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Good Faith in International Investment Arbitration by Sipiorski, Emily

2 Defining Good Faith

From: Good Faith in International Investment Arbitration

Emily Sipiorski

From: Investment Claims (http://oxia.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved.  Subscriber: null; date: 21 January 2020

Subject(s):
Jurisdiction — Good faith — General principles of international law

(p. 20) Defining Good Faith

2.01  Good faith is frequently used in both domestic and international law. The diverse approaches to the principle of good faith ultimately reveal a general conformity. This chapter identifies uses of the principle that have informed the understanding of good faith in international economic law.

2.02  Although the principle of good faith has a long history in Greece and Rome,2 the Oxford English Dictionary traces the first use of the term ‘good faith’ in English writing to around 1340.3 In disagreement with the Duchess of York in Shakespeare’s Richard III, the term does hold force. However, as the line from the play quoted at the beginning of this chapter suggests, it is difficult to understand accurately and comprehensively.

2.03  This difficulty is particularly apparent when looking at the application of good faith across legal systems. Differences brought by individual actors in the international legal regime create inconsistencies in understanding. There is a struggle to apply good faith throughout investment law jurisprudence in a uniform manner. At the centre of the challenge is the simultaneous application of investment laws and maintenance of legitimate expectations for both investors and host states. This chapter brings a level of coherence to the understanding of good faith across several legal systems and legitimizes its use and placement in the practice of international investment law.

(p. 21) A.  Historically Framing Good Faith

2.04  Good faith as an influence in legal systems has a long history, based generally in the ideas of co-operation and tolerance. The roots of the idea of good faith can arguably be linked to the human necessity of trust. Mutual trust is necessary for a group to function as a whole.4 Good faith is inextricably linked to obligation, with humans relying on one another for the fulfilment of certain duties and obligations. By the second half of the fifth century bc, Socrates had identified the idea of justice as being inextricable from obedience with law.5

2.05  A richness emerges in the idea of Fides in Rome: it was strongly linked to public obligations but was also overtly religious.6 De Wilde indicates that ‘violations of fides publica were believed to provoke the wrath of the gods or could lead to public condemnation’.7 The temple of the Goddess Fides reveals its relevance to international obligations: ‘its walls [were] covered with the texts of international treaties.’8 Stories supporting the importance of fides were prevalent in the Roman narrative.9 De Wilde further notes that the application of fides—although relevant in normal situations when a magistrate was interpreting law—‘bec[ame] visible only, or most clearly, in exceptional circumstances, when law or covenants [were] lacking’.10

2.06  The overtly religious element was slowly disassociated from good faith—despite the word ‘faith’. In more recent history, good faith’s relationship with equitable contracts closely follows the law of merchants relating to fairness.11 ‘During that era [the eleventh and twelfth centuries], the principle of reciprocity was considered a cornerstone of good faith contract.’12

2.07  Harold J Berman, in considering the emerging mercantile law of the period, noted ‘the element of equality of burdens or benefits as between the parties to the transaction—the element, that is, of fairness of the exchange’.13 He further notes that ‘good faith (bona fides) was itself a necessary test of the sanctity of the contractual undertaking’.14 This sanctity (p. 22) arose out of canon law and the ideas of ‘fraud, duress, and mistake’ as well as ‘the formalism of oaths, which had dominated the Germanic folk law’.15 Good faith was integral to the evolution of equitable contracts.16

2.08  By the sixteenth century, fides had begun to re-emerge significantly. Grotius approached the role of good faith between enemies in the law of war,17 which followed the idea of a basic sense of justice for both oneself and others.18 John Locke recognized the importance of trust in the ideals of a constitution; trust can be linked with the earlier expressions of fides.19 In the seventeenth century, good faith was included in the Treaty between France and Spain ending the Franco-Spanish War.20 Its use in modern treaty practice follows this approach.

B.  The Problems with a Definition

2.09  The principle of good faith evades a simple definition. The complex historical origins of the concept of good faith in religion, folk law, and mercantile practice establish a complex backdrop for its use and acceptance in international jurisprudence. Diverse means for applying and defining good faith are at the heart of the challenge regarding the term in the international context. None of these difficulties, however, compromises its status as a general principle or negates its applicability.21

2.10  One of the challenges of applying good faith in international law generally, and international investment law specifically, is created by diverse definitions, meanings, and nuances.22 Professor Bin Cheng believed the term ‘elude[s] a priori definition’.23 Each relevant (p. 23) host state may attach a different significance and understanding to the principle. Moreover, the principle of good faith spans public and private law in most jurisdictions. Therefore, diverse understandings of the term emerge not just between continents or states, but also within the same jurisdiction.24 This adds another layer of complexity.

2.11  The international and domestic juridical applications of good faith inform the use of the principle in investment law, but do not produce a concrete definition. There is no fixed mode of application. Any attempt to codify or define the term would be counterintuitive to its value as a principle in international law and undermine the integral purpose and usefulness of the term.25 The principle must have flexibility to be effective in its role and usage.

2.12  Hesselink notes:

Most lawyers from a system where good faith plays an important role, will therefore agree that these differences in theoretical conception do not matter very much. Indeed, many authors are themselves not very consistent in their indication of the status of good faith. What really matters is the way in which good faith is applied by the courts: the character of good faith is best shown by the way in which it operates.26

2.13  There are several reasons for the difficulty in establishing a definition. Foremost, even where these preliminary definitions exist, determination of how that particular understanding of good faith is applied ultimately remains at the discretion of the court or respective tribunal.27 This is a balance between the legal provision and the understanding of the judge’s application of good faith to that provision. Judges and decision makers may provide a somewhat divergent insight into how the term is de facto applied.28

(p. 24) 2.14  The relevance of individuals as decision makers is clear. One perceived benefit of international arbitration is the ability to choose the decision makers. In this context, Cremades notes that selection of the arbitrators is

one of the most delicate and fundamental tasks … For those who set the parties’ strategy when a case arises in which good faith may play a material role, the major question to ask is whether or not the legal culture and training of the potential arbitrators might condition their ultimate decision. Counsel must be aware of the various angles that can be given to good faith in legal argument as well as in the arbitrators’ decision-making process.29

2.15  Another reason for the difficulty in defining the term is the reliance on ‘moral standards’ in its application.30 Diversity applies at the individual as well as the cultural level.

2.16  In the context of US law, Litvinoff has acknowledged both a psychological and an ethical element to the application of good faith.31 This demonstrates the complexity that arises out of a partly moral concept:

Whilst everyone agrees that a doctrine of good faith represents some set of restrictions on the pursuit of self-interest, the objection is that it is not clear how far these restrictions go. In other words, good faith presupposes a set of moral standards against which contractors are to be judged, but it is not clear whose (or which) morality this is. Without a clear moral reference point, there is endless uncertainty about a number of critical questions.32

2.17  In parallel with the challenges associated with the precise understanding of good faith, its application encompasses a range of sensibilities.33 Beneath this struggle for understanding is a reality: for a term without a clear definition, it is often relied on to reach and legitimize decisions.

(p. 25) C.  International Law

2.18  The principle of good faith is well recognized by scholars and widely used throughout the jurisprudence of international courts.34 This section will consider its presence as a principle of international law through Article 38(1) of the Statute of the International Court of Justice (StICJ). Its inclusion in conventions, treaties, and international court decisions provides the foundation to the principle.

2.19  The section will first enumerate the relevance of good faith in treaty interpretation and its use in the United Nations (UN) and international treaties. The uses relate to both the interpretative function and performance obligations.

1.  Public international law

2.20  Pursuant to Article 38(1)(a) and (d) StICJ, sources include, inter alia, the United Nations Charter (UN Charter) and the Vienna Convention on the Law of Treaties (VCLT).

a)  Treaty interpretation

2.21  Cheng noted in the first lines of his chapter on good faith in treaties that ‘[t]he law of treaties is closely bound with the principle of good faith, if indeed not based on it’.35 The International Law Commission’s (ILC) codification for rules governing treaties references and relies on the term. The VCLT has separate provisions with regard to substantive and procedural good faith.

2.22  The wide scope of good faith even prior to the treaty entering into force is essential to conceptualizing the intricate importance of good faith in the development—that is, the drafting and negotiating—of treaties:

First of all, the principle of good faith already applies before the entry into force of the treaty. In addition, the principle of good faith governs all types of non-formal agreements. If the notion of pactum is broadly construed, it is the respect of the word given in an exchange of consents, which is at the same time the foundation of both the obligation to respect this promise and the way in which it must be respected (in good faith). For this reason, the same obligation of good faith operates with regard to resolutions of international organizations conceived as interstate agreements, for acquiescence, etc.36

2.23  Good faith also implies a level of flexibility in treaty interpretation. This flexibility may in some cases support the longevity and usefulness of a treaty. In this regard, the Permanent Court of International Justice (PCIJ) noted:

Good faith prevailing throughout this subject, treaties ought not to be interpreted exclusively according to their letter, but according to their spirit … Principles of treaty interpretation are, by and large, and mutatis mutandis, those of the interpretation of agreements (p. 26) between individuals, principles of common sense and experience already formulated by the Prudents of Rome.37

i)  Behavioural good faith

2.24  The idea of pacta sunt servanda and the relevance of good faith were noted by the negotiators as central to the purpose of the VCLT. Certain delegations considered the values embodied in the term to be required to ‘reaffirm the existence of “rules of international conduct, in the absence of which law and peaceful co-operation between States would be impossible” ’.38

2.25  Thus, resulting from these negotiations, pacta sunt servanda and good faith have several prominent places in the Convention. First, the Preamble makes an explicit reference to good faith and pacta sunt servanda as recognized in international law: ‘Noting that the principles of free consent and of good faith and the pacta sunt servanda rule are universally recognized’.39 This position in the first lines of the VCLT demonstrates its centrality to the interpretation to be provided presently.40

2.26  The next reference to good faith in the VCLT is contained in Article 26 on pacta sunt servanda. The Convention provides that good faith is an essential aspect of understanding states’ responsibility for pacta sunt servanda: ‘Every treaty in force is binding upon the parties to it and must be performed by them in good faith’. In his commentary on the VCLT, Mark Villiger notes with regard to this article that ‘pacta sunt servanda … is seen today as the cornerstone of international relations … No case is known in which a tribunal has repudiated the rule or questioned its validity.’41

2.27  The term pacta sunt servanda was favoured over use of a term in an official language of the Convention. This was a way to ensure that its meaning would stay more consistent over time:

The ILC saw five reasons for employing a Latin term in the Convention: (i) pacta sunt servanda was more succinct than other languages; (ii) it did not have negative connotations of other Latin expressions, e.g. clausula rebus sic stantibus (Article 62, q.v.); (iii) the term had been employed in international law since Grotius (N. 1); (iv) it was universally understood (p. 27) by both international and domestic lawyers; and (v) as it stemmed from an extinct language, there was no danger that its meaning could change.42

2.28  With reference to the inclusion of the principle of good faith in Article 26 of the VCLT, Kirsten Schmalenbach considers that ‘the ICJ understands the concept as a back principle informing and shaping the observance of existing rules of international law, but being not in itself a source of obligation where none would otherwise exist’.43

ii)  Interpretative good faith

2.29  VCLT Article 31(1) provides that treaties are to be interpreted in good faith: ‘A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.’ Therefore, even areas of international law that do not overtly apply the principle of good faith are bound by good faith interpretation. Good faith in this article provides a plea for reasonability: ‘the treaty terms were intended to mean something, rather than nothing.’44

2.30  Dörr further supports this premise of reasonability as implicit in the use of good faith:

Although it is difficult to give precise content to the concept in general, the bottom line of it appears to be a fundamental requirement of reasonableness qualifying the dogmatism that can result from purely verbal or, for that purpose, excessively teleological analysis. This is also the understanding in which the concept of good faith is at least hinted at in the rules of interpretation themselves, albeit only as an obligation of result: what is to be avoided by applying the principle of good faith is set out in Art 32 lit b, ie that interpretation of a treaty should not lead to a result, which is manifestly absurd or unreasonable.45

2.31  Villiger suggests that the obligations arising out of this provision of the Convention extend to abuse of right: ‘The prohibition of the abuse of rights, flowing from good faith, prevents a party from evading its obligations and from exercising its rights in such a way as to cause injury to the other party.’46 This results in a provision that has a broad scope in its implications for ensuring the reasonableness of treaty application.

b)  United Nations Charter

2.32  The use of good faith in United Nations Charter adheres to the ideal of morality and acknowledges the need for interpretation ‘beyond the letter of the law’.47 The American delegation at the San Francisco Conference commented on the inclusion of good faith: ‘the meaning that we are all to observe these obligations, not merely the letter of them, but the (p. 28) spirit of them’.48 The delegation, however, maintained that ‘[i]n the law of the UN, the principle of good faith is objective in nature’.49

2.33  This approach was supported by other delegations. During negotiations of the UN Charter, the Colombia delegation indicated that ‘[t]he United Nations … must proclaim that international life requires a minimum of morality as a normative principle of conduct for peoples. This minimum cannot be anything else than full good faith.’50

i)  UN Charter Article 2.2

2.34  Article 2.2 of the UN Charter states: ‘All Members, in order to ensure to all of them the rights and benefits resulting from membership, shall fulfil in good faith the obligations assumed by them in accordance with the present Charter.’ The provision was adopted unanimously by the committee.51

The emphasis of the rule laid down in para. 2 is on the requirement of fulfilling the Charter obligations (or other obligations under international law) ‘in good faith’. In other words, it is concerned with a particular method of fulfilling obligations. This constitutes an abandonment of a formalistic understanding of law, in which too much attention is paid to the letter of the law. Instead, the object and purpose of legal rules is emphasized in determining the conduct demanded in a concrete case.52

2.35  The use of good faith provides a moral basis for the rights and benefits involved. An assumption of common sense arises from the drafters’ utilization of good faith in the language of the text.

ii)  UN General Assembly Resolution 2625 (XXV)

2.36  This acceptance and application of good faith is included in several other Conventions and Declarations. The 1970 Declaration on Principles of International Law concerning Friendly Relations and Co-operation among States in accordance with the Charter of the United Nations, adopted by consensus in UN General Assembly Resolution 2625 (XXV), 24 October 1970, supplements the reference in the UN Charter:

The Principle that States shall fulfil in good faith the obligations assumed by them in accordance with the Charter

Every State has the duty to fulfil in good faith the obligations assumed by it in accordance with the Charter of the United Nations.

Every State has the duty to fulfil in good faith its obligations under the generally recognized principles and rules of international law.

Every State has the duty to fulfil in good faith its obligations under international agreements valid under the generally recognised principles and rules of international law.53

(p. 29) 2.37  The general repetition of the term good faith throughout this resolution acts as an affirmation of the basic morality of the obligations that must be fulfilled. The use, however, leaves space for certain exceptions. For example, Article XX of the General Agreement on Tariffs and Trade (GATT) allows exceptions to the general obligations under the agreement.

2.38  The historical moment of the resolution also points to the complexities involved in the inclusion of the language—good faith had one meaning for the members of the New International Economic Order (NIEO), another for members of North American Treaty Organization (NATO), another for states associated with the Union of Soviet Socialist Republics (USSR)—and variation within the groups involved.

The demand that good faith be shown is aimed not so much at subjective conscientiousness in the fulfillment of treaties, which is a category of subjective morality, but rather it requires conduct that, according to objective criteria, is oriented towards mutual consideration. It demands fulfillment of the treaty in such a way as the other party to the treaty may ordinarily expect on the basis of the text agreed upon, or in other words, in such a way as is required by the sense and purpose of the treaty, as understood by the contracting parties in good faith.54

c)  United Nations Convention on the Law of the Sea

2.39  Other sources of good faith within the United Nations system include the United Nations Convention on the Law of the Sea (UNCLOS). The Convention provides: ‘All members of the Authority shall fulfil in good faith the obligations assumed by them in accordance with this Part in order to ensure to all of them the rights and benefits resulting from membership.’55

2.40  The UNCLOS further provides that ‘States Parties shall fulfil in good faith the obligations assumed under this Convention and shall exercise the rights, jurisdiction and freedoms recognized in this Convention in a manner which would not constitute an abuse of right’.56

2.41  States bringing claims under UNCLOS have relied on Article 300 as a general recognition of co-operation. For example, in the relief sought in the Southern Bluefin Tuna Case, Australia requested that Japan be found in breach inter alia for ‘failing in good faith to co-operate with Australia with a view to ensuring the conservation of SBT [southern Bluefin tuna], as required by Article 64 of UNCLOS’.57 Thus, the language of the treaty may allow tribunals to emphasize co-operation through the good faith provisions.

d)  ICJ Jurisprudence

2.42  Article 38(1)(d) of the Statute of the ICJ provides that international law comes from ‘judicial decisions and the teachings of the most highly qualified publicists of the various nations’. The relevance and centrality of good faith to international law has been repeatedly (p. 30) reaffirmed by scholars. Schwarzenberger included good faith in one of the seven fundamental principles of international law:58

It is possible to hold that, within the limits in which the principle of good faith is incorporated in international law, any deviation from these rules constitutes a breach of rules prohibiting the interpretation of legal duties of abstention as jus strictum or in outright bad faith. It is, however, equally permissible to put the emphasis on the positive regulative functions which the rules underlying the principle of good faith fulfill in delimiting the respective spheres of competing rights.59

2.43  Despite acknowledging the challenge of defining good faith,60 Cheng noted the principle’s power in state relations:

The principle of good faith which governs international relations controls also the exercise of rights by States. The theory of abuse of rights (abus de droit), recognized in principle both by the Permanent Court of International Justice and the International Court of Justice, is merely an application of this principle to the exercise of rights

Good faith in the exercise of rights … means that a State’s rights must be exercised in a manner compatible with its various obligations arising either from treaties or from the general law. It follows from this interdependence of rights and obligations that rights must be reasonably exercised.61

i)  Procedural good faith

2.44  With consideration the ICJ’s application of procedural good faith, Lauterpacht noted in his Separate Opinion in the Admissibility of Hearings of Petitioners by the Committee on South-West Africa that ‘[t]he third possibility, which appears to me most appropriate as a legal proposition and in accordance with good faith and common sense, is to interpret the instrument as continuing in validity and as fully applicable subject to reasonable re-adjustments calculated to maintain the effectiveness’.62 He further noted that the purpose of interpreting in good faith is to ‘give effect to the … legal instrument before it.’63

2.45  This perspective on how good faith informs treaty interpretation reflects back on the basic association between good faith and common sense, as expressly noted by Lauterpacht. In this aspect, however, Lauterpacht fails to acknowledge the potential discord in judges’ common-sense understanding of what the legal instrument in fact provides.

ii)  Substantive good faith

2.46  An early reference to good faith was included in the Arbitral Award of 7 September 1910 in the North Atlantic Fisheries Case (United Nations, Reports of International Arbitral Awards, Vol XI, p 188):

Because the line in question is drawn according to the principle of international law that treaty obligations are to be executed in perfect good faith, therefore excluding the right to legislate at will concerning the subject-matter of the Treaty, and limiting the exercise of sovereignty of the States bound by a treaty with respect to that subject-matter to such acts as are (p. 31) consistent with the treaty [ … ]. But from the Treaty results an obligatory relation whereby the right of Great Britain to exercise its right of sovereignty by making regulations is limited to such regulations as are made in good faith, and are not in violation of the Treaty.

2.47  The ICJ has followed this application of the principle and has consistently recognized the importance of good faith in reaching decisions. The application of the principle has been applied to a range of issues, including valuation,64 negotiation,65 respect for proceedings,66 and respect for obligations.67 Good faith must be considered in parallel with an obligation that already exists.68

2.48  The ICJ frequently refers to interpretative good faith. For example, it stated in the Gabčikovo-Nagymaros Project decision: ‘It is the purpose of the treaty, and the intentions of the parties in concluding it, which should prevail over its literal application.’69

2.49  In the Nuclear Tests (Australia v France) Case, the Court considered it a ‘basic’ principle of law:

One of the basic principles governing the creation and performance of legal obligations, whatever their source, is the principle of good faith. Trust and confidence are inherent in international co-operation, in particular in an age when this co-operation in many fields is becoming increasingly essential. Just as the very rule of pacta sunt servanda in the law of treaties is based on good faith, so also is the binding character of an international obligation assumed by unilateral declarations.70

(p. 32) 2.50  Although it considers the principle central to any interpretation, the Court in Cameroon v Nigeria has also maintained that the principle is not an obligation to be applied independently of others: ‘Although the principle of good faith is “one of the basic principles governing the creation and performance of legal obligations” … it is not in itself a source of obligation where none would otherwise exist.’71

2.51  As a principle that does not and cannot stand on its own without the existence of other obligations, there is perhaps less danger that it will be used carelessly and too often. Instead, it acts to strengthen the ethical obligations behind another obligation. The substantive use of the term by a court thus allows these considerations where the relevant legal text does not directly point to such an obligation.

e)  WTO

2.52  Good faith has been repeatedly relied upon in WTO jurisprudence.72 It has been ‘part of the GATT acquis in the form of the basic tenet of PLE [protection of legitimate expectations] ever since the beginnings of GATT 1947 adjudication’.73 As WTO law should not be read ‘in clinical isolation from Public International Law’,74 general principles are incorporated into the reasoning of the Appellate Body and panels.

2.53  Panizzon notes that WTO Panels and the Appellate Body draw on the corollaries of good faith in reaching decisions.75 In Argentina—Definitive Anti-Dumping Duties on Poultry from Brazil, the panel held that two requirements were necessary to demonstrate a lack of good faith by a Member bringing a complaint to the WTO:76

On the basis of the above mentioned Appellate Body finding, we consider that two conditions must be satisfied before a Member may be found to have failed to act in good faith. First, the Member must have violated a substantive provision of the WTO agreements. Second, there must be something ‘more than mere violation’.77

2.54  The chapeau of GATT Article XX is one of the most prominent expressions of good faith in the covered agreements.78 Namely, the panel in US–Shrimp considered the chapeau of Article XX to be an expression of the general principle of good faith. In this regard, the duty to negotiate in good faith is presumed to be part of the general obligations. The DSU expressly requires that members undertake consultations in good faith, pursuant to Article 4.3. (p. 33) Moreover, Article 3.10 states that ‘all Members will engage in these procedures in good faith in an effort to resolve the dispute’.

2.55  Good faith is also implied in other provisions of the DSU, as noted by the AB in Mexico—Corn Syrup (Article 21.5–US) discouraging members from bringing frivolous claims based on the principle of good faith.79 With regard to the DSU, the AB in US—FSC 2000 noted the good-faith standard of ‘fair, prompt and effective resolution of trade disputes’.80 Such statement provides a clear standard of the application of procedural good faith. Thus, in terms of both substance, under Article XX GATT, and interpretation, in the DSU, good faith plays an essential role in the decisions of the WTO.

2.  Private international law

a)  UNIDROIT Principles of International Commercial Contracts (PICC)

2.56  The UNIDROIT Principles of International Commercial Contracts provide a general restatement of the international application of contract principles. Commercial arbitration parties may choose application of the principles to govern their contract.81

2.57  Good faith is referred to in several articles, including Articles 1.7, 4.8, and 5.2.82 The duty to act with good faith is stronger in the PICC than in the United Nations Convention on Contracts for the International Sale of Goods (CISG).83 Article 1.7 provides: ‘(1) [e]ach party must act in accordance with good faith and fair dealing in international trade. (2) The parties may not exclude or limit this duty.’ The limitations of the parties’ ability to contract out of this good-faith obligation creates a stronger sense of commitment to the obligation, deliberately created by the drafters.84 Article 5.3 states that ‘[e]ach party owes to the other a duty to co-operate in order to give full effect to the contract’. Regarding the scope of good (p. 34) faith implied in the rules, one scholar has stated that ‘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.’85

b)  CISG

2.58  Article 7(1) of the CISG provides that ‘[i]n the interpretation of this Convention, regard is to be had to its international character and to the need to provide uniformity in its application and the observance of good faith in international trade’. In the earlier drafts of the Convention, ‘the need for the “observance of good faith in international trade” was added after an extensive debate on whether principles of good faith were sufficiently definite to serve as a basis for the interpretation of an international convention’.86

2.59  Good faith was one of the most debated provisions of the Convention.87 There was extensive discussion in the preparation of the Convention on whether to even include an obligation for good faith: ‘Opinions on the role to be played by good faith ranged from the idea that it should be viewed as an obligation present at all stages of the contracting process to the view that good faith should not be explicitly mentioned in any provision.’88 This debate regarding good faith continued even following its limited inclusion in the CISG for the ‘observance of good faith in international trade’, while not including an implied duty of good faith. Some commentators suggest that the interpretation of good faith should be left to domestic legal systems.89

2.60  There is a focus on the international character of the interpretation of good faith, rather than reliance on domestic jurisprudence for making decisions in that context.90 ‘The reference to the international character of the CISG indicates that the origin of its rules must be borne in mind when applying any method of interpretation.’91 As such, a central problem with the CISG was establishing uniformity in its interpretation. Komarov maintains that a study of CISG cases applying good faith demonstrates that a uniform definition was never established.92 One explanation for the lack of uniformity is the number of official and unofficial translations of the Convention: ‘An enlightened court might in exceptional cases (p. 35) be driven to consider two or more versions side by side. Interpretation is therefore to be approached with an internationalist spirit.’93

2.61  Although the article on good faith may add to the lack of uniformity, there is another side to the Article 7 analysis in general: ‘Article 7 has some claim to being the most important provision of the CISG. It deals with the interpretation of the CISG and also with the filling of gaps in its coverage.’94 The second part of the article dealing with good faith ‘does not impose on the contracting parties a general duty of good faith and fair dealing in the formation and performance of contracts’.95

c)  European Union law

i)  Principles of European Contract Law (PECL), Article 1:201(1)

2.62  Article 1:201(1) PECL provides that ‘[e]ach party must act in accordance with good faith and fair dealing’. The rule is considered mandatory pursuant to Paragraph 2. Some consider the article as an overarching obligation.96 Others do not give it such status.97 In particular, the fact that good faith is elsewhere referenced indicates that it is not completely overarching.98

ii)  Common European Sales Law

2.63  The application of good faith in commercial relationships extends further in European law. The proposed Common European Sales Law indicates in Annex 1, Article 2(1) that ‘[e]ach party has a duty to act in accordance with good faith and fair dealing’.99

iii)  Introduction of good faith in English law through European law

2.64  Good faith in contract law is generally recognized in the domestic legal systems of all European Union (EU) Members. The exception to this acceptance is English law, which may prove to be a non-issue as the United Kingdom’s exit from the EU progresses.

3.  Lex mercatoria

2.65  The applications of good faith in the CISG and PECL indicate an inconsistent application generally in private law. In its current state, one author has referred to the usage of good faith in lex mercatoria to mean co-operation.100 Its construction in these codes as combined (p. 36) ‘good faith and fair dealing’ draws attention to the general idea of fairness. From a historical perspective, the emergence of equitable contracts101 creates the foundations for this current usage.

2.66  With respect to applicability in commercial arbitration via lex mercatoria, there is a recognized good-faith obligation with respect to commercial contracts. On the other hand, Guiditta Cordero-Moss considers that the sources of lex mercatoria have failed to establish an independent interpretation of good faith.102 She cites the CISG’s failure to require good-faith conduct as a reciprocal duty for the parties as a key indication of the lack of uniform good faith in lex mercatoria.103 She further contends that the writing of contracts in a common law style, thus with an emphasis on the provisions above the general rules of law, creates a movement ‘away from the assumption of a good faith and fair dealing standard even in countries where the legal system does recognise an [] important role to good faith’.104

D.  Domestic legal systems

2.67  Domestic legal systems rely on good faith, particularly in contract law. Kotzur notes that ‘[bona fides] can be qualified as an equally fundamental and universal structure of any legal order regardless of its social, political, economical, development-related, or cultural particularities’.105

2.68  Domestic legal systems have distinct applications of the principle of good faith. Some jurisdictions are more apt to apply the term in specific areas of the laws; this develops a more specialized line of jurisprudence on the principle. The following discussion on domestic applications splits usage between common law and civil law systems, with particular emphasis placed on the United States and Germany because of the well-developed use of the principle in those two systems.

1.  Common law

a)  US law

2.69  The reliance on good faith in US law is relatively recent, but has been incorporated into some state statutes since at least the mid-nineteenth century.106 Field’s Civil Code (p. 37) § 642—the New York State Commissioners’ Draft of a Civil Code for the State of New York, drafted in 1862—stated: ‘The offer of performance must be made in good faith by the party owing performance to the party who is entitled to the same, and the former must be ready and willing to perform his obligation.’ Similarly, the California Civil Code § 1493, drafted a century later, states: ‘An offer of performance must be made in good faith, and in such manner as is most likely, under the circumstances, to benefit the creditor.’

2.70  On the federal level, good faith is used in the Labor Management Relations Act of 1947, the Robinson–Patman Act, the Bankruptcy Act, Chapter X, and the Automobile Dealer Day in Court Act.107 In the broader US perspective, good faith performance is incorporated into US law in several sources: inter alia, the Uniform Commercial Code (UCC), through the work of Karl Llewellyn, and the American Law Institute (ALI) Restatement 2d Contracts, modelling what was written in the UCC and further developing an ‘excluder’ means of defining the principle.108

2.71  The following sections will examine the use of the term in the Restatement and the UCC. They will also further address the varied positions taken by US scholars on the matter of defining good faith.

i)  Uniform Commercial Code

2.72  The first codified incorporation of the term into US law can most likely be attributed to Karl Llewellyn’s drafting of the UCC. Having been influenced by the German Civil Code during his studies in Leipzig, there is a substantial connection between the concept of good faith in US law and its use in the German Civil Code § 242 provision on Treu und Glauben.109 It follows that the acceptance of the concept in US law emerges from its first use in the UCC.110 In considering the specific use of good faith in the UCC, E Allan Farnsworth noted: ‘Still, the lesson is there, and the Code’s concepts of good faith performance and commercial reasonableness await development, even beyond the bounds of the Code, at the hands of resourceful lawyers and creative judges.’111

2.73  The UCC defines good faith as ‘honesty in fact in the conduct or transaction concerned’.112 UCC § 1-203 provides the basis for implementing the principle: ‘Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.’ In the case of a merchant, UCC § 2-103(1)(b) further elaborates on good-faith (p. 38) obligations: ‘honesty in fact and the observance of reasonable commercial standards of fair dealing in trade.’ The UCC has been largely accepted by the US states in an effort to create uniformity in the commercial codes of the United States.113

ii)  Restatement of the Law Second, Contracts § 205

2.74  The Restatement Second, § 205 states that ‘[e]very contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement’. The definition of good faith provided by the Restatement relies on an ‘excluder’ analysis, namely defining good faith through its negative—by defining (or identifying) bad faith behaviour. Comment d expressly provides that

[a] complete catalogue of types of bad faith is impossible, but the following types are among those which have been recognized in judicial decisions: evasion of the spirit of the bargain, lack of diligence and slacking off, wilful rendering of imperfect performance, abuse of a power to specify terms, and interference with or failure to cooperate in the other party’s performance.

iii)  Controversy of defining good faith in US law

2.75  Farnsworth discussed the problematic nature of establishing a single definition of good faith throughout the courts and jurisprudence of the United States: ‘The fact that we have statutory definitions of “good faith” does not, however, mean that we Americans are in complete agreement as to what “good faith” means in the context of good faith performance.’114 Farnsworth’s comments reference an extensive dialogue among three scholars regarding the character of good faith in US law.115

2.76  Good faith is a typical term supplied by the court. Most often the courts refer back to the general idea of fairness: ‘This duty [of good faith] is based on fundamental notions of fairness, and its scope necessarily varies according to the nature of the agreement.’116 The principle, however, is used by the courts where one ‘party has been given a discretionary power over one of the terms of the contract. Output and requirements contracts are leading examples of this.’117 But an agreement between the parties must exist before the court will consider implementing such a requirement.118 It thus follows that there is no good-faith requirement in pre-contractual negotiations, as the requirement only surfaces once there is an agreement.

2.77  The Restatement defines good faith by excluding what it is not, using ‘excluder’ analysis. This approach to the study of good faith has been taken by Summers, who in turn influenced the writing of the Restatement.119 Comment d of the Restatement 2d on Contracts, § 205 describes how the term operates within this framework, as noted previously. (p. 39) Summers further describes the approach: ‘that in cases of doubt, a lawyer will determine more accurately what the judge means by using the phrase “good faith” if he does not ask what good faith itself means, but rather asks: What … does the judge intend to rule out by his use of this phrase?’120

2.78  The use of ‘excluder’ analysis in defining good faith is not, however, universally accepted by US legal scholars. In particular, Burton contends that such analysis is unworkable because it ‘implies that courts typically use the doctrine to render agreed terms unenforceable or to impose obligations that are incompatible with the agreement reached at formation … [rather than] to effectuate the intentions of the parties’.121

2.79  Good faith in US law acts as a supplementary term. There is (debatably) no independent cause of action that arises from the duty.122 The explicit terms of the contract remain the primary point of interpretation for a judge and the principle of good faith then acts to fill gaps.123 The 7th Circuit supported this position on the principle of good faith in parallel with other requirements in a 1990 decision:

When the contract is silent, principles of good faith … fill the gap. They do not block use of terms that actually appear in the contract … Any attempt to add an overlay of ‘just cause’ … to the exercise of contractual privileges would reduce commercial certainty and breed costly litigation … The Bank was entitled to advance its own interest, and it did not need to put the interest of Debtor and Debtor’s other creditors first.124

Critics considered that this decision failed to analyse the language of the code.125

2.80  Burton maintains, however, that even if the duty is not something that can be enforced independently, it is nevertheless necessary in order to completely realize contractual obligations: ‘Contract parties rely on the good faith of their exchange partners because detailed planning may be ineffectual or inadvisable. Therefore, express contract terms alone are insufficient to determine a party’s good faith in performance.’126 Burton further contends that the doctrine of good faith performance ‘functions to support the market’.127 In a sense, those entering into a contractual relationship rely not only on the terms of the contract ‘but also on the customary implications of the express terms as to opportunities forgone in the commercial setting’:128

The law puts the burden of careful contract planning on the discretion-exercising promisor who wishes to depart from the norm, because such a promisor is in the best position to (p. 40) secure the expectations of both parties. The cost perspective on the contractual expectation interest thus renders the common law good faith performance doctrine reckonable.129

2.81  Although this interpretation of the duty suggests that the market is better supported with the inclusion of the principle, the duty of good faith is ‘not a duty of candor’ and thus ‘does not prevent from entering into a contract to purchase something that the counterparty undervalues’.130 With this caution regarding scope, the court in Market Street Associates Ltd Partnership v Frey stated that good faith approximates ‘the terms the parties would have negotiated had they foreseen the circumstances that have given rise to their dispute’.131

b)  Other common laws

2.82  Good faith is used cautiously in other common law jurisdictions. Michael Bridge posits that use of the concept is likely to result in ‘idiosyncratic judgments’. He notes that there is no use for the concept of good faith in Canadian law.132 Bridge further maintains that justified expectations are sufficiently protected under Canadian contract law, and thus there has been no need to specifically legislate for the inclusion of the principle in the statutes regulating contractual performance.

2.83  The interaction with good faith is most interesting in British law, particularly after the incorporation of certain provisions of European Union law into the United Kingdom’s legal system. The idea of good faith does not exist in British contract law. Instead there is a focus on interpreting the contract literally.133

2.84  Professor Roy Goode maintained that it would be difficult to incorporate such a concept into British law and noted that ‘we do not know quite what [good faith] means’.134 He further criticized the American use of the term: ‘[T]he Americans have, or so it might seem, too many meanings of good faith. What do Americans mean by “good faith” in the context of performance of contracts?’135

2.85  Resistance to the term may in some ways be referred to predictability. By allowing good faith—applied as an equitable principle—into the interpretation of contracts, a dispute can have a greater number of possible outcomes.136 With specific regard to the differences in the legal system:

(p. 41)

The English do not impose any specific duty on the parties to enter into and to continue negotiations in good faith they do not recognize any general duty of disclosure for a party who knows that the other party is ignorant of a critical fact … Furthermore, England has no general rule to the effect that unfair contract terms are unenforceable.137

2.86  The jurisprudence of the EU, however, has forced the British legal system to accept the use of the principle of good faith, at least in that context. Teubner refers to the incorporation of the term into the British legal system as a ‘legal irritant’:138

[Good faith] is an outside noise which creates wild perturbations in the interplay of discourses within these arrangements and forces them to reconstruct internally not only their own rules but to reconstruct from scratch the alien element itself. ‘Legal irritants’ cannot be domesticated; they are not transformed from something alien into something familiar, not adapted to a new cultural context, rather they will unleash an evolutionary dynamic in which the external rule’s meaning will be reconstructed and the internal context will undergo fundamental change.139

2.87  The resistance to the concept of good faith in English law seems, however, to be softening. This is apparent in commercial contracts. In the Yam Send v International Trade Corporation decision, the judge found grounds for an implied duty of good faith.140 The judge’s reasoning included that every contract ‘requir[es] honesty in its performance’. Commentators have inferred from this decision that good faith ‘may be implied not as a matter of law but as a matter of fact, meaning that it is based on the presumed intentions of the parties’.141

2.88  Prior to the incorporation of EU law, the idea of fairness had been part of the jurisprudence, albeit without the same name.142 Thus, the fact that the term good faith is not (p. 42) present in British law does not mean that the concept of applying rules regarding honesty and fairness is also absent. Friedman notes that the lack of a clear statement of good faith in English law is overcome by the application of abuse of rights in calculation of remedies, including in the concept of mitigation and measure of recovery available.143

2.  Civil law

2.89  The relationship between the parties is at the core of the understanding of good faith in most civil law jurisdictions.144 A sampling of laws from European states demonstrates the relevance of the principle in application of commercial law.

a)  German law

2.90  Good faith is integral to German contract law.145 The obligations for good faith extend to both contract negotiation and contract performance.146 This connection with good faith was first codified in the law in 1900.147 Section 242 Bürgerliches Gesetze (BGB) provides: ‘Der Schuldner ist verpflichtet, die Leistung so zu bewirken, wie Treu und Glauben mit Rücksicht auf die Berkehrssitte es erfordern.’148

2.91  Pre-contractual negotiations are one of the aspects in which common law and civil law jurisdictions differ in their interpretation of the concept of good faith, or bona fides.149 In most civil law jurisdictions, the obligation to act in good faith begins at a much earlier point in the negotiations. In contract law, the principle has a multifaceted function: ‘it serves as the legal basis of interstitial law-making by the judiciary, it forms the basis of legal defences in private law suits, and it provides a statutory basis for reallocating risks in private contracts.’150

(p. 43) 2.92  Extending beyond contractual law, good faith serves a role in many areas of the law.151 Potentially dangerously, ‘[t]he doctrine of good faith has been used by the courts to create new causes of action where no cause of action existed in statutory law’.152 As early as 1902, a new cause of action was required for remedy where there was no statutory relief available:153 contaminated fodder was delivered and killed two of the buyer’s horses. To manage the situation, the court applied ‘the new doctrine of positive Vertragsberletzung’.154 The doctrine allows for recovery where a secondary obligation causes the damages.155 The decision was based in part on § 242 of the BGB.156

2.93  A more memorable application of good faith by the German courts came in 1923. After serious inflation, the judges of the Imperial Supreme Court considered the ‘inaction of the legislature as intolerable and gravely detrimental to the general respect for law and justice’.157 By applying § 242 BGB, the Court maintained that ‘[t]he currency laws had to be disregarded in so far as they could not be reconciled with the precepts of good faith’.158

b)  French law

2.94  French law makes a distinction regarding good faith and bad faith in pre-contractual negotiations, as included in Civil Code Art 1134(3), providing that parties are not obliged to act in good faith, but rather cannot act in bad faith.159 The concept of good faith has been incorporated into French contract law since 1804:160

[T]he Civil Code imposes good-faith performance and imposes to contractual parties obligations deriving from ‘equity’, in connection to other legal doctrines, such as the ‘abus de droit’. Duties to disclose and certain obligations of cooperation and loyalty complete the picture.161

c)  Italian law

2.95  The principle of good faith exists in Italian law mainly in Article 1375 of the Italian Civil Code as well as in Articles 1175, 1337, 1366, and 1460. Good faith appears in regard to ‘negotiations, interpretation and performance of contract, and imposes a duty of good faith on both debtor and creditor in relation to obligations in general’.162 Articles 1175 and 1337 (p. 44) address the behaviour of parties, Articles 1366 and 1375 provide for the interpretation and execution of contracts, and Article 1460 allows refusal of contractual performance where the other party has not performed unless such refusal is contrary to good faith.163

2.96  The principle was incorporated in the 1942 Civil Code, notably after German case law was available on the application of § 242 of the BGB.164 Both subjective and objective good faith are incorporated into the application of the principle.165

2.97  Italian judges, however, infrequently rely on the principle to make decisions.166 Despite the limited utilization of the term, the interpretation and use of the principle may nevertheless be considered somewhat more expansive here than in other civil law countries. The Corte do Cassazione affirmed that the judge has power in the application of good faith and may even use it ‘to modify and integrate the agreement’.167 The application of Italian law in an international arbitration reaffirmed this role of the judge in making decisions regarding good faith.168

d)  Other civil laws

2.98  Most other European jurisdictions include good faith in some form. In Dutch law, good faith will not only supplement obligations arising from contract but may also modify and extinguish them. The duty ‘attaches to contracts also obligations arising from good faith and declares inapplicable all contractual arrangements contrary to good faith’.169 Similarly, Portugal170 and Spain171 include the principle in their legal codes.

3.  Other laws

2.99  Shari’ah law also recognizes good faith:172

The question [of whether to apply an obligation of good faith] is of particular significance in modern Islamic jurisdiction where Western contracts law have been imported and are often either silent on the issue of good faith or apply it in a manner not entirely compatible with the injunctions of the Shari’ah.173

(p. 45) Majeed notes that there are certain essential rules of contract that have developed within Shari’ah systems with the incorporation of foreign contract law in order to compensate for potential deficiencies in the language and scope of the laws.

2.100  The inclusion of the principle derives from existing cultural ideals. The Qur’an provides some of the primary examples of basic contractual obligations that are similar to the Western idea of good faith: ‘O you who believe, eat not each other’s property by wrong means, but let there be amongst you trade and business through mutual good-will.’174

E.  Conclusions

1.  The convergence of understandings: honesty and fairness

2.101  The basic idea of good faith reflects honesty and fairness.175 Kotzur contends that ‘[g]ood faith belongs to the very few legal principles which do find resemblance in more or less all legal systems and legal cultures’.176 Kotzur’s understanding of good faith maintains that it

combines moral standards such as trust, honesty, conscientiousness, and loyalty with strict or at least more precise legal contents, eg the principle of reciprocity, the objective and purpose-oriented method of interpretation. It owes its present authority to natural law, to the aforementioned treaties, to customary international law, and especially to its global implementation in more or less all legal systems and cultures.177

2.102  This basic application can be generally agreed; however, honesty and fairness are then left open for specific interpretations.178 Reflecting on the presentation of good faith provided in this chapter, it is understandable that no single application of the principle emerges. Peter Schlechtriem recognizes this lack:

If the principle of good faith and fair dealing is indeed common to all legal systems based on the values of western civilization, then it should be easy to find a common core of concrete rules derived from this principle … But I have looked in vain for a monograph … which would report and compare in detail the various manifestations of the principle and its applications and understanding in the legal systems of the Western world.179

2.103  Good faith has an important general role in guiding justice: ‘Good faith and fair dealing is penicillin. It permeates all parts of the system and kills all the pernicious germs.’180

(p. 46) 2.  Lack of definition: benefits and problems

2.104  The essence of the term is woven into the basis of law. Stepping back and questioning its value can challenge our most essential notions of what is right and wrong, and what is legitimate and illegitimate.

2.105  The difficulty in accurately applying the term falls on the limitations of language itself. William Park addresses the limitations of language in international arbitration:

Legal phrases, maxims and rules often enhance efficient dispute resolution by providing intellectual hooks on which to hang analysis, as well as mental handles with which to arrange otherwise complex arguments. Like the questions we ask, the language of the law can shape the choices ultimately made by arbitrators and judges. Words can beget misunderstanding as well as insight, however. Expressions which bear multiples meaning often find themselves employed with promiscuous disregard to context and function.181

2.106  Courts, tribunals, and law-making bodies implement the term with a certain conception of its definition.182 Even in jurisdictions that have made notable attempts to provide an understandable definition of the principle—in particular, the United States—different courts’ interpretations of that definition can vary.

2.107  Because the definition and application of the term can vary to such a great degree, the value in using the principle may be compromised. In this regard, Fernando De Trazegnies Granda noted that ‘good faith is the terrorist of law, allowing for arbitrariness in judicial decision-making’.183

2.108  Contrary to these positions, it can also be argued that there is valuable uniformity that comes out of this global perspective: almost every legal system applies some principle of good faith. The deliberate application of the principle is essential to the functioning of the courts. Indeed, even in the United Kingdom and other common law jurisdictions that have refused to incorporate the principle of good faith by name, the principle emerges in other forms and ultimately achieves the same results.184 These results consistently achieve a certain gap-filling function, ensuring the application of justice—or a particular sense of culturally understood justice.185

2.109  There are other similarities that extend across jurisdictional boundaries. Good faith (or its equivalent) is never an obligation on its own, but instead always combined with another obligation. Although this was expressly indicated in the jurisprudence of the ICJ in the Cameroon v Nigeria Case, it is also apparent in other legal systems. Section 242 of (p. 47) the German Civil Code requires an obligor to perform in good faith. Good faith, thus, does not stand on its own. Rather, there must have been an obligation or an agreement made between two parties in order to establish the good-faith requirement. The Uniform Commercial Code similarly requires that a contract be performed in good faith. Yet good faith only operates within this context of an existing contract.

2.110  Along similar lines, the CISG also requires good-faith behaviour only after the agreement has come into existence. Even the VCLT requires that a treaty first be entered into by the parties, and then further requires the performance of that treaty in accordance with the principles of good faith.

2.111  Negative consequences also similarly result regardless of the legal system in which the principle is used. A core problem arises through application of the principle when judges or arbitrators intentionally or unintentionally use the principle for judicial activism or the application results in judicial activism. Such activism can be difficult to identify because good faith can sufficiently hide the true motivations.

3.  Good faith in investment arbitration

2.112  Applying good faith most often upholds a greater sense of justice rather than a misuse of the law.186 An arbitrator’s sense of justice is derived from their legal education and experience. This influence is an accepted aspect of international law, as all international lawyers inevitably have training in their home jurisdiction and, in many cases, extensive judicial résumés in their home jurisdictions before beginning their career in the international legal context.

2.113  Some arbitrators are more apt to apply the principle of good faith as a means of ensuring that justice is being done. There is an advantage to having a term at hand to apply where the treaties and conventions leave significant gaps in the creation of just results. The use of that principle cannot be exploited if it is to remain useful.

2.114  Ultimately, good faith lacks a definition but is undeniably important for the functioning of domestic, international, and multilateral legal systems. This leads to the ultimate question, which this book may not fully answer but nonetheless explores and deconstructs: Is the use of the principle of good faith in the investment arbitration context beneficial to further developing the system, or does it create uncertainty for both investors and states, and ultimately adversely impact legitimate expectations of the parties?

Footnotes:

1  William Shakespeare, Richard III (1595) II. iv. 16.

2  JF O’Connor, Good Faith in International Law (Aldershot 1991) 17 (hereafter O’Connor, Good Faith in International Law).

3  Oxford English Dictionary (online edition, Oxford University Press 2012).

4  O’Connor, Good Faith in International Law (n 2).

5  ibid.

6  W Proudfoot, ‘Specific Performance of Contracts in the Roman Law’ (1894) 14 Canadian Legal Times 257, 258 (‘We find it recorded that the wise and pious king Numa, the immediate successor of Romulus, and thus at the dawn of the Roman nation, desirous of the advance of the nation in the arts of peace and civilization, instituted a festival to the goddess Faith, and the flamens, while employed in her worship, were to have their hands covered to signify that faith was to be carefully observed’); see also Remus Valsan, ‘Fides, Bona Fides, and Bonus Vir: Relations of Trust and Confidence in Roman Antiquity’ (2017) 5 Journal of Law, Religion and State 48, 52.

7  Marc de Wilde, ‘Fides Public in Ancient Rome and Its Reception by Grotius and Locke’ (2011) 79 Tijdschrift voor Rechtsgeschiedenis 455 (hereafter de Wilde, ‘Fides Public in Ancient Rome and its Reception by Grotius and Locke’) 462.

8  ibid.

9  Sara Perley, ‘Fides Romana: Aspects of Fides in Roman Diplomatic Relations during the Conquest of Iberia’ Thesis (University of Otago 2012) 130 et seq (for example, Galba’s slaughter of Lusitani in contravention with Fides).

10  ibid, 466.

11  Larry A DiMatteo, Equitable Law of Contracts: Standards and Principles (Transnational Publishers 2002) (hereafter DiMatteo, Equitable Law of Contracts: Standards and Principles) 111.

12  ibid.

13  Harold J Berman, Law and Revolution: The Formation of the Western Legal Tradition (Harvard University Press 1983) 344.

14  ibid, 345.

15  ibid.

16  DiMatteo, Equitable Law of Contracts: Standards and Principles (n 11) 111.

17  Hugo Grotius, The Rights of War and Peace (1901 edn, 1625) Chapter XIX <http://oll.libertyfund.org/titles/553> accessed 30 January 2018 (hereafter Grotius, The Rights of War and Peace).

18  Haim H Cohn, ‘The Grotian Concept of Good Faith’ (1985) 7 Tel Aviv University Studies in Law 9, 10.

19  de Wilde, ‘Fides Public in Ancient Rome and its Reception by Grotius and Locke’ (n 7) 475; see for example, John Locke, Second Treatise of Government (1689) para 142 (‘The legislative power of every commonwealth, in every form of government, is subject to the following limits to the trust that is put in them by the society and by the law of God and the law of nature’).

20  Markus Kotzur, ‘Good Faith (Bona Fides)’, in Max Planck Encyclopedia of Public International Law (Oxford University Press 2009) para 2 (hereafter Kotzur, ‘Good Faith (Bona Fides)’); Treaty of the Pyrenees between France and Spain (signed 7 November 1659).

21  Kotzur, ‘Good Faith (Bona Fides)’ (n 20) para 5.

22  This plurality of understandings of good faith necessarily brings consideration of scholarship in legal pluralism, albeit that this is not the theoretical focus of this study. See Baudouin Dupret, ‘Legal Pluralism, Plurality of Laws, and Legal Practices: Theories, Critiques, and Praxiological Re-specification’ (2007) 1(1) European Journal of Legal Studies 20; see also Bronisław Malinowski, Crime and Custom in Savage Society, as cited in Dupret. Malinowski noted that although some societies may lack a system of laws, there were nonetheless recognized ‘obligations’ and ‘rightful claims’ imbedded in the organization of the society.

23  Bin Cheng, General Principles of Law as applied by International Courts and Tribunals (Cambridge University Press 1994, reprinted) 105 (hereafter Cheng, General Principles of Law); Bernardo Cremades, ‘Good Faith in International Arbitration’ (2012) 27(4) American University International Law Review 761, 766 (hereafter Cremades, ‘Good Faith in International Arbitration’). Cremades further contemplates the complexity of definition with specific state examples, as will be discussed later in this chapter. After stating that good faith has been applied in the international arbitration context, he further notes: ‘Nevertheless, it is not clear what the concept of good faith actually means. Some view this principle with religious connotations: in Rome, the goddess Fides was entrusted by Jupiter with justice in contracts. In medieval times, good faith was connected to Christian morality. The French doctrine of the 19th and 20th centuries introduced a key element of altruism or loyalty. German doctrine applies paragraph 242 BGB with Kantian references to the categorical imperative. In the Anglo-Saxon sphere, doctrine and jurisprudence demonstrate a radical rejection of good faith that they hold to be “abhorrent” with the adversarial spirit, which must govern in the world of contracts. Naturally, this rejection has been mitigated in the legal system of the United States, where there is no shortage of voices advocating good faith as the great recent discover in U.S. law. In other legal systems, good faith is questioned as are, in general, any standards which may lead to arbitrariness by judicial or arbitral decision-makers.’ (citations deleted)

24  See, for example, E Allan Farnsworth, ‘Good Faith in Contract Performance’ in Jack Beatson and Daniel Friedman (eds), Good Faith and Fault in Contract Law (Oxford University Press 1995) (hereafter E Allan Farnsworth, ‘Good Faith in Contract Performance’) 153–70; Robert S Summers, ‘The Conceptualisation of Good Faith in American Contract Law: A General Account’ in Reinhard Zimmermann and Simon Whittaker (eds), Good Faith in European Contract Law (Cambridge University Press 2000) (hereafter Summers, ‘The Conceptualisation of Good Faith in American Contract Law: A General Account’) 369.

25  Filip Černý, ‘Short Flight of the Phoenix: A Few Thoughts on Good Faith, the Abuse of Rights and Legality in Investment Arbitration’ (2012) Czech Yearbook of International Law 184.

26  Martijn W Hesselink, ‘Good Faith’ in Arthur Hartkamp, Martijn Hesselink, Ewoud Hondius, Carla Joustra, Edgar du Perron, and Muriel Veldman (eds), Towards a European Civil Code (3rd edn, Nijmegen 2004) 622–23.

27  Cremades, ‘Good Faith in International Arbitration’ (n 23) 771 (‘arbitrators are the protagonists of international arbitration and, therefore, it is appropriate to ask whether the legal culture they come from and the training they have received, conditions their decisive mental process at the time of applying the general principle of good faith’.)

28  Gunther Teubner, ‘Legal Irritants: Good Faith in British Law or How Unifying Law Ends Up in New Divergences’ (1998) 61 The Modern Law Review 11, 12 (hereafter Teubner, ‘Legal Irritants’) (Teubner notes the concern with regard to incorporation of the term into British law via the European Union, questioning: ‘what kind of transformations of meaning will the term undergo, how will its role differ, once it is reconstructed anew under British law?’)

29  Cremades, ‘Good Faith in International Arbitration’ (n 23) 767.

30  Andrew Grubb and Michael Furmston, The Law of Contract (2nd edn, Lexis Nexis UK 2003) 73 (hereafter Grubb and Furmston, The Law of Contract).

31  S Litvinoff, ‘Good Faith’ (1987) 87 Tulane Law Review 1645, 1649: ‘It has been said that, in a legal context, good faith has both a psychological and an ethical component. The former would consist of a belief that one is acting according to the law, and is designated as good faith-belief. The latter would consist in conducting oneself according to moral standards, and is designated as good faith-probity, or good faith-honesty, and is germane to ideas of loyalty and respect for the pledged word. From the vantage point of the psychological component it does not matter if the belief is erroneous, provided it is sincere.’

32  Grubb and Furmston, The Law of Contract (n 30) 73.

33  Cheng, General Principles of Law (n 23) 24. Cheng references the Gentini Case, Reports of International Arbitral Awards, Volume X (1903) 551, 720, 725, which provides: ‘A rule … is essentially practical and, moreover, binding; there are rules of art as there are rules of government, while a principle expresses a general truth, which guides our action, serves as a theoretical basis for the various acts of our life, and the application of which to reality produces a given consequence.’ Also consider Grotius, The Rights of War and Peace (n 17) Chapter 19, Section IX. Grotius stated that there were certain natural laws that were to be observed even in one’s relations with enemies: notably, promises made must be kept in good faith. Where, however—as in the case of pirates—the promisee is using fear to extort a particular action, the promisor may be released from this requirement of keeping the promise in good faith. ‘Yet it does not follow from hence that any one, who has extorted such a promise in unjust war, can, consistently with piety and the duties of a good man, retain what he has so received, nor can he compel another to stand to such engagements, whether upon oath, or not. For the natural and internal injustice of such a promise always remains the same, nor can the injustice be removed or altered, till it has received a new and free concurrence from the party, by whom it was given.’

34  Cheng, General Principles of Law (n 23) 106–20; James Crawford, Brownlie’s Principles of Public International Law (8th edn, Oxford University Press 2012) 377–383; Georg Schwarzenberger and E Brown, A Manual of International Law (6th edn, Milton 1976) 99 (hereafter Schwarzenberger and Brown, A Manual of International Law).

35  Cheng, General Principles of Law (n 23) 106.

36  Jean Salmon, ‘Article 26’ in Olivier Corten and Pierre Klein (eds), The Vienna Conventions on the Law of Treaties: A Commentary (Oxford University Press 2011) 680.

37  Dutch–Portuguese Boundaries in the Island of Timor (the Netherlands v Portugal), PCA Award (25 June 1914), as referenced in Cheng, General Principles of Law (n 23) 115

38  Huseyin Pazarci, ‘Preamble’ in Olivier Corten and Pierre Klein (eds), The Vienna Conventions on the Law of Treaties: A Commentary (Oxford University Press 2011) 4, citing the Romanian delegate’s intervention, UN Conference on the Law of Treaties, 2nd session, Official Records, 171. See also Kirsten Schmalenbach, ‘Article 26’ in Oliver Dörr and Kirsten Schmalenbach (eds), Vienna Convention on the Law of Treaties: A Commentary (Springer 2012) 431 (hereafter Schmalenbach, ‘Article 26’) (‘In the course of the drafting process, some discussion evolved about the article’s suitable position within the Draft Convention. Some ILC members and a few States wanted to affirm the special prominence of the rule by inserting it at the beginning of the Convention. Eventually, it was deemed to be more appropriate to aim for systematic coherence of the text and to reiterate the norm by its inclusion in the Preamble’).

39  See also Mark E Villiger, Commentary on the 1969 Vienna Convention on the Law of Treaties (Martinus Nijhoff 2009) 363 (hereafter Villiger, Commentary on the 1969 Vienna Convention on the Law of Treaties).

40  See generally Anthony Aust, Modern Treaty Law and Practice (2nd edn, Cambridge University Press 2007) 336–38.

41  Villiger, Commentary on the 1969 Vienna Convention on the Law of Treaties (n 39) 363); see also Andreas R Ziegler and Jorun Baumgartner, ‘Good Faith as a General Principle of (International) Law’, in Andrew D Mitchell, M Sornarajah, and Tania Voon (eds), Good Faith and International Economic Law (Oxford University Press 2015) 19 (‘Whether one considers good faith the source of the [pacta sunt servanda] rule or only a companion thereto, the interplay between the principle of good faith and the rule of [pacta sunt servanda] is undeniable’).

42  Yearbook of the International Law Commission (United Nations 1964), I 163 ff, statements by Lachs, De Luna, Yasseen, and Ago (Chairman).

43  Schmalenbach, ‘Article 26’ (n 38) 435.

44  Villiger, Commentary on the 1969 Vienna Convention on the Law of Treaties (n 39) 425

45  Oliver Dörr, ‘Article 31’, in Oliver Dörr and Kirsten Schmalenbach (eds), Vienna Convention on the Law of Treaties: A Commentary (Springer 2012) 548. Dörr further notes that ‘the ordinary meaning, if established in its context, must always be submitted to the test of reasonableness. If applying the words of a treaty in their ordinary meaning would seem to lead to a result, which would be manifestly absurd or unreasonable, another interpretation must be sought.’

46  Villiger, Commentary on the 1969 Vienna Convention on the Law of Treaties (n 41) 425–26.

47  Bruno Simma, Daniel-Erasmus Khan, Georg Nolte, and Andreas Paulus (eds), The Charter of the United Nations: A Commentary (3rd edn, Oxford University Press 2012) 90–99 (hereafter Simma et al, The Charter of the United Nations: A Commentary) (‘The duty of one member towards another or towards the Organization under the Charter is not to be determined according to purely formal criteria, based on the letter of the law, but rather according to the principle of good faith, which alone gives the treaties the elasticity that is indispensable for implementation in reality’).

48  American delegate at the San Francisco Conference, as cited in ibid, 90.

49  ibid, 93.

50  Documents of the United Nations Conference on International Organization (United Nations 1945–55) vol 6 Doc 1123 I/8 [20 June 1945] 8, as cited in Kotzur, ‘Good Faith (Bona fides)’ (n 20).

51  American delegate at the San Francisco Conference, as cited in Simma et al, The Charter of the United Nations: A Commentary (n 47) 90.

52  Simma et al, The Charter of the United Nations: A Commentary (n 47) 91.

53  Declaration on Principles of International Law Concerning Friendly Relations and Co-operation among States in accordance with the Charter of the United Nations, adopted by consensus in UN General Assembly Resolution 2625 (XXV) (24 October 1970) para 3.

54  Simma et al, The Charter of the United Nations: A Commentary (n 47) 95.

55  United Nations Convention on the Law of the Seas of 10 December 1982 (entered into force 16 November 1994) Article 157.

56  ibid, Article 300.

57  In the dispute Concerning Southern Bluefin Tuna (Australia v Japan), UNCLOS, Statement of Claim and Ground on Which It Is Based (15 July 1999) para 52: Australia submitted that ‘[i]n particular, UNCLOS recognizes the fundamental importance of cooperation between coastal States and distant water fishing States by laying down in various articles an obligation on these States to cooperate for a range of purposes’; see also Peter Prows, ‘Mauritius Brings UNCLOS Arbitration against the United Kingdom over the Chagos Archipelago’ (5 April 2011) 15(8) ASIL Insights (noting that part of Mauritius’ claim against the UK included its actions in bad faith contrary to the UNCLOS obligations and its disregard of rights of Mauritius).

58  Schwarzenberger and Brown, A Manual of International Law (n 34) 99.

59  ibid, 99.

60  Cheng, General Principles of Law (n 23) 105.

61  ibid, 121, 131.

62  Admissibility of Hearings of Petitioners by the Committee on South-West Africa (Advisory Opinion) [1956] ICJ Reports 23, Separate Opinion of Sir Hersch Lauterpacht, 55–56.

63  ibid.

64  Rights of Nations of the United States of America in Morocco (Judgment) [1952] ICJ Reports 212 (‘The power of making the valuation rests with the Customs authorities, but it is a power which must be exercised reasonably and in good faith’); Case Concerning the Factory at Chorzów (Germany v Poland) (Merits) PCIJ Rep Series A No 17, 31 (concluding that the passage of ownership of the Chorzów factory from the Reich to the Oberschlesische was bona fide).

65  North Sea Continental Shelf (Federal Republic of Germany v Denmark; Federal Republic of Germany v the Netherlands) [1969] ICJ Reports 3; Railway Traffic between Lithuania and Poland, [1931] PCIJ Reports, Series A/b, No 42, 4, 116 (obligation to negotiate in good faith was ‘not only to enter into negotiations, but also to pursue them as far as possible, with a view to concluding agreements’, recognizing that ‘an obligation to negotiate does not imply an obligation to reach an agreement’); Fisheries Jurisdiction Case (Federal Republic of Germany v Iceland) (Merits, Judgment) [1974] ICJ Reports 175, 202 (‘The task before them will be to conduct their negotiations on the basis that each must in good faith pay reasonable regard to the legal rights of the other in the water around Iceland outside the 12-mile limit, thus bringing about an equitable apportionment of the fishing resources based on the facts of the particular situation, and having regard to the interest of other States which have established fishing rights in the area … Negotiations in good faith, which are ordered by the Court in the present Judgment, involve in the circumstances of the case an obligation upon the Parties to pay reasonable regard to each other’s rights and to conservation requirements pending the conclusion of the negotiations’).

66  Border and Transborder Armed Actions (Nicaragua v Honduras) (Jurisdiction and Admissibility) [1988] ICJ Reports 69 (hereafter Border and Transborder Armed Actions (Nicaragua v Honduras) (Jurisdiction and Admissibility)) (‘Having accepted the Contadora process as a ‘special procedure’ within the meaning of Article II of the Pact of Bogota, Nicaragua is precluded both by Article IV of the Pact and by elementary considerations of good faith from commencing any other procedure for pacific settlement until such time as the Contadora process has been concluded’).

67  Nuclear Tests (Australia v France) (Judgment) [1974] ICJ Reports 253, 268 (hereafter Nuclear Tests (Australia v France) (Judgment)); Border and Transborder Armed Actions (Nicaragua v Honduras) (Jurisdiction and Admissibility) (n 66) 105: (‘[good faith] is not in itself a source of obligation where none would otherwise exist’).

68  Border and Transborder Armed Actions (Nicaragua v Honduras) (n 66) 105.

69  Gabcikovo-Nagymaros Project (Hungary v Slovakia) [1997] ICJ Reports 7, para 142.

70  Nuclear Tests (Australia v France) (Judgment) (n 67) para 49.

71  Land and Maritime Boundary between Cameroon and Nigeria (Cameroon v Nigeria) (Preliminary Objections) [1998] ICJ Reports 275, para 38.

72  See generally Andrew D Mitchell, ‘Good Faith in WTO Dispute Settlement’ (2006) 7 Melbourne Journal of International Law 339, 339; Marion Panizzon, Good Faith in the Jurisprudence of the WTO: The Protection of Legitimate Expectations, Good Faith Interpretation and Fair Dispute Settlement (Hart Publishing 2006) (hereafter Panizzon, Good Faith in the Jurisprudence of the WTO) 1; Helge Elisabeth Zeitler, ‘ “Good Faith” in the WTO Jurisprudence—Necessary Balancing Element or an Open Door to Judicial Activism?’ (2005) 8(3) Journal of International Economic Law 721, 723.

73  Panizzon, Good Faith in the Jurisprudence of the WTO (n 72) 365.

74  WTO, United States—Standards for Reformulated and Conventional Gasoline, Report of the Appellate Body, WT/DS2/AB (20 May 1996) 17.

75  Panizzon, Good Faith in the Jurisprudence of the WTO (n 72) 365.

76  WTO, Argentina—Definitive Anti-dumping Duties on Poultry from Brazil (Argentina–Poultry), Panel Report, DS241 (22 April 2003) para 7.36.

77  ibid.

78  WTO, United States—Import Prohibition of Certain Shrimp and Shrimp Products (US–Shrimp), Panel Report, WT/DS58/R (15 May 1998) para 7.41 ff; Panizzon, Good Faith in the Jurisprudence of the WTO (n 72) 52.

79  Michelle T Grando, Evidence, Proof, and Fact-finding in WTO Dispute Settlement (Oxford University Press 2009) 35–36.

80  WTO, United States—Tax Treatment for ‘Foreign Sales Corporations’, Appellate Body Report, WT/DS108/AB/R (20 March 2000) para 166.

81  Sandeep Gopalan, ‘The Creation of International Commercial Law: Sovereignty Felled?’ (2004) 5 San Diego International Law Journal 268, 317; see also Fabrizio Marrella, ‘Choice of Law in Third-Millennium Arbitrations: The Relevance of the UNIDROIT Principles of International Commercial Contracts’ (2003) 36 Vanderbilt Journal of Transnational Law 1137, 1146–47.

82  E Allan Farnsworth, ‘Duties of Good Faith and Fair Dealing under the UNIDROIT Principles, Relevant International Conventions and National Laws’ (1995) 3 Tulane Journal of International and Comparative Law 47, 60; see also Michael Joachim Bonell, The UNIDROIT Principles in Practice: Caselaw and Bibliography on the UNIDROIT Principles of International Commercial Contracts (2nd edn, Transnational Publishers 2006) 83 (hereafter Bonell, The UNIDROIT Principles in Practice): ‘There are a number of provisions throughout the different chapters of the Principles which constitute a direct or indirect application of the principle of good faith and fair dealing … This means that good faith and fair dealing may be considered to be one of the fundamental ideas underlying the Principles. By stating in general terms that each party must act in accordance with good faith and fair dealing, para. (1) of this article makes it clear that even in the absence of special provisions in the Principles the parties’ behaviour throughout the life of the contract, including the negotiation process, must conform to good faith and fair dealing.’

83  Paul J Powers, ‘Defining the Undefinable: Good Faith and the United Nations Convention on Contracts for the International Sale of Goods’ (1999) 18 Journal of Law and Commerce 333, 348 (hereafter Powers, ‘Defining the Undefinable’).

84  Bonell, The UNIDROIT Principles in Practice (n 82) 150: ‘Paragraph 2 of Art. 1.7 expressly states that the general duty to act in accordance with good faith and fair dealing as laid down in paragraph 1 of the same article may not be excluded or limited by agreement between the parties. In other words, while the parties are of course free to provide in their contract for even higher standards of behaviour, they may not exclude or limit their general duty to observe good faith and fair dealing.’

85  Naomi Julia Barnes, ‘Good Faith under the UNIDROIT Principles of International Commercial Contracts: A Struggle for Meaning’ (no date available) <https://www.scribd.com/document/277468196/Good-Faith-Unidroit> accessed 30 January 2018, 4.

86  Peter Schlechtriem (ed), Commentary on the UN Convention on the International Sale of Goods (CISG) (2nd edn, 1998 (in translation) Munich, 1998) 60 (hereafter Schlechtriem (ed), Commentary on the CISG).

87  John Felemegas, ‘The United Nations Convention on Contracts for the International Sale of Goods: Article 7 and Uniform Interpretation’ in Pace International Law Review, Review of the Convention on Contracts for the International Sale of Goods (CISG) (Kluwer Law International 2000–01) 115–265

88  Alexander S Komarov, ‘Internationality, Uniformity and Observance of Good Faith as Criteria in Interpretation of CISG: Some Remarks on Article 7(1)’ (2005–06) 25 Journal of Law and Commerce 75, 81–82 (hereafter Komarov, ‘Internationality, Uniformity and Observance of Good Faith as Criteria in Interpretation of CISG’).

89  Phanesh Koneru, ‘The International Interpretation of the UN Convention on the Contracts for International Sale of Goods: An Approach Based on General Principles’ (1997) 6 Minnesota Journal of Global Trade 105, 139–41; Larry A DiMatteo, ‘The CISG and the Presumption of Enforceability: Unintended Contractual Liability in International Business Dealings’ (1997) 22 Yale Journal of International Law 111, 145–148.

90  Michael Bridge, The International Sale of Goods: Law and Practice (2nd edn, Oxford University Press 2007) 532 (hereafter Bridge, The International Sale of Goods).

91  Schlechtriem (ed), Commentary on the CISG (n 86) 61.

92  Komarov, ‘Internationality, Uniformity and Observance of Good Faith as Criteria in Interpretation of CISG’ (n 88) 83.

93  Bridge, The International Sale of Goods (n 90) 187.

94  ibid, 531.

95  ibid, 534.

96  Hector L MacQueen, ‘Good Faith’ in Hector L MacQueen and Reinhard Zimmermann (eds), European Contract Law: Scots and South African Perspectives (Edinburgh University Press 2006) 43–73; Ole Lando, ‘Is Good Faith an Over-arching General Clause in the Principles of European Contract Law?’ (2007) 15(6) European Review of Private Law 841, 852 (hereafter Lando, ‘Is Good Faith an Over-arching General Clause in the Principles of European Contract Law?’) (‘The travaux preparatoires of PECL that I possess do not provide much guidance on our discussions in the CECL. The only thing I remember is that some of us, relying on the text and the comment, regarded Article 1:201 as an over-arching principle, and that we did not raise a discussion on the issue, because we believed that the others were of the same opinion’).

97  Hugh Beale, ‘General Clauses and Specific Rules in the Principles of European Contract Law: The Good Faith Clause’ in Stefan Grundmann and Denis Mazeud (eds), General Clauses and Standards in European Contract Laws—Comparative Law EC Law and Codification (Kluwer Law International 2005) 205–18 (hereafter Beale, ‘General Clauses and Specific Rules in the Principles of European Contract Law’).

98  ibid (Hugh Beale has argued that the many articles in PECL providing for good faith would be unnecessary if Article 1:201 were to be regarded as an overarching principle).

99  COM(2011) 635 final, Proposal for a Regulation of the European Parliament and of the Council on a Common European Sales Law.

100  Lorena Carvajal-Arenas, Good Faith in the Lex Mercatoria: An Analysis of Arbitral Practice and Major Western Legal Systems, PhD thesis (University of Portsmouth 2011) <https://researchportal.port.ac.uk/portal/en/theses/good-faith-in-the-lex-mercatoria(d1495c6c-b68e-4b6f-a4c1-a0d52d3fe306).html> 223 accessed 30 January 2018.

101  DiMatteo, Equitable Law of Contracts: Standards and Principles (n 11) 111.

102  Giuditta Cordero-Moss, ‘International Contracts between Common Law and Civil Law: Is Non-state Law to Be Preferred? The Difficulty of Interpreting Legal Standards Such as Good Faith’ (2007) 7(1) Global Jurist (Advances) 30 (noting that ‘[t]here is no uniform notion of good faith and fair dealing that might be valid for all types of contracts on an international level, and there is hardly a notion that is generally recognized for one single type of contract either. There is no evidence of trade usages in respect of how the standards of good faith (if any) is applied in practice’).

103  ibid, 31.

104  ibid.

105  Kotzur, ‘Good Faith (Bona Fides)’ (n 20).

106  E Allan Farnsworth, ‘Good Faith Performance and Commercial Reasonableness under the Uniform Commercial Code’ (1963) 30(4) The University of Chicago Law Review 666, 667 (hereafter Farnsworth, ‘Good Faith Performance and Commercial Reasonableness under the Uniform Commercial Code’); Chunlin Leonhard, ‘A Legal Chameleon: An Examination of the Doctrine of Good Faith in Chinese and American Contract Law’ (2010) 25 Connecticut Journal of International Law 305, 311–12 (noting that ‘[t]he doctrine of good faith, with regard to contractual relations, has a relatively recent history in the US’); see also Cremades, ‘Good Faith in International Arbitration’ (n 23) 766.

107  Farnsworth, ‘Good Faith Performance and Commercial Reasonableness under the Uniform Commercial Code’ (n 106) 667. See, for example, the Labor-Management Relations Act of 1947: ‘Sec. 502. [Sec. 143.] [Abnormally dangerous conditions] Nothing in this Act [chapter] shall be construed to require an individual employee to render labor or service without his consent, nor shall anything in this Act [chapter] be construed to make the quitting of his labor by an individual employee an illegal act; nor shall any court issue any process to compel the performance by an individual employee of such labor or service, without his consent; nor shall the quitting of labor by an employee or employees in good faith because of abnormally dangerous conditions for work at the place of employment of such employee or employees be deemed a strike under this Act [chapter].’

108  Farnsworth, ‘Good Faith in Contract Performance’ (n 24).

109  ibid; William Twining, Karl Llewellyn and the Realist Movement (2nd edn, Cambridge University Press 2014) 313.

110  Farnsworth, ‘Good Faith in Contract Performance’ (n 24) 155.

111  Farnsworth, ‘Good Faith Performance and Commercial Reasonableness under the Uniform Commercial Code’ (n 106) 679.

112  Uniform Commercial Code § 1-201(19).

113  Imad D Abyad, ‘Commercial Reasonableness in Karl Llewellyn’s Uniform Commercial Code Jurisprudence’ (1997) 83 Virginia Law Review 429, 436 (noting that the acceptance of the UCC was a result of several less effective codes in the previous years).

114  E Allan Farnsworth, ‘The Concept of Good Faith in American Law’, Centro di studi e ricerche di diritto comparato e straniero, Saggi, Conferenze e Seminari 10 (Rome 1993) 3

115  Summers, ‘The Conceptualisation of Good Faith in American Contract Law: A General Account’ (n 24); SJ Burton, ‘Breach of Contract and the Common Law Duty to Perform in Good Faith’ (1980) 94(2) Harvard Law Review 369, 369 (hereafter Burton, ‘Breach of Contract and the Common Law Duty to Perform in Good Faith’).

116  E Allan Farnsworth, Farnsworth on Contracts, Volume II (Aspen 1990) 325–32, 310–11 (hereafter Farnsworth, Farnsworth on Contracts); Farnsworth, ‘Good Faith Performance and Commercial Reasonableness under the Uniform Commercial Code’ (n 106) 666.

117  Farnsworth, Farnsworth on Contracts (n 116) 311.

118  ibid, 313.

119  ibid, 329, 331: ‘But courts have often been perplexed as to whether, in particular situations, good faith is to be judged solely by the traditional subjective standard of honesty or also by an objective standard of reasonableness. If the duty of good faith is taken to include a component of fair dealing, this arguably incorporates an objective standard.’

120  Robert Summers, ‘ “Good Faith” in General Contract Law and the Sales Provisions of the Uniform Commercial Code’ (1968) 54(2) Virginia Law Review 195, 200.

121  SJ Burton, ‘More on Good Faith Performance of a Contract: A Reply to Professor Summers’ (1984) 69 Iowa Law Review 497, 499.

122  See generally Farnsworth, Farnsworth on Contracts (n 116) 155.

123  ibid.

124  Kham & Nate’s Shoes No 2 v First Bank, 908 F 2d 1351 (7th Cir 1990) 1357–58.

125  DM Patterson, ‘A Fable from the Seventh Circuit: Frank Easterbrook and Good Faith’ (1991) 76 Iowa Law Review 503, 505, 506, 533.

126  Burton, ‘Breach of Contract and the Common Law Duty to Perform in Good Faith’ (n 115) 371.

127  ibid, 403.

128  ibid.

129  ibid.

130  Filomena Chrico, ‘The Economic Function of Good Faith in European Contract Law’ in Pierre Larouche and Filomena Chrico (eds), Economic Analysis of the DCFR: The Work of the Economic Impact Group within CoPECL (Sellier 2010) 31–44, 36 (hereafter Chrico, ‘The Economic Function of Good Faith in European Contract Law’).

131  Market Street Associates Ltd Partnership v Frey, 941 F 2d 588 (1991), 595; see also Todd D Rakoff, ‘Good Faith in Contract Performance: Market Street Associates Ltd. Partnership v Frey’ (2007) 120 Harvard Law Review 1187, 1191.

132  Michael G Bridge, ‘Does Anglo-Canadian Contract Law Need a Doctrine of Good Faith?’ (1984) 9(4) Canadian Business Law Journal 385, 413.

133  Jori Munukka, ‘Harmonisation of Contract Law: In Search of a Solution to the Good Faith Problem’ (2005) 48 Scandinavian Studies in Law 229, 233.

134  Farnsworth, ‘Good Faith in Contract Performance’ (n 24) 157; R Goode, ‘The Concept of “Good Faith” in English Law’, 2 Saggi, Conferenze e Seminari 3 (Rome 1992) (hereafter Goode, ‘The Concept of “Good Faith” in English Law’); see also Teubner, ‘Legal Irritants’ (n 28).

135  Farnsworth, ‘Good Faith in Contract Performance’ (n 24) 161.

136  Goode, ‘The Concept of “Good Faith” in English Law’ (n 134) (‘[W]hat we like to think—perhaps wrongly—is the world’s leading financial centre, the predictability of the legal outcome of a case is more important than absolute justice. It is necessary in a commercial setting that businessmen at least should know where they stand. The law may be hard, but foreigners who come to litigate in London … will at least know where they stand. We are worried that if our courts become too ready to disturb contractual transactions then commercial men will not know how to plan their business life … The last thing that we want to do is to drive business away by vague concepts of fairness which make judicial decisions unpredictable, and if that means that the outcome of disputes is sometimes hard on a party we regard that as an acceptable price to pay in the interest of the great majority of business litigants.’) This strict resistance to reading contracts in equity can also be observed in Union Eagle Ltd v Golden Achievement Ltd, (1997) AC 514, decided by the Privy Council. Money for the sale of a flat in Hong Kong was transferred ten minutes later than the contract expressly provided, and the Council did not enforce the sale. Time, however, was considered of the essence, and therefore even if an equitable principle of good faith could have been applied to the sale of the contract, such time restraints may have made any application moot. ‘[T]he parties should know with certainty that the terms of the contract will be enforced.’

137  Lando, ‘Is Good Faith an Over-arching General Clause in the Principles of European Contract Law?’ (n 96) 850.

138  Teubner, ‘Legal Irritants’ (n 28) 12; see also Walford v Miles (1992) 2 AC 128 (HL) 138 (noting that ‘[t]he concept of a duty to carry on negotiations in good faith is inherently repugnant to the adversarial position of the parties when involved in negotiation. Each party to the negotiations is entitled to pursue his (or her) own interest, so long as he avoids making misrepresentations … A duty to negotiate in good faith is as unworkable in practice as it is inherently inconsistent with the position of a negotiating party.’)

139  Teubner, ‘Legal Irritants’ (n 28) 12.

141  ibid, 3.

142  Interfoto Picture Library v Stiletto Visual Programmes Ltd [1988] 1 All ER 348: ‘This does not simply mean that they should not deceive each other, a principle which any legal system must recognise; its effect is perhaps most aptly conveyed by such metaphorical colloquialisms as “playing fair”, “coming clean” or “putting one’s cared face upwards on the table”. It is, in essence a principle of fair and open dealing. In many civil law systems … the law of obligations recognises and enforces an overriding principle that in making and carrying out contracts parties should act in good faith … English law has, characteristically, committed itself to no such overriding principle but has developed piecemeal solutions in response to demonstrated problems of fairness.’

143  Daniel Friedman, ‘Good Faith and Remedies for Breach of Contract’ in Jack Beatson and Daniel Friedman (eds), Good Faith and Fault in Contract Law (Clarendon 1995) 399–426 (hereafter Friedman, ‘Good Faith and Remedies for Breach of Contract’).

144  John Klein and Carla Bachechi, ‘Precontractual Liability and the Duty of Good Faith Negotiation in International Transactions’ (1994) 17(1) Houston Journal of International Law 1, 16–17 (hereafter Klein and Bachechi, ‘Precontractual Liability and the Duty of Good Faith Negotiation in International Transactions’); see also Powers, ‘Defining the Undefinable’ (n 83) 335.

145  Marietta Auer, ‘The Structure of Good Faith: A Comparative Study of Good Faith Arguments’ (2006) <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=945594> 21 accessed 30 January 2018 (hereafter Auer, ‘The Structure of Good Faith’).

146  Klein and Bachechi, ‘Precontractual Liability and the Duty of Good Faith Negotiation in International Transactions’ (n 144) 17.

147  Cremades, ‘Good Faith in International Arbitration’ (n 23) 772.

148  ‘The debtor is bound to effect performance according to the requirements of good faith, giving consideration to common usage.’ See Nathalie Hofmann, ‘Interpretation Rules and Good Faith as Obstacles to the UK’s Ratification of the CISG and to the Harmonization of Contract Law in Europe’ (2010) 22 Pace International Law Review 145, 158; German Civil Code § 242. In addition, § 157 BGB provides that ‘contracts shall be interpreted according to the requirements of good faith, ordinary usage being taken into consideration’.

149  Omer Tene, ‘Good Faith in Precontractual Negotiations: A Franco-German-American Perspective’ (2006) Working Paper <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=943383> accessed 30 January 2018 (hereafter Tene, ‘Good Faith in Precontractual Negotiations’).

150  Werner F Ebke and Bettina M Steinhauer, ‘The Doctrine of Good Faith in German Contract Law’ in Jack Beatson and Daniel Friedman (eds), Good Faith and Fault in Contract Law (Clarendon 1995) 171–90, 171 (hereafter Ebke and Steinhauer, ‘The Doctrine of Good Faith in German Contract Law’).

151  Auer, ‘The Structure of Good Faith’ (n 145) 31.

152  Ebke and Steinhauer, ‘The Doctrine of Good Faith in German Contract Law’ (n 150) 171.

153  Judgment of 9 July 1907, Reichsgerichts in Zivilsachen 66, 289.

154  Ebke and Steinhauer, ‘The Doctrine of Good Faith in German Contract Law’ (n 150) 174.

155  ibid.

156  ibid.

157  Auer, ‘The Structure of Good Faith’ (n 145) 21.

158  ibid.

159  Tene, ‘Good Faith in Precontractual Negotiations’ (n 149); NE Nedzel, ‘A Comparative Study of Good Faith, Fair Dealing, and Precontractual Liability’ (1997) 12 Tulane European and Civil Law Forum 97, 155.

160  French Civil Code, Article 1134 (providing that contracts ‘must be performed in good faith’); Cremades, ‘Good Faith in International Arbitration’ (n 23) 771–72. Cremades posits that the French jurists made an intentional link to the goddess Fides of the Roman tradition, as noted previously in this chapter. This link may have extended as far as the inherent religious notions associated with Fides in the protection of contracts. Jean Domat and Robert-Joseph Potheir, as the architects of the French Civil Code, likely found good faith closely associated with Christianity and more specifically the ‘mutual love among mankind’. At the same time, however, the entry into force of the French code allowed for a dissociation with religious law and thus it was stated by Andre Gide that ‘good faith is an essential lay virtue, which simply replaces faith’. Andre Gide, Journal, Volume II (1925–1950) (13 December 1927) 62.

161  Chrico, ‘The Economic Function of Good Faith in European Contract Law’ (n 131) 32.

162  ibid, 33.

163  Cristiano Pettinelli, ‘Good Faith in Contract Law: Two Paths, Two Systems, the Need for Harmonisation’, Diritto & Diritti—Rivista giuridica elettronica pubblicata su Internet (2005) <http://www.diritto.it/archivio/1/20772.pdf> accessed 30 January 2018.

164  ibid.

165  ibid (noting that ‘[s]ubjective good faith deals with the psychological attitude of the party, ignorance of the fact there is an infringement of the rights of another or, positively, the knowledge that one is acting lawfully … Objective good faith … means proper behaviour, loyalty, respect for another’s reliance, as a matter of social solidarity under article 2 of the Constitution’).

166  Chrico, ‘The Economic Function of Good Faith in European Contract Law’ (n 130) 33.

167  Lorena Carvajal-Arenas, Good Faith in the Lex Mercatoria: An Analysis of Arbitral Practice and Major Western Legal Systems (n 100) 92; Judgment no 20106, Suprema Corte di Cassazione (Italian Supreme Court of Cassation), Sezione III Civile (18 September 2009) <http://www.altalex.com/index.php?idnot=47610>.

168  Award No 76/98, 24 November 1999, (2000) 25 Yearbook of Commercial Arbitration 368.

169  Dutch Civil Code Articles 6:2 and 248; Chrico, ‘The Economic Function of Good Faith in European Contract Law’ (n 130) 33.

170  Portuguese Civil Code Article 762(2) which provides: ‘No cumprimento da obrigação, assim como no exercício do direito correspondente, devem as partes proceder de boa fé.’

171  Spanish Civil Code Articles 7 and 1258; Spanish Commercial Code Article 57.

172  Nudrat Maheed, ‘Good Faith and Due Process: Lessons from the Shari’ah’ (2004) 20(1) Arbitration International 91, 101 (hereafter Maheed, ‘Good Faith and Due Process: Lessons from the Shari’ah’).

173  ibid, 101.

174  Qur’an IV:29, as cited in Maheed, ‘Good Faith and Due Process: Lessons from the Shari’ah’ (n 173) 102.

175  Chrico, ‘The Economic Function of Good Faith in European Contract Law’ (n 131). With a particular focus on the CISG, Powers notes that ‘good faith can be defined as an expectation of each party to a contract that the other will honestly and fairly perform his duties under the contract in a manner that is acceptable in the trade community’. Powers, ‘Defining the Undefinable’ (n 83) 351.

176  Kotzur, ‘Good Faith (Bona Fides)’ (n 20).

177  ibid.

178  Chrico states: ‘Among legal scholars and practitioners, “good faith” is often referred to as a fundamental principle, placed at the heart of the law and of all human interactions. It is usually intended as to include duties of fairness, honesty, loyalty, disclosure of information and cooperation with contractual counterparties.’ Chrico, ‘The Economic Function of Good Faith in European Contract Law’ (n 130) 31.

179  Peter Schlechtriem, Good Faith in German Law and in International Uniform Laws (Centro di studi e ricerche di diritto comparato e straniero 1997) 5.

180  Lando, ‘Is Good Faith an Over-arching General Clause in the Principles of European Contract Law?’ (n 96) 853.

181  William W Park, ‘The Arbitrator’s Jurisdiction to Determine Jurisdiction’ in AJ van den Berg (ed), ICCA Congress Series No 13, International Arbitration 2006: Back to Basics? (Kluwer Law International 2008) 3.

182  The same complexity and difficulty in defining a deliberately open-ended term can be seen in ‘commercial reasonableness’. See generally Farnsworth, ‘Good Faith Performance and Commercial Reasonableness under the Uniform Commercial Code’ (n 106) 676 ff.

183  De Trazegnies Granda, ‘Desacralizando la buena fe en el derecho’ [Desecrating the Good Faith in Law], in 2 Tratado de la Buena Fe en el Derecho 19, 43, 45, as cited in Cremades, ‘Good Faith in International Arbitration’ (n 23) 766.

184  See Friedman, ‘Good Faith and Remedies for Breach of Contract’ (n 143) 399–426 (noting that abuse of rights achieves the same results as application of a principle of good faith).

185  The Bürgerliches Gesetzbuch (BGB) (German Civil Code) § 242 provides the principle of good faith should be applied ‘taking customary practice into consideration’. Although other codes or approaches to good faith may not be quite as express in their customary application, there is little doubt that judges apply the principle in accordance with their customary understanding of the requirement.

186  Consider the application of good faith by the German courts during the inflation crisis in the 1930s. See generally, John P Dawson, The Oracles of the Law (University of Michigan Law School 1968) 474; Raphael Powell, ‘Good Faith in Contracts’ (1956) 9 Current Legal Problems 16, 35.