In what ways has english law responded to "Demonstrated problems of unfairness"? What is meant by "Good faith" in english contract law?

 One of the most technical areas of the law of contract is that dealing with rescission or a variation of a contract by a subsequent agreement. But variations which are not contractually binding, because of lack of consideration or which are unenforceable because of non-compliance with some formal requirement give rise to a number of problems which can only be resolved satisfactorily by reference to the principle of good faith.

 The variations are often called waivers because the essence of the arrangement is that one party gives up his strict legal rights, and in an attempt to express this more clearly some writers prefer to use the term forbearance for this situation. Forbearance is preferred as a convenient general term for waivers, concessions and variations of performance which are not contractually binding or enforceable.

 Hickman v. Haynes is a well-known example of a type of forbearance. It was held that where a seller voluntarily withheld delivery at the verbal request of the buyer, no new contract being substituted for the original one,the seller was entitled to maintain his action for non-acceptance of the goods in accordance with the original contract.

 Lindley, J. said: "the proposition that one party to a contract should thus discharge himself from his own obligations by inducing the other party to give him time for their performance, is to say the least, very startling, and if well founded will enable the defendants in this case to make use of the Statute of Frauds, not to prevent a fraud upon themselves, but to commit a fraud upon the plaintiff".

 The complex and unsatisfactory distinctions drawn in common law cases between variation, waiver and forbearance, and the difficulty of reconciling several of the cases in this area , may be contrasted with the more direct application of fairness and reasonableness in equity decisions on forbearances. In the leading case of Hughes v. Metropolitan Railway Co. Lord Cairns (House of Lords) stated: "as the first principle upon which all Courts of Equity proceed", that if one party leads the other to suppose "that the strict rights arising under the contract will not be enforced or will be kept in suspense or held in abeyance the person who otherwise might have enforced those rights will not be allowed to enforce them where it would be inequitable having regard to the dealings which have thus taken place between the parties". This rule may be correctly regarded as a rule derived from the principle of good faith.

 Subsequent applications and developments of the rule in Hughes, under various descriptions such as equitable or promissory estoppel, merely confirm its true origin in the principle of good faith. To the extent that the rule is now also applicable to forbearances which might formerly have been dealt with under common rules on waiver , it might be suggested that this confirms the view that the principle of good faith is also the real basis of the common law rules in this area.

 A reconsideration of well-known cases on forbearances, in the light of the principle of good faith, may dispel some of the difficulties associated with the doctrine of promissory estoppel. If  attention is directed to the requirements of honesty, fairness and reasonableness, rather than to technical rules, some decisions which are difficult to reconcile within a technical and schematic approach become less problematic.

 On the other hand, the courts have, consistently with fairness and reasonableness, held that forbearances have operated to extinguish claims where it would have been impossible or excessively difficult for the representee to return to the original position.

 The revocability of the forbearance in circumstances where the beneficiary has behaved inequitably is of course perfectly consistent with the good faith nature of the rules in this area. It would be clearly contrary to fairness and reasonableness to allow a representee to benefit from a forbearance which he has obtained by unacceptable means and decisions such as D. & C. Builders Ltd. V. Rees and Arrale v. Costain Civil Engineering Ltd. are clearly based on the principle of good faith.

 In English law obvious breaches of good faith, such as fraudulent misrepresentation, has long given rise to the possibility of adequate remedies. But less obvious breaches of good faith, at both the formation and performance stages, have gone without remedy. Gradually, the unconscionability of the bargain is being invoked to remedy unfairness and unreasonableness in the English law of contract. However, a distinction must be made between a new general rule on unconscionable bargains, based on the principle of good faith, and long-established rules of common law and equity which vitiate which have been obtained by fraud, duress, undue influence and mistake. These rules, although reflecting the general object of the law to do justice and ensure fairness, do not qualify as good faith rules. They are 'normal' rules of law, and even when developed to include new situations of inequality of bargaining power such as 'economic' duress they remain part of the normal body of rules.

 The existing body of case law and statutes reduces the need for a general rule to negotiate in good faith, but such a rule has proved to be necessary in other jurisdictions and might be a means in English law to deal with some breaches of good faith at the pre-contract stage, which are difficult to categorize under established headings. An unjustifiable refusal to deal, or an unreasonable last-minute withdrawal from negotiations, are examples of the type of unfair and unreasonable conduct which might well constitute a breach of the duty to negotiate in good faith.

 The basic principle of freedom of contract, and the absence of any legally relevant intermediate stage between contract and no-contract, often makes it difficult to identify a possible cause of action for breaches of good faith in the negotiation stage. Although such breaches may often involve representations of future conduct, the limitation of equitable estoppel to defense rather than to cause of action will generally prevent a plaintiff from obtaining a remedy by this means. If a remedy in tort is not available, for instance, by an action for deceit or for negligent representation under the principle in Hedley Byrne v. Heller, there may be no effective remedy at all in English law. An agreement simply to negotiate does not bind the parties, even to the limited extent of using their best endeavors to reach an agreement. This is a classic instance where there may be a serious breach of good faith and other common law jurisdictions have invoked the principle to provide a remedy.

 The common commercial device of a 'letter of intent' which indicates that one party is very likely to contract with another is also a possible source of non-actionable breaches of good faith under existing English law. Such might also be dealt with under a general rule requiring negotiations in god faith.

 Good faith, in the sense of 'honesty' may be relevant in considering the effect of an illegal contract. It may also be irrelevant. Here overriding considerations of public policy may require that the innocent party who has acted in good faith should nevertheless be penalized.

No doubt, general considerations of fairness and reasonableness weighed heavily in persuading courts, in some cases, to permit a party who entered into an illegal contract 'honestly'(in good faith) to recover damages or to recover money paid or property transferred under an illegal contract. The rules which therefore emerged are related to good faith in a general sense, but they are positive rules of law like many others which are related to good faith in this way.

 As in most areas of the English law of contract, well-developed rules which incorporate fairness and reasonableness exist to govern the topics of performance and breach, and there is little scope for a more general principle of good faith performance. Even here, however, there are situations where the existing rules cannot deal with particular manifestations of unfair or unreasonable conduct, and the general principle of good faith may be invoked. In the Panchaud Frères SA v. Etablissements General Grain Co. case Winn, L.J. suggested that there may be an inchoate doctrine stemming from the manifest convenience of consistency in pragmatic affairs which would prevent a party from 'blowing hot and cold' in commercial conduct.

 In that case, the defendant accepted without objection shipping documents which clearly showed that the goods had been shipped out of time in breach of an express term of the contract. When the goods arrived, the defendant rejected them on another ground which was later held to be insufficient and only three years later sought to justify rejection on the ground that the goods had been shipped out of time. To have allowed rejection after such a long time for a ground which might properly have been raised immediately would be inconsistent with 'a requirement of fair conduct'. The general rule that a party can reject goods, or terminate a contract of employment, for breach, even though he did not know of that particular breach at the time, and relied instead on some other alleged breach which in fact is insufficient, must be regarded as particularly well settled.  It was, however, overridden in Pachaud Frères because the principle of good faith required it.  

   The judgment of the Court of Appeal is particularly welcome for its clarification of the scope of the ‘good faith’ principle. It is now clear that ‘good faith’ in the context of the 1994 Regulations is to be equated with open and fair dealing, and has a procedural and substantive element. But is this an acceptable interpretation of the ‘good faith’ principle? The literature on ‘good faith’ in English law has grown rapidly in the last five years or so, undoubtedly motivated, at least in part, by the adoption of the EC Directive on unfair contract terms. Thus, Roger Brownsword has similarly suggested that one possible interpretation of ‘good faith’ could be by reference to the standards of fair dealings of the society of which the contracting parties are members – in his words, a ‘good faith requirement’. However, Brownsword favours an objective standard of good faith, which would be based on the standards of fair dealing and

co-operation as prescribed by the most defensible moral theory. He prefers an objective criterion – a ‘good faith regime’. Yet, he concedes that English law at present seems to be developing a ‘good faith requirement’, and this decision of the Court of Appeal confirms this. This interpretation of the concept and its most likely prevalence over a normative interpretation was also suggested by John Wightman. His concept of ‘contextual good faith’ is based on what the parties to the contract would reasonably expect particularly reasonable standards of fair dealing. Whereas Wightman also finds merit in an objective ‘good faith’ concept, he too concedes that English contract law would develop the concept more in line with an interpretation as open and fair dealing. Thus, the Court of Appeal’s judgment confirms academic opinion on how the ‘good faith’ concept would develop in English contract law.

 The absence of a general principle of good faith in English law is partly compensated by the law of remedies, which greatly limits the possibility of abuse of rights. To this end, it has proven an effective tool, both because remedies are controlled by the courts and because the parties’ freedom of contract in this field is limited. At this point it would be useful to distinguish the remedies between: discretionary (equitable) remedies, non-discretionary (legal) remedies and self-help.

 The very nature of the discretion in specific performance and injunctive relief means that the plaintiff is not entitled to that which the tribunal may in its discretion withhold. Some of the legal paradoxes are to be found where a legal right is defined as absolute, while the remedy for its protection is discretionary. In the exercise of this discretion, the court may deprive the part of the ability to do that which in theory it is entitled to do, namely, to insist upon his 'absolute' right in disregard of the circumstances and interests of others. The plaintiff’s unfairness may lead to the denial of specific performance not only if it occurred at the formation of the contract, but also when it happened during its performance.

 The court’s power to withhold discretionary remedies is, therefore, an important tool of controlling unfair conduct. It is a particularly potent weapon where the alternative non-discretionary remedy, usually, damages, is unavailable or of little value, as where the plaintiff suffered no loss or where the loss cannot be proved. The problem becomes more complex where the non-discretionary remedies, which the plaintiff has at his disposal, can potentially be effective.

 Specific performance (discretionary remedy) and damages (non-discretionary remedy) are meant to serve precisely the same purpose. Both intend to put the innocent party in the position he would have been in, had the contract not been breached. The difference is that specific enforcement grants the plaintiff the promised performance in specie, while damages intend to provide him with the exact equivalent in monetary terms. Although these two remedies serve the same purpose, they can differ considerably. The extent of the difference depends upon the rules on the appraisal of the damages. The factors allowing flexibility in awards of damages tend to reduce the practical gap between specific performance and damages.

 Although the remedy of damages is non-discretionary and English law does not recognize a general principle of good faith, the rules on damages often take good faith into account. This is sometimes reflected in the mode of calculating damages, and in other instances through the principle of mitigation.

 Apart from that, there is also self-help. The exercise of self-help enables the aggrieved party to obtain a remedy without resorting to an action in court. Self-help can be challenged in court as well, but it has the advantage of moving the duty to initiating litigation to the other party.

There are two types of self-help. Physical help takes such forms as ,for example, reception of stolen goods. Legal self-help refers to an extra-judicial legal act which affects the rights of the parties. A typical example is the termination of a contract on the ground of breach.

 The question of physical self-help arises rarely in the context of contractual rights.Legal self-help is, however, quite common in contractual contexts. Legal self-help consists of forfeiture, termination and the right to 'earn' the contractual payment. Typically, forfeiture is a self-help remedy. Where the forfeited interest greatly exceeds the loss suffered by the aggrieved party, the forfeiture is severe.

 Furthermore, the option to terminate the contract or to keep it in force is an option to exercise legal self-help. The innocent party is given a power which he is free to use without resorting to court. This option  is a powerful weapon which, if complete freedom in its application is allowed, would in many instances result in overprotecting the innocent party’s interest, while severely penalizing the party in breach.

 The basic position of English law is that the party in breach cannot dissolve the contract. This privilege is reserved to the injured party. But as the power to terminate a contract can be abused, so can the power to keep it in force. A typical case in which the issue arises is where the contract is kept in force so that the injured party can gain the promised performance.

 Concluding, good faith is a vital feature of legal systems. Despite the fact that it isn’t adopted by the English legal system, it is implied and applied in many situations in combination with the other remedies, sometimes. It is a fundamental principle directly related to honesty, fairness and reasonableness aiming to improve legal rules.

BIBLIOGRAPHY   

- Atiyah, "Contact and Fair Exchange" in Essays on Contract, Clarendon Press (1986).

- Atiyah, "An Introduction to the Law of Contract", 4th edition (1989).

- Brownsword, Contract law: Themes for the Twenty-First Century (2000).

- Poole, Textbook on Contract Law, 6th edition, Blackstone Press (2001).

- Poole, Casebook on Contract Law, 5th edition, Blackstone Press (2001).

- R. Brownsword, N. J. Hird, G. Howells, Good Faith in Contract, Ashgate (1999).

- I. Brown & A. Chandler, Law Of Contract (Law Questions & Answers), 3rd edition, Blackstone (2001).

-  J. N. Adams, Roger Brownsword, Key Issues In Contract, Butterworths (1995).

- A. DM Forte, Good Faith in Contract and Property Law, Oxford-Portland Oregon (1999).

- C. Willett, Aspects of Fairness In Contract, Blackstone Press (1996).

-  G.H. Treitel, The Law of Contract 6th edition (1983).   

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