)

• Temporary impossibility suspends obligations temporarily

• Non-Performance - occurs if a party or person entrusted doesn't perform obligation.

• The other party has a right to judicial action.

• First: can the non-performance be excused? (Force majeure, hardship, claimants fault)

• If not, one can claim remedies.

Remedies

• Legislators prefer specific performance.

• Suspension of one's own obligations can be raised in a reciprocal agreement where obligations may be suspended if the obligator does not perform.

• Assurance exists for the aggrieved party.

• Termination only occurs in case of a fundamental breach, otherwise when buying from a car dealership and you are not given the car.

• Conditions to terminate contract where non-performance causes fundamental breach where notice is reasonably given in a way that is known by fundamental breach.

• Fundamental non-performance occurs when: Strict compliance with the obligation being of the essence of the contract, in case of a duty to achieve a specific result.

• Non-performance substantially deprives the aggrieved party of what it was entitled to except under conditions.

• Non-performance is intentional and justifies the aggrieved party's reason to not rely on performance with fraud.

• Victims obtain a release from future obligations, but not from those obligations that has already accured.

• There is no release from prioir obligations with guilty party from primary obligations not yet due.

• Termination happens when the seller fails to deliver the goods.

• In Civil Law legal systems, there is retroactive effect to restitue everything had been exchanged in cases of fundamental breach.

• Price reduction occurs only with a party who accepts not conforming to the contract may reduce the price with proportionate decrease in value of the performance which no extra damages available when damages can be collected for other losses.

• Replacement requires fundamental breach that are defective for replacement while the repair can be defective with performance.

Damages

• An aggrieved party can be entitled to loss when other party's is not excised and be there instead of specific performance or breach.
• With Cumulation of remedies, the remedies can't be combined.
• An example would be late payment and interest from damages where late payment would compensate the financial loss while damages would compensate the adminstration.

Limitations

• Contractual clause restrict or invoke with valid causes to the clause when limites are within good faith or fair dealing of unfaired contract.
• If a party doesn't mitgate harm, that party is entitled to the damages with reasonable steps.
• The aggrieved party is entitiled to expenses to recover any losses from harm.