Duty of good faith

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  • Created by: Nikki
  • Created on: 15-04-16 10:07

General rule

General principle = no oblgiation owed by parties to each other during negotiation 

Courts have been reluctant to recognise a duty to negotiate in good faith

But why?

  • parties should be free to enter (or not) into an agreement 
  • concern to protect freedom of contract
  • need for parties to explore commercial opportunities without committing themselves
  • efficiency of the market

For pre-contractual duties to arise they require a justification which has sufficient weight to overcome objections

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Exception 1: misrepresentation and misleading stat


  • statements of fact --> words or conduct
  • statements of law
  • statements of intention
    • to be actionable must be term of contract or dishonest 
    • if honest, representor entitled to change mind; if dishonest --> actionable
  • statements of opinion
    • not statements of fact and not actionable just because they are inaccurate
    • may be actionable if: dishonest; no reasonable ground; contractual term
    • speaker without greater knowledge than representee who offers honest opinion makes no actionable representation
  • puffs --> unreasonable to rely on them 

Made to claimant --> must have been addressed either to C directly or to TP with intention that it be passed on to C

Inducement and materiality 

  • C must prove statement induced him to enter into contract --> low standard of causation
  • immateriality of misrep will not defeat claim if representor was fraudulent or knows or ought to know that his statement will influence C
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Exception 1: misrepresentation and misleading stat


  • Damages
    • s2(1) unless misrepresentor can show belief honest and reasonable 
      • once C shows representor made false statement which induced him into contract with representor, C entitled to most generous measure of damages unless representor can prove honest and reasoanble belief in making statement
    • common law remedies still available but less attractive measure --> only used whereno contract results between A and B
  • Rescission 
    • sets aside contract --> conditional on mutual restoration of any benefits received under it
    • effective once communicated to other party
    • subject to bars --> affirmation; lapse of time; TP rights; impossibility of mutual restitution; inequity (s2(2) Misrep Act)
  • Damages in lieu of rescission (s2(2) Misrep Act)
    • doesn't simply replicate 2(1) --> measure is difference in value between what representee believed he was acquiring and what he in fact acquired
    • representee must have good claim for rescission --> cannot be barred
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Exception 2: failure to disclose information

No general duty of disclosure --> party normally need not say anything even if it relates to important facts that the silent party knows or should know that the other party is mistaken or ignorant about

Failure to disclose contractual term -->

  • can be required in certain circ -->
    • standard form contracts
    • party on whic hit is imposed will often not have time and expertise to assess the terms of the contract
    • interfoto --> draw attention to a term (onerous terms)
    • disclosure of term in good time --> Olley v Marlborough

Failure to disclose facts

  • change of facts --> falsiciation by later events
  • relationships of dependence 
  • contracts of uberimmae fidei 
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Exception 3: abuse of position of trust

Duty of good faith owed by fiduciary 

  • highest standards of good faith 
  • failure to dislcose info = contract voidable and may also impose duty on party in breach to account for any profits made as a result of failure to disclose
  • equitable jurisdiction to avoid contract on ground of undue influence can be employed to identfy special circ which trigger a duty to dislcose info --> Lloyds Bank v Bundy
  • weaker duties of disclosure with particular types of contract 

Contracts uberimmae fidei 

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Exception 4: misuse of confidential information

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Exception 5: Misleading implied promises

Involve promise to act or refrain from acting in certain ways in future

Liability may be conceived as either a contract based upon exchange model supported by consdieration (usually as unilateral contract) or as an estoppel based upon reliance model 

Collateral contracts
- Blackpool and Fylde Aero Club Ltd v Blackpool BC

- Crabb v Arun DC

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Good faith abroad

Different approach taken overseas -->
- French law / German law / US law / International instruments

Duty of good faith in France

  • articel 1134, para 3 of civil code --> contracts are to be performed in good faith
  • nothing in Civil code relating to good faith at negotiation stage but extension by courts: good faith also applies to negotiations
  • imposition of code of ethics
    • to behave loyally, to cooperate with other party
    • general duty of disclosure
    • not to withdraw an offer abruptly and without legitimate reasons
    • not to break off neogtiations at an advanced stage
  • liability in tort

Principles of European Contract Law - Art 2.301 - Negotiations Contrary to Good Faith

UNIDROIT Principles (2010) Art 2.1.15: Negotiations in bad faith 

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Why no duty of good faith in English law?

Concern about overly broad principles

Uncertain meaning, obscure concept --> wariness about 'policing such a duty in practice

Reluctance to interfere with free, adversarial pursuit of a bargain

Reluctance to impose oblgiations before contract arises


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Impact of European legislation

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FOR general principle of good faith

  • market efficiency --> justify certain types of negotiation regbof behaviour which harms effiency to market e.g. fraud
  • enhance competitive properties of market --> ensure that negotiating parties retian fruits of their efforts
  • relations of dependence
    • purely self-interested exercise of freedom during negotiating process is impermissible where one party stands in a relation of dependence to the other
  • would assist orderly exposition of law, revealing underlying tensions and articulating relevant considerations which need to be balanced in a particular case
  • current anomalies resulting from applicaiton of different conceptual analyses to similar states of facts
    • uniform test for liability and coherent approach to remedies might be achieved
  • would create a distinct species of liability which isn't either precisely contractual nor tortious so that courts could develop appropriate principles for quantification of damages
    • loss incurred; opportunity cost since aims are to compensate for harm caused and promote competitive market
  • current approach forced courts to borrow cocnepts from other branchs of law which often prove inappropriate
    • tort law falls short in describing kinds of misleading bargaining practices which should be basis for censure buggests a measure of damages which is anomalous in commercial context
    • vitiation of consent approach --> makes little provision for damages beyond restitution and often reemdy will be barred altogether 
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FOR/AGAINST general principle of good faith

  • address problem directly and openly
  • deal with cases in coherent and effective way
  • be better equipped to achieve just results 
  • contribute to a culture of trust and cooperation 


  • Shouldn't interfere with general freedom of contract
    • freedom which allows individuals to act in own best interest without regard to toehrs
    • market efficiency
      • ability to negotiate without commitment permtis traders to discover which possible bargain will be most advantageous in promoting welfare maximisation
      • in detail discussiona voids misunderstandings
  • could weaken utility of contract --> parties must be free to break off prelim negotiations without being held to account
  • self interested behaviour must be permitted in order to protect the incentives to acquire info and expertise
    • must be constrained so that one who has acquried at some cost or ingenuity better skills or info should be able to reap the rewards of that effort through making advantageous contracts
  • unnecessary and inappropriate in commercial context?
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Alternative approaches (1)

General duty to negotiate in good faith

  • what would this mean? --> define good faith
  • but case-by-case approach gives courts flexibility?
  • problems with good faith terminology
    • meaning of good faith is obscure
    • tends to function as a negative concept inpractice
    • idea of good faith implies a content to the duty whic his far too narrow -->
      • ordinary usage requires honesty of conduct which does not deliberately deceive or harm another --> but doesn't include neg or careless behaviour which often has same effect
      • but many pre-contractual obs arising under Eng law require more than honesty --> require carefullness in giving info so that reasonable care must be taken as to its accuracy 
    • good faith idea suggests taht standard is constant, which fails to capture way in which legal duties increase in relations of dependence and may vary according to market context
    • nevertheless good faith can be understood as a requirement for an obj standard of conduct, not limmited to unconscioanble practices akin to fraud, but encompassing ideas of fair dealing, in which case good faith standard may effective amount to a duty to negotiate with care
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Alternative approaches (2)

Duty to negotiate with care (Collins)

  • interpretation of law where purely self-interested action is impermissible where one party stands in relation of depednence to the other --> doesn't create direct conflict with ideal of freedom of contract --> interprets privilege to act in self-interested way within narrower confines
  • law can best be interpreted by reference toa  duty to negotiate with care
    • draws attentiont o emphasis in justification on protection of interests of other party
    • by employing idea of care, it recognises that carefulness is a flexible standard
  • superior to alternative duty to bargain in good faith
    • implies law merely requires honesty --> inaccurate in instance of negligence liability 
    • more restrictive duty --> more acceptable
    • still subjective but speaks to judges in their own language --> 'reasonable care'
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Alternative approaches (3)

Development of existing way sof remedying unfairness (Waddams)

  • no need for general disclosure --> increasing uncertainty - cases can be reopened after years of completions --> you want finality in commerical law

Protecting the expectations of reasonable men (Steyn)

  • extra-judicial writing --> good faith should not be ignored, cannot be impervious to ideas of good faith --> English law serves market place --> doesn't think good faith brings too much uncertainty --> but not necessary so long as English law protects reasoanble expectations of parties, this suffices
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