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Abstract: The legal concept of good faith is largely a moral concept comprised of
notions of fairness. The moral aspect of good faith necessarily leads to uncertainty
regarding the meaning of good faith because moral standards differ based on the
people, the context and the circumstances involved. The UNIDROIT Principles
contain good faith provisions ranging from an overriding good faith principle that is
potentially applicable to all conduct under all circumstances to more specific
applications governing the interpretation of contracts. There are several arbitral
decisions that have been released which apply the good faith provisions of the
UNIDROIT Principles. A survey of these decisions gives some indication of the
meaning of good faith under the Principles. However, the legal concept of good faith
is stubbornly resistant to precise definition, largely due to the fact that its application
is generally context specific and moral in nature. Therefore, despite the fact that the
provisions have been applied and to some extent interpreted, we are not much closer
to pinning down the meaning of good faith.
B.A. Anthropology, University of Arizona, J.D. University of New Mexico, LL.M. Candidate Natural
Resources Law and Policy, Centre for Energy, Petroleum and Mineral Law and Policy, University of
Dundee. Ms. Barnes will join Kutak Rock, LLP in Scottsdale Arizona to practice in the area of public
finance in June 2006.
LIST OF ABBREVIATIONS
ICC
ICSID
Principles
ii
1.
INTRODUCTION
Good Faith as a principle of contract law has long escaped precise definition. This is
largely due to the fact that the concept is generally applied as a basis to rectify the
perceived unfairness of a strict legal result under the applicable contract law. As a
result, the concept of good faith has many meanings in a variety of circumstances.
Because the legal concept of good faith is based upon the moral concept of fairness, it
is by nature nearly impossible to define because standards of fairness naturally vary
depending upon ones perspective. Even among philosophers, defining the moral
principle of fairness been difficult:
I. Fairness
It seems doubtful that there is one particular moral good. If there were
we would expect general agreement about what it is, whereas there is
no such agreement. There is no a priori reason why there should be
one, rather than many, kinds of moral good. Yet, for reasons of
simplicity, it is tempting to look for some relatively comprehensive
formula, or for some central notion to which all others are related. . . .
It is the fairness of people sharing beneficial principles which the
virtuous freely endorse. The great difficulty, as Hobbes knew, is to
explain the content and status of these principles, and how they work
whether it is by explicit agreement, or by being privately used as
ideals, or postulated as what any rational, prudent person would agree
to.1
The dilemma of defining fairness as a general moral principle applies equally in
attempts to define the legal concept of good faith in contracts.
The infinite
V.M. Hope, Virtue By Consensus, at 122 (New York: Oxford University Press, 1989).
Andrew Grubb & Michael Furmston, The Law of Contract, at 73 (London: Lexis Nexis UK, 2d ed.
2003).
2
Parties to a contract have obvious difficulty in complying with or predicting the effect
of a legal rule that is incapable of precise definition. 3
This paper attempts to narrow the possible scope of the meaning of good faith by
looking at its application under the UNIDROIT Principles (the Principles). 4 The
Principles are not binding law, they are merely an effort to restate contract law
principles in the context of international trade and to provide guidance in legislating,
drafting contracts and settling disputes, particularly before arbitral tribunals. 5 The
Principles are designed to be persuasive on issues of contract law. 6 This is not to say,
however, that parties to a contract cannot choose to have their contract governed by
the Principles. But the parties choice will generally not exclude the application of
domestic law, especially in proceedings before a state court. 7
In the arbitration
setting, ho wever, the Principles can be adopted as the law governing the contract if
the parties have so agreed 8 or if the arbitral tribunal deems them applicable. 9 The
available arbitral decisions that discuss good faith under the Principles have generally
utilized the Principles merely as a reference or a guide, and in some cases, a
confirmation of the adequacy of the application of a principle of domestic law. 10
This paper first discusses the good faith provisions of the Principles themselves in
Chapter 2. In Chapter 3, available arbitral awards are surveyed in an attempt to define
the boundaries of good faith under the Principles. 11 It was the goal of this paper
3
Id.
Michael Joachim Bonell, Principles of International Commercial Contracts, (Rome, Italy:
International Institute for the Unification of Private Law (UNIDROIT), 1994).
5
Michael Joachim Bonell, The UNIDROIT Principles of International Commercial Contracts: Why?
What? How?, 69 Tul. L. Rev. 1121, 1122 (1995) (Nor are the UNIDROIT Princip les case in the form
of an international convention or uniform law: they do not have any binding force as such and will be
applied in practice by reason of their persuasive value only.).
6
Id.
7
Id. at 1145.
8
UNIDROIT Principles, Official Commentary, cmt. 4(a).
9
Sandeep Gopalan, The Creation of International Commercial Law: Sovereignty Felled?, 5 San Diego
Intl L.J. 267, 317 (2004); see also Fabrizio Marrella, Choice of Law in Third-Millennium Arbitrations:
The Relevance of the UNIDROIT Principles of International Commercial Contracts, 36 Vand. J.
Transnatl L. 1137, 1146-47 (2003).
10
See Marrella, supra, at 1139 (Whether one agrees or disagrees with lex mercatoria doctrines, one
must accept the fact that a significant number of awards have made reference to them, whatever that
means.).
11
See Hans van Houtte, The UNIDROIT Principles of International Commercial Contracts, 2 Intl
Trade & Bus. L. Ann. 1, 12 (1996) (stating in relation to the meaning of good faith that [m]any
awards, which give a judgment on the question whether parties have acted fairly and in good faith in a
multitude of situations and in [sic] variety of trade, can be of guidance to interpreting these concepts.).
4
initially to use a survey of arbitral awards to find a definition of good faith under the
Principles. However, as many legal scholars have recognized, good faith always
escapes precise definition.
2.
The Principles do not define good faith, 12 but the term and its various counterparts are
woven into several provisions of the Principles. 13 The terms used to express the
notion of good faith range from good faith and fair dealing,14 bad faith,15
reasonable commercial standards of fair dealing,16 and grossly unfair.17 Despite
the differences in the language, it is generally accepted that on the whole, these
provisions embody the principle of good faith. 18 One author has surmised that the
meaning, if any, of the different terminology will ultimately be reconciled by courts
or arbitral tribunals applying the Principles to individual contract disputes. 19
The function of these good faith provisions relate to two major aspects of contracts:
(1) performance, and (2) contract interpretation. 20
performance is meant to describe the behavioral aspect of good faith; that is, the
conduct of the parties that may or may not run afoul of the principle of good faith.
The interpretative function of good faith under the Principles, while dealt with
separately in this paper, is not wholly distinct from performance.
If a partys
interpretation is contrary to the principle of good faith, so too would be their behavior.
The categorizations used in this paper are meant to provide a framework to analyze
the meaning of good faith under the Principles.
12
See E. Allen Farnsworth, Duties of Good Faith and Fair Dealing Under the UNIDROIT Principles,
Relevant International Conventions and National Laws, 3 Tul. J. Intl & Comp. L 47, 60 (1995).
13
UNIDROIT Principles Arts. 1.7, 4.8 & Art. 5.2.
14
Id.
15
UNIDROIT Principles Art. 2.15.
16
UNIDROIT Principles Arts. 3.5, 3.8 & Art. 3.10.
17
UNIDROIT Principles Art. 7.1.6.
18
See Bonell, The UNIDROIT Principles of International Commercial Contracts: Why? What? How?,
supra, at 1138.
19
See Farnsworth, supra, at 49-50.
20
See also Arthur Hartkamp, The Concept of Good Faith in the UNIDROIT Principles for International
Commercial Contracts, 3 Tul. J. Intl & Comp. L. 65, 66 (1995) (discussing the function of good faith
as interpretative, supplementary (adding rights and duties) and restrictive (precluding application of
terms or law). Note also that a partys performance can itself include interpretation of the contract.
2.1
With respect to a partys conduct and performance, Article 1.7 of the Principles states:
(1)
Each party must act in accordance with good faith and
fair dealing in international trade.
(2)
The parties may not exclude or limit this duty. 21
This provision is the overriding and all-encompassing good faith provision of the
Principles. The language is extremely broad and can therefore apply to virtually any
conceivable conduct.
standards of international trade. The commentary to the Principles states that the
reference to international trade indicates that good faith is not to be measured by
standards included in national laws. 22 It would be useful if the standard of reference
actually helped to give parties more notice of what conduct is prohibited. But, it is
difficult to conceive that the standard of international trade is any more precise tha n
existing national notions of good faith. Thus, Article 1.7 does not assist parties in
determining what conduct is prohibited by the Principles. Subsection 2 of Article 1.7
states that the parties can not exclude the duty of good faith. Therefore, parties to
contracts governed by the Principles are in a predicament: Contractors cannot, with
any reasonable certainty, predict what conduct is prohibited by Article 1.7, yet they
cannot exclude the duty from the scope of their obligations. However, because the
Principles lack the force of binding law, [t]he impact of Article 1.7(2) and its power
to prevent the parties from overriding default rules by means of explicit provisions are
. . . questionable.23
Article 2.15 addresses the converse of good faith; that is, bad faith. But the bad faith
addressed in Article 2.15 is limited to bad faith in negotiations. 24 In particular, Article
2.15 provides that entering into or continuing negotiations despite a partys intent not
to reach an agreement, is bad faith. 25 Unlike Article 1.7, the relative specificity of
21
Article 2.15 assists in giving some notice to contractors of what standards of conduct
are excluded from the notion of good faith. 26
Article 3.8 addresses the circumstances under which a contract can be avoided for
fraudulent behavior. 27
2.2
3.
3.1
26
See Farnsworth, supra, at 63 (discussing the meaning of good faith based upon exclusions of bad
faith).
27
UNIDROIT Principles Art. 3.8.
28
Id.
29
UNIDROIT Principles Art. 4.8.
30
UNIDROIT Principles 5.2.
31
Note that this survey of interpretations of good faith under the Principles is limited to those available
decisions or arbitral awards that have been published in the English language. There are additional
decisions and arbitral awards published in Italian, French and Dutch. See www.unilex.info (last visited
on 30 April 2005).
3.1.1
3.1.2
In an ad hoc arbitration in 2004, an arbitral tribunal held that under French law and
Article 1.7 of the Principles, parties have a good faith obligation to attempt to resolve
32
Anderson Consulting Bus. Unit Member Firms v. Arthur Anderson Bus. Unit Member Firms, et al.,
ICC International Court of Arbitration, Case No. 9797, Geneva (28.07.2000), available at
www.unilex.info/case.cfm?pid=2&do=case&id=668&step=FullText (last visited on 30 April 2005).
33
Id. Note that the interpretative application of the Principles in the absence of contract terms
demonstrates the Principles utility as a gap-filling mechanism. The tribunal in this case did not appear
to rely on the Principles to imply or supply a term under Articles 4.8 and 5.1.
34
Id.
35
Id.; see also Unknown, Ad hoc Arbitration, Rome (04.12.1996), available at www.unilex.info (last
visited on 1 May 2005) (decision in Italian, Unilex abstract states that the tribunal relied upon Article
1.7 to demonstrate the duty of the parties to act in good faith throughout the life of the contract).
disputes arising under a contract. 36 However, the tribunal concluded that the mere
failure to reach an agreement was not in itself a breach of good faith and that parties
are not required to grant large concessions in order to comply with the good faith
obligation. 37 This decision shows the ambiguous nature of good faith. On the one
hand parties have an obligation to attempt to settle a dispute, but on the other hand,
they do not have to grant large concessions to reach an agreement. The range of
possible circumstances between those extremes is the seemingly unknowable realm of
good faith.
3.1.3
In ICC Award No. 9474, an arbitral tribunal was referred to Articles 3.5 and 3.8 by a
party claiming that a contract should be nullified due to an alleged fraudulent nondisclosure of a payment of a consulting fee by the opposing party. 38
The party
It is interesting to note here that the standard of good faith, especially when coupled
with the concept of fair dealing and reasonable commercial standards, would tend to
be an objective standard. 41 Reasonable commercial standards would tend to indicate
objective standards unaffected by a partys intent. However, the tribunal in this case
based its conclusion on the partys intent. This decision, although contrary to the
generally accepted standard for fair dealing, is not very helpful to inform the meaning
36
Unknown,
Ad
hoc
Arbitration,
(04.03.2004),
available
at
http://www.unilex.info/case.cfm?pid=2&do=case&id=973&step=FullText (last visited on 3 May
2005).
37
Id.
38
Unknown, ICC International Court of Arbitration Award No. 9474, Paris (00.02.1999), available at
http://www.unilex.info/case.cfm?pid=2&do=case&id=690&step=FullText (last visited on 3 May
2005).
39
UNIDROIT Principles Art. 3.8.
40
Unknown, Award No. 9474.
41
See Farnsworth, supra, at 60.
of good faith and fair dealing, other than to stand for the proposition that as long as
there is an absence of fraudulent intent, there is no violation of the principle.
3.1.4
In ICC Award No. 8540, the Principles were referred to by the tribunal only as further
support for its decision that an agreement to negotiate in good faith is binding under
the law of the State of New York. 42 In reference to the Principles, the tribunal stated
that the undertaking to negotiate in good faith . . . [is] valid, binding and enforceable
under general principles of law as reflected in the UNIDROIT Principles.43 As to the
meaning of the obligation to negotiate in good faith, the tribunal explained that
conduct such as renouncing the deal, abandoning the negotiations, or insisting on
conditions that do not conform to the preliminary agreement would not constitute
good faith negotiations.
3.2
In ICC Award No. 8908, the tribunal referred to the Principles as a useful reference
framework for . . . judging a contract of an international nature, although the tribunal
found that the applicable law was Italian law.44
previous settlement agreement between the parties, the tribunal referred to the
Principles in terms of good faith in contract interpretation. The tribunal described this
interpretative principle as being based upon the reciprocal trust between the parties.
Based on the Principles and other legal rules, the tribunal held that the conduct of the
parties could be used to interpret the meaning of the agreement.
The precise
interpretation given by the tribunal is unclear from text of the decision. This decision
not only implies that a tribunal will attribute fairness to the terms of an agreement, but
will also attribute fairness to the parties behavior (such as acceptance of a
counterproposal) in order to give meaning to the terms of an agreement.
42
See Unknown, ICC International Court of Arbitration, Award No. 8540, Paris, (04.09.1996),
available at www.unilex.info/case.cfm?pid=2&do=case&id=644&step=FullText (last visited on 20
April 2005).
43
Id.
44
See Unknown ICC International Court of Arbitration , Award No. 8908, Milano (00.09.1998),
available at www.unilex.info/case.cfm?pid=2&do=case&id=663&step=FullText (last visited on April
30, 2005).
In ICC Award No. 9875, the Principles were applied at the request of the parties. 45
The tribunal stated that it would specifically take into account the principle of good
faith.
In rendering the award, the tribunal held that good faith prevents an
In ICC Award No. 9651, the arbitral tribunal applied Swiss law but referred to the
Principles in terms of good faith interpretation of a contract. 47 In particular, the
tribunal referred to Article 1.7 in explaining that a contract should be interpreted to
give effect to the intent of the parties. Intent with respect to one partys declaration,
in the tribunals opinion, was not to be found in what the declarant had in mind or in
the words of the declaration itself, but rather in the meaning which the addressee
could in good faith attribute to it.48 In the tribunals opinion, the only good faith
understanding of the choice of law provision of the contract was that it applied to both
pre-contractual and contractual disputes because both disputes arose in connection
with the contract, despite the language of the provision and the subjective belief of
the parties. 49
Principles standard of good faith because the language closely resembles the good
45
Unknown, ICC International Court of Arbitration Case No. 9875 (00.03.2000), available at
www.unilex.info/case.cfm?pid=2&do=case&id=697&step=FullText (last visited on 30 April 2005).
46
Id.
47
Unknown, ICC International Court of Arbitration, Award No. 9651 (00.08.2000), available at
www.unilex.info/case.cfm?pid=2&do=case&id=692&step=FullText (last visited on April 30, 2005).
48
Id.
49
Id.
50
Lemire v. Ukraine, International Centre for Settlement of Investment Disputes, Award No.
ARB(AF)/98/1,
(20.03.2000),
available
at
www.unilex.info/case.cfm?pid=2&do=case&id=962&step=FullText (last visited on April 30, 2005).
faith language in Article 1.7 of the Principles. The Article 1.7-type language was
incorporated into the interpretation and implementation section of the agreement.
While this award appears to incorporate the good faith principle embodied in the
Principles, it unfortunately does not give any assistance in determining the scope of
good faith under the Principles.
3.3
Unfortunately, the arbitral decisions discussed above that apply or refer to the
Principles do not add considerably to an understanding of the meaning of good faith.
As discussed above, there is a moral component to good fait h that runs through the
decisions that will never be capable of precise definition. In terms of performance,
the decisions indicate the following about good faith: (1) failure to perform a contract
in good faith will not necessarily lead to legal remedy; (2) good faith includes an
obligation to attempt to resolve disputes, but not to reach a settlement; (3) a contract
cannot be avoided for failure to disclose information unless the non-disclosure was
made with fraudulent intent; and, (4) in the context of an agreement to negotiate in
good faith, parties are not permitted to repudiate the deal or insist on terms that are
unreasonably inconsistent with the agreement to negotiate. In terms of contract
interpretation, the decisions indicate the following regarding the role of good faith:
(1) good faith will be attributed to the parties behavior during contract formation
insofar as that behavior informs the interpretation of the contract; (2) good faith
prevents a party from doing indirectly what a contract prohibits directly; (3) good
faith can be incorporated into the interpretation provisions of a settlement agreement,
although the direct effect of this incorporation is unknown; and, (4) contract terms can
be interpreted based on what a party could have, in good faith, understood the term to
mean at the time the contract was executed.
4.
CONCLUSION
Good Faith in contracts invokes moral principles that by their nature escape precise
definition and consistent application. Even through viewing arbitral applications of
the principle of good faith under the Principles, a precise definition of good faith
under those legal rules cannot be found.
10
decisions have ve ry little interpretative value due to the context specific nature of the
decisions. Once again, good faith with its moral underpinnings has refused to be
contained in a neat interpretative envelope.
11
REFERENCES
1.
PRIMARY SOURCES
(None were used)
2.
SECONDARY SOURCES
2.1
Books
Andrew Grubb & Michael Furmston, The Law of Contract (London: Lexis Nexis UK,
2d ed. 2003).
Gabril Moens & Peter Gillies, International Trade and Business: Law, Policy and
Ethics (Sydney: Cavendish Publishing (Aus) Pty Ltd 1998)
V.M. Hope, Virtue By Consensus (New York: Oxford University Press, 1989)
2.2
Articles
Arthur Hartkamp, The Concept of Good Faith in the UNIDROIT Principles for
International Commercial Contracts, 3 Tul. J. Intl & Comp. L. 65 (1995)
E. Allen Farnsworth, Duties of Good Faith and Fair Dealing Under the UNIDROIT
Principles, Relevant International Conventions and National Laws, 3 Tul. J.
Intl & Comp. L 47 (1995)
Fabrizio Marrella, Choice of Law in Third-Millennium Arbitrations: The Relevance
of the UNIDROIT Principles of International Commercial Contracts, 36
Vand. J. Transnatl L. 1137 (2003)
Hans van Houtte, The UNIDROIT Principles of International Commercial Contracts,
2 Intl Trade & Bus. L. Ann. 1 (1996)
Michael Joachim Bonell, Principles of International Commercial Contracts, (Rome,
Italy: International Institute for the Unification of Private Law (UNIDROIT),
1994)
Michael Joachim Bonell, The UNIDROIT Principles of International Commercial
Contracts: Why? What? How?, 69 Tul. L. Rev. 1121 (1995)
Sandeep Gopalan, The Creation of International Commercial Law: Sovereignty
Felled?, 5 San Diego Intl L.J. 267, 317 (2004)
2.3 Other
Anderson Consulting Bus. Unit Member Firms v. Arthur Anderson Bus. Unit Member
Firms, et al., ICC International Court of Arbitration, Case No. 9797, Geneva
(28.07.2000),
available
at
www.unilex.info/case.cfm?pid=2&do=case&id=668&step=FullText
(last
visited on 30 April 2005)
Lemire v. Ukraine, International Centre for Settlement of Investment Disputes, Award
No.
ARB(AF)/98/1,
(20.03.2000),
available
at
www.unilex.info/case.cfm?pid=2&do=case&id=962&step=FullText
(last
visited on April 30, 2005).
Unknown, Ad hoc Arbitration, Rome (04.12.1996), available at www.unilex.info (last
visited on 1 May 2005)
Unknown,
Ad
hoc
Arbitration
(04.03.2004),
available
at
http://www.unilex.info/case.cfm?pid=2&do=case&id=973&step=FullText
(last visited on 3 May 2005)
Unknown, ICC International Court of Arbitration, Award No. 8540, Paris,
(04.09.1996),
available
at
www.unilex.info/case.cfm?pid=2&do=case&id=644&step=FullText
(last
visited on 20 April 2005)
Unknown ICC International Court of Arbitration , Award No. 8908, Milano
(00.09.1998),
available
at
www.unilex.info/case.cfm?pid=2&do=case&id=663&step=FullText
(last
visited on April 30, 2005)
Unknown, ICC International Court of Arbitration Case No. 9875 (00.03.2000),
available
at
www.unilex.info/case.cfm?pid=2&do=case&id=697&step=FullText
(last
visited on 30 April 2005)
Unknown, ICC International Court of Arbitration, Award No. 9651 (00.08.2000),
available
at
www.unilex.info/case.cfm?pid=2&do=case&id=692&step=FullText
(last
visited on April 30, 2005)