Out-Law Analysis 9 min. read
07 Sep 2022, 3:18 pm
‘Good faith’ is a concept which requires parties to perform their contractual obligations in accordance with certain standards, and is one which parties to construction projects in most jurisdictions will be familiar with. However, there is traditionally a divide between common law and civil law jurisdictions in the way good faith arguments are treated by courts.
One of the distinguishing features of civil law jurisdictions is that they provide for a general requirement of good faith. However, regardless of whether a requirement of good faith is codified, the scope of its application and the extent to which the courts are willing to apply such concepts vary significantly between jurisdictions.
Under article 1104 of the French Civil Code, the duty to negotiate and to perform a contract in good faith applies automatically. It does not need to be expressly included in the contract itself, in a letter of intent or in any other pre-contractual agreement. Parties cannot derogate from this principle by contract.
Therefore, if French law applies, the duty of good faith will apply to the parties’ negotiations and to their performance of the contract from the pre-contractual stage to the dispute phase.
Moreover, French courts have derived a series of specific duties from the general obligation to act in good faith. These include the duties of loyalty, collaboration, and advice which have serious implications over the performance of the works:
There are more than 60 references to good faith in the Spanish Civil Code, although many relate to family, matrimonial or real estate law. However, there are also very wide-ranging references that apply generally to commercial contracts and to the exercise of legal or contractual rights.
While there is no good faith provision specifically applying to the negotiation and formation of contracts, that obligation applies through the way the courts have interpreted article 1902 of the Code, which contains a duty of acting diligently in general. This duty typically includes the duties of providing information, confidentiality and loyalty.
A party would be in breach of the duty if, for example, they withdrew suddenly from negotiations without a justification when it was reasonable to expect the conclusion and signature of the agreement. Any damages caused by that bad faith withdrawal have to be paid to the innocent party.
Another consequence is that a serious breach of the duty of good faith in negotiations may make a contract invalid.
There is traditionally a divide between common law and civil law jurisdictions in the way good faith arguments are treated by courts. One of the distinguishing features of civil law jurisdictions is that they provide for a general requirement of good faith.
To avoid breaching the good faith duty, many companies will sign ‘light-touch’ agreements such as memorandums of understanding to help interpret the parties’ expectations in relation to their respective positions and their duties during the negotiation.
The obligation of good faith also applies during the performance of the contract. Articles 7 and 1258 of the Code set out general duties of good faith. Nevertheless, the valid clauses of a contract remain essential, and good faith does not replace the contract. Good faith principles will be relevant in the exercise of contractual rights and obligations. The contract must be clear on key aspects, and specific rights or obligations which could put pressure on the other side must be clearly stated so that there is no doubt as to the right to exercise them in the specific circumstances agreed – such as the right to suspend works or the right to terminate.
Article 246 of the United Arab Emirates (UAE) Civil Code requires that the parties perform their contractual obligations as stated in the contract in accordance with the principles of good faith and in a manner consistent with the contract's purpose and requirements.
Case law suggests that the implementation of this provision will take account of “law, custom, and the nature of the transaction”. This allows flexibility, but also some uncertainty, when considering contractual rights and obligations.
Under UAE law, there is an implied obligation of cooperation among the parties for the proper execution of the contract. There is also an implied obligation to transparently disclose any matter or event that may impact or influence the performance of the contract, as well as an implied obligation to mitigate damage or harm.
In addition, the duty of good faith manifests itself in the civil law principle of 'abuse of right’. Article 106 of the Civil Code indicates that even in circumstances where a contractual right exists, the way in which that right is subsequently exercised by a party to the contract may be considered unlawful pursuant to the provisions of this article.
A party exercising a right under a contract should always consider whether the exercise of that right will result in harm to the other party that is disproportionate to the benefit gained.
Under UAE law, the imposed duty of good faith does not alter a party's contractual obligations or offer a window to escape liability which is imposed by law. Rather, a party's conduct and any perception of bad faith would, if anything, affect the applicability of other remedies available to the 'innocent party', including the assessment of damages.
Although the domestic courts may decline to award a party its contractual entitlement if the claimant has not acted in good faith, the influence that the concept exerts in practice is more subtle than this and is often intertwined with other codified principles of civil law.
Good faith in English law was described in a 1987 case as “playing fair”, “coming clean”, or “putting one's cards face upwards on the table” (Interfoto Picture Library Ltd v Stiletto Visual Programs Ltd). English common law has traditionally refused any attempt to apply good faith in commercial contracts, aiming to keep relations secured by the expressed words in the agreement. The traditional perception is that a general doctrine of good faith would create too much uncertainty by creating obligations that are potentially vague and subjective. This could undermine the goal of contractual certainty, on which English law places great weight.
The courts have nevertheless recognised a limited form of good faith as an implied contract term in some instances. This includes the Yam Seng Pte Ltd v International Trade Corporation Ltd case in 2013 where the judge held that the defendants had breached their implied duty of honesty and by extension their duty to perform the contract in good faith by misleading the claimant. The judge reasoned that contracts involving the existence of long-term business relationship between the parties – so-called ‘relational contracts’ – may require an extra standard of protection. Any construction contract requiring close cooperation over a lengthy time period could qualify as a relational contract. This opens the door to the inclusion of implied terms of good faith.
However, judges in other cases have declined to imply a duty of good faith, considering that there was no express clause in particular contracts leading parties to rely on good faith, and ruling that an express duty of good faith would need to be set out clearly. Parties should therefore make it clear in their contract if they wish to rely on a good faith obligation.
South Africa follows the common law tradition so, as in England, there is no implied obligation of good faith in contracts.
In South Africa there is tension between the highest courts over the interpretation of good faith obligations. The Constitutional Court, for example, said in a 2007 case (Barkhuizen v Napier) that the South African constitution was respectful of certainty of contract, but public policy would be determined in accordance with the constitution. In a 2014 decision, Botha v Rich, the court added: “Honouring that contract cannot therefore be a matter of each side pursuing his or her own self-interest without regard to the other party’s interests. Good faith is the lens through which we come to understand contracts in that way.”
On the other hand, the Supreme Court of Appeal has leaned towards legal certainty.
To avoid uncertainty, parties in South Africa that want to have an agreed standard of behaviour during the performance of the contract will need to insert good faith as a particular provision in their contract. The parties could do so by either having good faith incorporated as a broad general standard relevant to the contract as a whole, or to specific provisions.
Standard form construction contracts have been or are now beginning to incorporate good faith as a standard provision. For instance, the NEC includes the obligation of acting in the spirt of mutual trust and cooperation.
There are other standard forms that provide an overarching principle of good faith within the contract, such as the Joint Contracts Tribunal (Constructing Excellence) contract, which speaks of the parties working together in a cooperative and collaborative manner.
In the South African context, the often-used Joint Building Contracts Committee Principal Building Agreement envisages a situation where parties are to work together to ensure the provisions of the contract can be rendered enforceable, ultimately giving effect to the completion of the project and not delaying the project due to a misalignment around a particular provision.
Standard form construction contracts include a variety of formulations of good faith, which do have an impact in the extent to which good faith is applied by the courts. Adopting a generic reference to good faith may give rise to uncertainty as to how exactly the duty applies, depending on the law applicable to the contract. That is why common law contracts also sometimes include specific provisions that explain or spell out what good faith means in specific scenarios that often arise on construction projects, and where parties may want to have clarity as to what standard of behaviour applies.
Examples of this could include:
A good example of the application of good faith provisions as set out in standard form contracts is the recent Van Oord v Dragados case in Scotland. The Scottish appeal court, the Inner House of the Court of Session, reviewed the interlocking provisions of NEC3, including clause 10.1, which obliges parties to act in a “spirit of mutual trust and co-operation”. The court found that this clause “reflects and reinforces the general principle of good faith in contract” and was consistent with other terms in the Contract and general principles of contract law including the principle of mutuality of obligations, meaning that a party cannot enforce a contractual term in its favour if it is the counterpart of another obligation which it has breached. Because Dragados was in breach of contract in omitting work, it could not enforce a provision which would allow them to reduce the rate for the remaining work. The court took the opportunity to emphasise that the good faith provision in the NEC3 form (clause 10.1) “is not merely an avowal of aspiration” but an integral part of the contract.
Co-written by construction law experts Alastair Walls, Nick Tolley, Muhammed Somrey and Toshima Issur of Pinsent Masons. The issue of good faith in construction contracts was discussed at a recent Pinsent Masons event – a recording is now available. The next event in the EMEA Skill Set series will take place on 6 October on the topic of termination of construction contracts.
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