How effectively do you think those ‘piecemeal solutions’ Essay Example

a general duty of good faith would deal with them. In doing this, two conceptions of good faith and their ability to tackle unfair outcomes will be assessed in parallel. It is conceded that there are many more ideas of what good faith is, but owing to constraints of time and space unfortunately they will be outside the remit of this essay. Finally, it will be submitted that the two yardsticks, one of which being 'reasonable commercial standards'8, and the other being the 'justified expectations'9 of contractors, should work in tandem.

Furthermore, they should encompass not just the performance and enforcement of contracts (the 'carrying out'), but negotiation (the 'making') too. It is suggested this conception would 'do justice' to the parties 'legitimate expectations' more soundly than the current framework. Though it is accepted that using such a notion of good faith would enact a 'substantive change to the law'10, it is argued that this is a necessary, and even desirable, transformation.. One of the most contentious areas of English Law is that of disclosure.

Though in theory it comes under the umbrella of the doctrine of misrepresentation, there is no duty of disclosure by contractors, as demonstrated by the case of Smith V Hughes. 11 Although the seller was aware of the fact the buyer was mistaken about the subject matter of the contract, he was held to be under no obligation to disclose this. As seen in Bank Nova Scotia V Hellenic Mutual War Trusts12, the justification for this is that the seller is only under a 'moral obligation' to disclose, with no legal obligation flowing from it.

Yet is requiring parties to act in a

'moral manner' not a worthy end in itself? 13 The injustice of allowing parties to conduct themselves in an immoral manner can be seen more clearly from this hypothetical example. A purchases a house from B in a road where a sewage works is about to be built (so will drive the price of the house down considerably). B is aware of this fact and, crucially, is aware that A is ignorant of this. There is no positive misrepresentation here and so no breach of contract, notwithstanding that A's expectations going into the deal have been completely shattered.

The doctrine of misrepresentation also loses credibility by failing to recognise a duty to inform the buyer of the potential harmful consequences of using a product in a harmful or incorrect way. If, say, a seller of fertiliser fails to inform a customer of the damage its fertiliser could do to his land, and duly ruins his crops, the only remedy available is damages. 14 A corollary of this could be that vendors are encouraged not to label their products correctly and not to disclose the risks while blindly hoping they will get away with their opportunism.

Allowing such a short-term pursuit of profit is surely undesirable in the commercial world. The narrowness of the current legal approach to misrepresentation extends to that of mistake. The cynical opportunism of buyers 'snapping up' an offer he knows has been made by mistake, as seen in Hartog V Shields15, has been rightly condemned by the likes of Lord Steyn. 16 Yet arguably even more unfair is that where both parties are unaware of a significant mistake, the contract will not always

be void.

The important case of Bell V Lever Bros17 is an instructive example. The employers did not know that the employee had previously committed 'several breaches of his duty'18 towards the company when making an agreement to award him compensation. There agreement had been 'extravagantly different'19 to the one both parties had contemplated. Yet the court was unwilling to come to the conclusion that the 'underlying assumption20 of the deal had been rendered unacceptably different by Bell's failure to disclose facts.

Accordingly, there presently exists no duty to disclose one's past conduct, despite the possibility of it radically altering the agreement. However, pointing to Solle V Butcher21, some commentators claim that the court of equity is willing to intervene and set aside the contract where the result of this is patently unfair. In practice though, this solution is 'very little applied'22 by the courts and so in essence is an toothless one. Allowing such 'bad faith silence'23 encourages parties to withhold information, thereby fostering an atmosphere of mistrust and defensive dealing.

After all, if one party can expect under law that perhaps the other party is legally withholding vital information material to the contract, then he will be less likely to take the risk of entering into the contract. If, on the other hand, parties know all information concerning the subject matter has been disclosed, then they can enter into the contract more confidently. In addition, if parties do not have to waste time and resources checking information the other party has supplied, transaction costs will be 'substantially reduced. 24 If we return to the example of the sewage works, A would not need to research the

character of the area and particulars of the deal so rigorously as he could be sure B would not be able to deceive him. With a good faith requirement, in this deal, and on a general scale, a healthier 'culture of trust and cooperation'25 might emerge. In all probability, this would stimulate dealing rather than smother it. The 'making' of contracts would become an altogether more productive enterprise. A good faith requirement is therefore more instrumentally rationally than the current arrangement.

If, however, a good faith requirement were based solely on the 'reasonable commercial standards of fair dealing in the trade,'26 then little change, to cases where non-disclosure takes place, would occur. For it is widely seen as an industry norm that the buyer does not have to disclose facts he knows are ignorant to the seller. Using a wider interpretation of good faith would help compel a duty of disclosure. If the subjective intentions of the parties were considered more readily, then courts could determine whether the failure to disclose was made in bad faith.

However, this poses many difficult problems. Ascertaining exactly what sort of information the parties must disclose would be problematic. It would be tricky to decide exactly what information is 'clearly of importance'27 and whether the parties had the ability to obtain it. Critics say that more importantly, having to disclose this information at all is unjust. They claim it would be inherently unfair for one party to invest heavily in obtaining valuable information, then being forced to gift it to the other party.

Yet if the 'justified expectations' of the parties had to be explicitly observed by the courts, then parties could

only anticipate having those particulars concealed from them as justified by their ignorance. It is often submitted that the 'legitimate' or 'justified' expectations of parties can be realised through implying terms into a contract. Indeed this technique used by the courts is 'not mere window dressing,'28 and at first glance aims to step outside the classical view of contract by looking not just to the written contract itself. Instead, implying terms aims to give rise to the parties' intentions better.

Courts have even been willing to imply terms on the sole basis of a course of previous dealings, despite there being no contract. 29 Likewise, courts have implied terms as obscure as 'loss of reputation'30 in order to avoid unfairness. Courts have even been prepared to imply terms which override express provisions in the contract. In Johnston V Bloomsbury31, an express term excluding responsibility was ruled to be nullified by an implied term that the employees health had to be looked after. Nevertheless, In Ingham V Emes32, the short-comings of the tool are revealed.

A plaintiff sued a hairdresser despite suspecting herself she was allergic to the lotion the hairdresser used. 33 To allow the plaintiff to succeed in her claim would clearly have been unfair, and completely outside any justified expectations either party held. Consequently, the courts implied a term which said that proper disclosure was necessary to maintain the fitness of the hair. Though the judgment was sound in the case, in reaching it the court had to twist the existing doctrine of implied terms to get there. This produces a distinct lack of clarity in the judicial reasoning.

Had the court simply been allowed to

rule the plaintiff's non-disclosure was in bad faith, the reasoning would have been more transparent. Instead, the court has to risk taking a useful tool of judicial interpretation, the implied term, and destroying its credibility. In the process, as warned by Lord Steyn, the court is forced to 'arrive at a result that the words of a contract do not mean what, on the face of it, they clearly do mean. '34 Thus rather than staying true to the 'spirit of the deal'35 as enshrined in the written contract, it departs sharply from it.

It also makes otherwise sound judgments seem hollow, purely through the obliqueness of the means used to achieve them. A further weakness of the implied term is that the test required to use it is extremely stringent. Irwin V Liverpool Council36 established that only if the term were 'necessary' could it be inserted into the contract. Though perhaps dubious to so neatly divorce what is 'necessary' and 'reasonable', it is telling that the judge in that case claimed 'reasonableness' was not enough to merit implication.

Returning to the relationship between explicit exclusion clauses and implied ones, the implied one cannot always be used to 'do justice. ' Instead, it cannot be removed from the confines of the classical 'adversarial model' of 'self-interested bargaining. '37 Clauses which can allow a 'nasty and brutish'38 performance of a contract are frequently permitted, providing an 'affront to good faith. '39 The most notorious case concerning this was L'Estrange V Graucob. 40 The common law special notice test requiring particularly 'onerous'41 or 'unusual'42 conditions to be brought to the attention of the party could not be employed..

The buyer

of a slot machine signed a contract binding her to the terms of a contract, notwithstanding that she had not read it, and did not know of its contents, which were especially 'onerous. ' Although the term wasn't reasonably drawn to her attention, it was deemed fair as the contract was signed. A good faith requirement would have most likely produced a different outcome to that reached. Hiding away such an onerous clause would probably be regarded as against 'reasonable commercial standards. Even if it weren't, it would almost certainly be held that the buyer could be 'justifiably expected' to get a refund if the machine did not work properly. This would make the clause one of bad faith, effectively disqualifying it while helpfully not 'forcing the court to use the small-print when manifestly unfair to do so43. Striking down unfair clauses would be in the interests of fairness as it would allow a more balanced allocation of risk between the parties. Returning to L'Estrange V Graucob, it would restrain the seller from off-loading all the risk involved with the purchase onto the buyer.

Again this would help cleanse the overall climate of contract performance as parties would gain greater security against the risk of unfair risk allocation. 44 Another means of making the performance of contracts fairer is the doctrine of frustration. Like good faith, frustration acknowledges that sometimes it is unjust to tie a party's obligations entirely to the contract. It is positive that the doctrine provides for acts beyond the control of either party which render performance impossible.

It also stays faithful to the parties' intentions by using the 'officious bystander' test. 5 That

is to say courts are only willing to rule a contract frustrated if the parties would have agreed to the frustrated term when drawing up the contract. 46 Nonetheless, frustration is used very narrowly, and will only be applied where a change to the 'foundation of the contract' has destroyed the 'basis of the contract. '47 The event must make performance radically different to that agreed to. 48 In practice this means that only when the subject matter of the contract has been completely destroyed, res extinctua, can frustration be claimed.

In Herne Bay Steamboat V Hutton,49 the defendant claimed the contract to hire a boat was frustrated as its entire purpose, to watch a naval review, was cancelled. Harshly, the court ruled the frustrating event had not gone to the root of the contract. The implications of this are substantial. For instance, A has a contract to sell gold to B. However, due to a completely unforeseeable civil war, inflation is rampant and the price of the gold in the contract is just five per cent of the rocketing market price. On the basis of Herne Bay V Hutton, A would not be able to ask for a higher price to take account of the unforeseen event.

It is admitted that contractors like A and B do have the scope to draw up contracts accounting for variation in prices and various intervening events. However, it is inevitable there will always be some events impossible to predict. A good faith requirement might yield a fairer result. German law could show the way with its law concerning the collapse of the underlying basis of the contract. 50 Crucially

it takes into account circumstances 'of which the other party would have had, in good faith, to acknowledge. '51 The example involving sudden inflation might fall within this.

As it might if the 'justified expectations' of the parties were used by the English courts. In the light of the unforeseen event, the court could hold that A could justifiably expect to receive a better price, and B expect to lose some of the benefit he has unfairly gained from the event. Sceptics might counter that B could justifiably expect to rely on the contract's specific terms. Some reasoning borrowed from Alan Gewirth could help address this problem. As Gewirth ranks 'legitimate interests' in a hierarchical manner, so could the courts with regard to 'justified expectations.

In the inflation case, though B does have the 'justified expectation' he could rely on the express provisions, it is not as 'just' as A's expectation that he will obtain a performance at least remotely close to what he contracted for. The courts could weigh up the 'justness' of the expectations between the two sides. The 'reasonable commercial standards' would have no bearing on the case as the industry generally views events like the inflation as 'unfortunate yet unable to vitiate the contract. '52 A similar attitude is taken by the courts to instances where parties terminate a contract for a 'bad' reason.

There is no effective 'piecemeal solution' to deal with this, judges apathetically taking the view that contractors 'can exercise (a right under a contract) for a good reason or a bad reason or no reason at all. '53 This delivered an unfair result in Chapman V Honig. 54 There, a

landlord gave notice to his tenant to leave purely because the tenant had given evidence against him in a previous case concerning a different tenant. English law has no mechanism for assessing the quality of the reason and penalising bad faith withdrawals.

There also exists no means of preventing contractors deliberately performing against the 'spirit of the deal. ' Courts are only concerned when performance breaches a specific term. Otherwise, there is no remedy, as discovered in the Suisse Atlantique case. 55 Though not explicitly breaking the terms of the contract, the charterers in that case deliberately performed too slowly, 'not assisting the owners. '56 As part of the contract, the owners could not 'justifiably expect' the charterers to be allowed to wilfully perform badly.

Their conduct would not also be considered up to a 'reasonable standard' in the context of the shipping industry. Either measure of good faith could prevent this kind of bad faith 'slacking off'57 in performance. It could have a similar effect on the deliberate breach of contract, which at the moment is considered by courts to be 'no more guilty than a breach of contract. '58 Likewise, law does not penalise parties who 'play the market' by withdrawing from the contract in unfair circumstances. In Arcos V Ronaasen59, the court upheld the buyers right to escape from the contract in order to take advantage of falling prices.

This can be seen as a form of bad faith performance, where parties unfairly attempt to regain opportunities lost upon contracting. 60 Though the reason for withdrawal was not so cynical, the manner of withdrawal was also unfair on the other party in Timeload V BT

plc. 61 In view of the fact their contractual relationship had lasted several years, it could not have been justifiably expected that BT should take advantage of a clause to give just one month's notice to withdraw. The court said reasonable expectations could lie outside the contract.

The failure of the common law to handle long-term contracts like this fairly highlights the pressing need for a good faith requirement. Currently the law ignores the reality that 'longer term dealing' often involves calculating long-term utility and 'cooperative gestures' rather than purely self-interest dealing. 62 Inserting pointedly self-serving terms in contracts where parties have been dealing together for years would hardly comprise a 'cooperative gesture. ' Allowing a party like BT to suddenly end the contract on its own terms without regard for Timeload's justifiable expectations of cooperativeness hardly seems fair.

Whittaker and Zimmermann's comparative study of European legal systems is revealing. It suggests that if a good faith requirement like Germany's were employed, Timeload's justifiable expectations might be considered by the court. As a result, they might be given more time to prepare for the contract to end. 63 In such contracts, where, occasionally even one party may misleadingly suggest will run for 'season after season, year after year', the doctrine of estoppel cannot intervene. This is again due to the fact that it cannot create a new cause of action in its own right.

The recent doctrine of economic duress attempts to deal with kinds of performance which, like BT's conduct, 'flout all considerations of decency and fair play' 64 To be more precise, this involves attempt to renegotiate the contract terms in an opportunistic manner. 65 However,

the doctrine, like frustration, is little used. Pao On V Yau Liu Long appeared a good opportunity for the courts to use the doctrine, even the trial judge admitting the losing party 'entered the contract against their will' and had been subject to 'coercive acts. 66 Where the contract has been fairly renegotiated and one party promises, without any 'coercion', to accept part-payment, then promissory estoppel can be used to make the promise binding. It is surely a sound proposition that if a promise is 'intended to be binding, acted upon, and actually acted upon' then it should be enforceable. 67 However, on the authority of Coombe V Coombe68, it can only be used as a 'shield not a sword', meaning it cannot found a new cause of action in itself. In cases where the promissory estoppel claim couldn't be made in its own right, good faith could be used.

Even if the promise was entirely gratuitous, if the court was convinced both parties had the justified expectation it would be binding, then it could be enforced. English law has been even more unwilling to enforce promises made during the negotiation of a contract. If A leads B to believe there will be a contract then A can still walk away from negotiations in bad faith. Presently, contractors can negotiate without serious intent, even if this involves a deliberate waste of the opposing party's time and resources.

Walford V Miles is the leading case on this. 69 The defendants agreed to negotiate exclusively with the plaintiffs in a so-called 'lock-out' agreement. However, Lord Acker stated that an 'agreement to negotiate is unenforceable' owing to it lacking the

necessary certainty. 70 He is not alone is claiming that a good faith requirement covering negotiation is unenforceable as 'how is a vendor ever to know that he is to withdraw from negotiations. '71 The need for such 'commercial certainty' is often cited by opponents of good faith.

However, would certainty really be undermined by allowing negotiations to be binding? Conversely, it could create a greater degree of certainty in the minds of contractors like Walford and Miles when entering into a pre-deal agreement. If the common law can recognise 'best endeavours'72 to negotiate, why can it not recognise good faith to negotiate? Why should the pre-contractual expectations be any different to those during the performance of the contract? The fact is that Walford and Miles made an explicit agreement to negotiate in good faith.

The court completely disregarded this, so again failed to uphold both parties' expectations. Surely the plaintiffs were justified in holding the expectation their express agreement would be enforceable. To introduce good faith in this area would increase the freedom of contract rather than restrict it. The area of negotiation, then, is just one of several in English law which would be improved by the acceptance of a good faith requirement. Though often far from 'byzantine', and really quite ingenious at times, 'piecemeal solutions' do not cover some areas good faith can.

The most obvious example is lack of a duty of disclosure, even where vital facts are unfairly being withheld. The misrepresentation doctrine does not address this fully. The implication of terms is often effective, yet similarly lacking in transparency. A good faith requirement would allow the 'spirit of the deal' to be

more closely adhered to. It would also deal with the unfairness evident in small-print clauses, something the common law special notice test fails to do.

Frustration, too, helps take account of the reasonable expectations of the parties involved, yet is too narrow a doctrine. Good faith again would provide the 'umbrella' necessary to catch those situations the doctrine did not cover and produce a fair outcome. It could also help confront bad faith withdrawal from a contract, an act which currently has no common law doctrine to deal with it. The 'piecemeal solutions' are likewise impotent to deal with performance of the contract which goes against the 'spirit of the deal. It is contended that in order to truly uphold contractual freedom, then this must be treated with respect. Only good faith can do this. However, selecting a particular mode of good faith presents another problem. This essay could has been confined to looking at two specific types, that of 'justified expectations', and that of prevailing commercial standards. The former would be a much more effective tool for the courts. It could even help bring about a system of contract law with a much more cooperative character.