GOOD FAITH AND THE CONTENTS OF CONTRACTS IN EUROPEAN PRIVATE LAW
Matthias E. Storme(1)
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In this contribution, I would like to draw first some conclusions from comparative research and legal theory before dealing with good faith in the Principles of European Contract Law. I will not present you a comparative overview as such, as there are excellent recent publications, such as Good Faith in European Contract Law, edited by Reinhard Zimmermann and Simon Whittaker.(2) At the end of the second part, I will try to indicate the specific role good faith can play in a multi-level legal system such as the actual or future European contract law.
I. Good faith in our legal systems in general
I.1 Three dimensions and three paradoxes
1. In a recent article in the European Review of Private Law,(3) Marietta Auer shows that the debate on the notion of good faith in contract law typically has three dimensions: 'first, a substantive dimension of justification of good faith duties in terms of, for instance, contractual ethics; second, a formal dimension concerned with its structure as a vague standard; and finally, an institutional competence dimension raising the question of judicial freedom and constraint in adjudication based on open standards such as good faith.' The discussion thus consists, according to this essay, of 'controversies between an individualist ethics of freedom of contract and the opposing altruist value of interpersonal responsibility, between the danger of judicial arbitrariness and the demand for equitable flexibility, and, finally, between the legitimacy of judicial law making and the insistence on judicial restraint'.
Indeed, each of these three dimensions gives only a partial view of the role of good faith in European contract law. Moreover, these three dimensions are not necessarily congruent; in fact, they often are not. Even if most applications of the principle of good faith can be seen as inspired rather by a communitarian than by an individualist ethic, others seem to protect individual positions in order to promote certainty in legal relationships, without imposing an altruist logic (e.g. Verwirkung). Further, the fact that one party has to take into account the interests of the other party in a given respect often discharges the other party from a similar duty. Thus, many duties to inform imposed on one party discharge the other party from informing itself on the same point, and thus shift the burden of examination from one party to the other. This raises doubts about the possibility of giving the notion of good faith a substantive meaning.
2. Different views have been developed as to how we should understand good faith, given the different controversies in which it is used as an argument, and the lack of congruency between them. At first sight, it seems tempting to separate these three dimensions and even give them different names in order to promote clarity in doctrine and debate. One could thus eliminate good faith from the first (substantive) dimension and replace it by a duty to co-operate, eliminate it from the second (formal) dimension and replace it by a notion of reasonableness or reasonable expectations, and finally eliminate it from the third (institutional) dimension and replace it by a mechanism of equity granting large powers to the judges. A number of theories have been developed where the function of good faith has been restricted to one of these dimensions (or to the two last ones).
Thus, in the tradition of Latin countries, there is often a tendency to restrict the function of good faith to the first dimension, and the notion to an ethical concept: good faith expresses a moral rule, more specifically an altruist morality, to the extent that the formal rules of law permit it. The contents of good faith may be coloured more subjectively, as in a traditional French view reducing good faith to the absence of bad faith in a subjective sense; they may be coloured more objectively, as in Demogue's theory of the contract as a microcosm, or in Art. 1175 of the Italian Civil Code on the regole della correttezza. What seems to be closing up good faith in the first dimension in reality does not say much about the first dimension, but is rather a statement in favour of a restrictive use of good faith by the judges, and thus rather a position in the formal and/or institutional dimension.
On the other hand, some authors have developed the theory that good faith has no substantive meaning at all, that there is no inner coherence between so-called good faith rules, and that any rule could be based on it. Good faith is in this view merely the sum of all additions and corrections to the old tradition brought about by judges, whatever their content may be, just as 'equity' in English law consists of the addenda and corrigenda to the old common law, and the ius honorarium in classical Roman law consisted of the addenda and corrigenda created by the praetor.(4) The only role of a good faith clause in a contract code would therefore consist in reminding us that judges are creating law. But in a systematic overview of the law, it should not be a separate subject.(5)
Paradoxically enough, those who only see a formal and/or institutional dimension in good faith do not say much about precisely this dimension: how is the judge going to use the power granted under the name of good faith, reasonableness, equity or any similar principle: by incremental change from precedent to precedent or by trying to give substance to very general principles?
3. In favour of the latter theory, it can be said that the justification of a given solution to a case by good faith, is indeed in most cases limited to solutions which are not found in the traditional rules (either the case law tradition or legislation).
On the other hand, it remains so that a series of doctrines are still justified by the good faith principle even after they have been enacted in statutes or incorporated in tradition. Other 'new' solutions, however, are not or no longer justified after a while by good faith even if they are not codified.(6)
Although I certainly have sympathy for the latter theory - and have defended in the past such ideas to a certain extent from a normative point of view(7) - from a descriptive point of view I think it is incorrect. In positive law there still is a substantive dimension in good faith,(8) albeit a very broad one (good faith as a very open norm, but still a norm), a substantive dimension negatively limited by the other two dimensions. In positive contract law, a solution will be seen as an application of the good faith principle, if (and only if) 1) it positively conforms to the open norm (substantive dimension) and 2) does not follow already from another firmly established norm (formal and/or institutional dimension). Once a more specific norm is firmly established, good faith is no longer necessary to justify that rule, but this does not mean that the content of the open norm of good faith can ever be exhausted into more specific norms (herunterkonkretisiert).
Apart from more restrictive substantive notions of good faith, a classical definition of good faith in contract law refers to the need to take into account the legitimate interests of the other party. In my opinion, such a definition does indeed cover the field of good faith.
4. At first sight, this seems to be contradicted by the fact that good faith acts into opposite directions, and more specifically often creates exceptions to rules, which are - or were - also based on good faith. But this paradox can be explained. Any rule, which translates the vague norm into a more specific norm tends to become abstracted from good faith (and live its own life). Whenever a specific rule is developed on the basis of the good faith principle in order to oblige one party to take into account the legitimate interests of the other party, it becomes a specific role in relation to which that other party must in its turn take into account the legitimate interests of the other party. Thus, any rule based on good faith is at a certain moment itself subject to correction based on the good faith principle.
In a historical perspective, many examples can be given of such developments. Thus, good faith has successively served to bind people by formless contracts (pacta nuda) even if there was no equivalence, to give priority to the meaning of contractual terms intended by the parties over their literal meaning, and to give preference to substantive fairness over the intended meaning of the contract. Good faith was thus used both to justify the loss of rights even before the expiration of the prescription period (Verwirkung) and to prevent a debtor to invoke prescription when he induced his creditor to delay the filing of his claim in court.I.2 Rule of construction versus rule of behaviour: Mechanisms of containment
5. Even if the substantive and the other dimensions are not always congruent, there is a large
overlap, and the forms of rule taken by the good faith principle in these dimensions are
convertible. There is a traditional opposition between good faith as a rule of behaviour on the
one hand, and a rule of construction (or development) of the law on the other hand. But there
is no contradiction here:
6. In order to contain communitarian values and guarantee party autonomy, good faith in its substantive dimension is often restricted to a number of specific criteria. The first and most restrictive one is the purely subjective good faith (bad faith in the sense of dishonesty in mind, animus nocendi, etc.). But good faith is usually not restricted to the absence of bad faith and has also given rise to objective standards, first of all a standard of interest (acting without serious or legitimate interest, or with a disproportionately low interest).
7. In order to contain judicial activism, a doctrine of different 'functions' of good faith was developed, trying to specify the principle in its institutional and/or formal dimension. The distinction between those functions has indeed only this meaning, and thus no substantive meaning.
The precise distinction between these different functions may vary, but we commonly
In the French and Belgian traditions, for example, the primary function of good faith is traditionally seen as 'interpretative' (the interpretation of contracts, not of the law, and, more specifically, interpretation according to the common intention of the parties). Paradoxically, however, this function is historically a form of correction in relation to an older rule favouring a literal interpretation.
Sometimes, a separate function is seen where a contract is modified on the basis of the good faith principles (esp. when circumstances have changed) - a 'modifying function'.
However, the distinction between a supplementary and a corrective function is in my opinion highly artificial. Any creation of an additional duty not only supplements the contents of a contract, but also corrects it. Any corrective mechanism based on good faith can inversely be framed in terms of an additional duty.(10)
A much more relevant question concerns the method or style imposed on the judges applying good faith. In this respect, there is a clear opposition between, e.g., Art. 1, II and III of the Swiss ZGB/CC on the one hand and the traditional French conception of the role of the judge on the other. Art. 1, II obliges the judge to do what French ideology forbids him, and forbids him to do what French ideology permits. Indeed, French ideology forbids the judge to create law, but exceptionally permits him to judge according to what equity requires in the specific case; but whenever a judge formulates a rule not recognised by law or tradition as a legal rule in order to justify his solution, he is seen as transgressing his authority. The Swiss Civil Code, however, obliges the judge to formulate a rule, namely the rule he would formulate if he were a legislator, and decide according to that rule. In Swiss law, the formal dimension (namely rule-orientation instead of mere equity) thus prevails over arguments from an institutional nature used in France. Maybe the thoroughly democratic character of Swiss institutions compared to the centralistic perspective on the judiciary in, e.g., France explains the difference.
II Good faith and the contents of contracts in the Principles of European Contract Law (PECL)
II.1 The notion of good faith and fair dealing
8. Let us now turn to the PECL, as they were published in 1999 - i.e. Parts I and II.
Can we infer some definition or delimitation of the concept of good faith from the Principles? The Comments to Art. 1:202 are clearly influenced by a primarily substantive notion of good faith. Although this is only mentioned after a series of more classical specifications, the Comments specifically state that Art. 1:201 'imposes upon each party a duty to observe reasonable standards of fair dealing and to show due regard for the interests of the other party'. They further explain that 'good faith' is primarily a subjective notion and 'fair dealing' an objective one, for which reason they are always used together as a hendiadys, just like Treu und Glauben in German and redelijkheid en billijkheid in Dutch law.
The substantive (rather than formal/institutional) approach also follows from the fact
that a number of specific rules expressly stated in the PECL are still seen as expressions of
'good faith and fair dealing', although they are expressly stated in the blackletter rules. This
is, e.g., the case of:
9. On the other hand, the formal dimension is certainly not absent in the notion of good faith and fair dealing, as it is expressly seen as a means to let justice prevail where 'the law or an otherwise valid contract term may under the circumstances lead to a manifestly unjust result', 'whether in such cases the court should let justice prevail will depend, inter alia, upon to what extent certainty and predictability in contractual relationships would suffer by letting justice get the upper hand.' Equally, good faith and fair dealing are an important factor when implied terms of a contract are to be determined (Article 6:102).
10. Certainly, the real function of good faith and fair dealing in the PECL can only be understood when one sees the interplay with the other rules. Such an interplay does not only relate to performance and non-performance of contracts, but also to formation of contracts. However, I will limit my analysis, given the title of this article, to the contents of contracts, also leaving the precontractual aspects to other contributors.
This brings me to the following paradox:
11. In order to see the role that good faith can play under the PECL, I would like to present a more extensive overview of the different elements determining the contents of contracts. I will take into account not only the PECL, but also the Convention on the International Sale of Goods (Rome Convention - CISG) and the Directive on consumer guarantees (EC Directive 99/44).II.2.a General contract law and specific contracts
12. The PECL only constitute the first part of a project for a European Civil Code, which is also to contain chapters on specific contracts. In order to see how the PECL deal with the contents of contracts, this should be taken into account. In different legal systems, the relationship between the two varies. In some jurisdictions, many things are detailed in General contract law, whereas others leave much to the rules on specific contracts. The PECL do the latter, although the Civil Code project tries to build an intermediate level with rules for service contracts in general.
We will detail below to what extent the contents of contracts are determined by the
general contract rules in the PECL, and see that the PECL remain rather abstract. Anyway,
general contract law must evidently create a minimal framework, namely rules permitting to
13. As in the national legal systems, elements from different sources are 'integrated' into the contents of contracts (to use the current expression in Italian, integrazione del contratto). I will dwell a bit longer on them, even if this exceeds somewhat the subject of good faith, for the reason mentioned, i.e. that the precise role of good faith can only be seen when one also knows the other rules. But here I only deal with rules on the primary contents of contents, not with pre-contractual rules nor with the modification of the primary contents at a later stage (rules in the case of non-performance).II.2.b.1 Express terms
14. A first source of content are its express terms. The PECL contain a set of rules of interpretation in order to determine the effects of express terms (chapter 5).II.2.b.2 Rules to determine undetermined terms
15. As Art. 2:103 PECL already implies, the Principles also contain a set of rules indicating how the terms of a contract can be determined when their definition by the parties is insufficient for the contract to be enforced. More generally, the PECL contain rules to determine undetermined terms of a contract. On the one hand, we find rules enabling the parties to refer the further determination of the terms to a third party or even to one of the parties and at the same time restricting this determination by substituting a reasonable term when the term determined by the party or third party is grossly unreasonable (Arts. 6:105 and 6:106 PECL). On the other hand, we find rules to determine how an undetermined price should be determined (Art. 6:104 PECL: 'Where the contract does not fix the price or the method of determining it, the parties are to be treated as having agreed on a reasonable price'), or an indefinite period can be limited by ending the contract (Art. 6:109 PECL: 'A contract for an indefinite period may be ended by either party by giving notice of reasonable length'). In these articles, good faith is not expressly used, but reasonableness is, and it indicates an application of the 'restrictive' function of good faith.II.2.b.3 Default rules on the modalities of performance
16. Further, the Principles contain specific rules on the modalities of performance, such as:
As to the quality of performance, the Principles thus remain equally vague. Precise rules can be found in specific contracts, e.g. in Uniform sales law, esp. Art. 35 para. 2 CISG, requiring the goods (a) to 'be fit for the purposes for which goods of the same description would ordinarily be used', and Art. 2 para 2(c) and (d) EC Directive 1999/44 (Consumer sales), according to which 'Consumer goods are presumed to be in conformity with the contract if they: . . . (c) are fit for the purposes for which goods of the same type are normally used, and (d) show the quality and performance which are normal in goods of the same type and which the consumer can reasonably expect, given the nature of the goods . . .'
It is not always clearly understood that quality is often a question of duration.(11) An essential element of quality relates to the period during which goods remain fit. Art. 36 CISG appears too restrictive in this respect - the quality is measured at the time of the transfer of risk, 'unless a guarantee was given that for a period of time the goods will remain fit for their ordinary purpose or for some particular purpose or will retain specified qualities or characteristics'. Such a restriction is absent from the Principles.II.2.b.4 Statements giving rise to contractual obligations
17. A dogmatically very interesting provision is found in Art. 6:101 PECL, which reads:
In sales law, there are more specific provisions along the same lines, especially the
provisions requiring the goods:
On the other hand, these requirements are limited by Art. 2 para. 3 EC Directive 99/44 and Art. 35 para. 3 CISG, according to which there will not be deemed to be a lack of conformity, or the seller is not liable for any lack of conformity if at the time of the conclusion of the contract the buyer knew or could not have been unaware of such a lack of conformity.
18. Such provisions imply duties or burdens (i.e. Obliegenheiten) to inform and examine for both parties: the seller should enquire about the purposes of the buyer and the qualities of the goods and inform the buyer about them; the buyer should examine the quality of the goods and inform the seller about his (specific) purposes. In principle, knowledge about specific purposes of the buyer is a responsibility of the buyer and knowledge about the qualities of the goods is a responsibility of the seller. But the intensity of these duties or burdens depends on the position and capacity of the parties, especially their professional status.
Although such duties and burdens are pre-contractual in nature, their sanction is basically contractual: when a buyer does not inform the seller about a specific purpose, being fit for this purpose is not required for the conformity of the goods; when a seller gives erroneous information on the qualities the goods possess, possession of these qualities is nevertheless an element of the required conformity. The content of contractual claims is thus in part determined by the pre-contractual behaviour of the parties.
In modern law, this is also true for obligations relating to specific goods and not only for obligations relating to generic goods (at least as to movable things).(12) Delivery of an individually determined good (species), which does not possess the required qualities, is therefore a case of non-performance of the contractual obligation to deliver conforming goods and not merely a violation of a pre-contractual duty (as was originally the case with the aedilitian guarantees (actio redhibitoria and actio aestimatoria), where the idea was that a seller who had delivered what he had sold, had performed his obligation to deliver the sold goods, even when these goods were defective). A specific, express warranty is not required for this effect. The 'initial impossibility' (of delivering conforming goods) is not relevant in this respect (unless it gives the seller a possibility to avoid the contract for mistake, etc.). The availability, to the buyer, of specific contractual remedies, depends on the reasonableness of claiming repair or replacement. But the sanctions or remedies are anyway contractual and not pre- or extra-contractual in the sense that their measure is the expectation interest (positive interest) and not the reliance interest (negative interest), as in tort law.II.2.b.5 Specific additional remedies in general contract law
19. A number of additional/ancillary contractual obligations, duties or burdens (pre-contractual ones are outside the scope of this article) can be deduced indirectly from the rules
on modification and non-performance. Thus:
Most additional/ancillary contractual obligations, however, are not spelled out in the Principles, and thus have to be deduced from the vague rules on good faith and nature and purpose of the contract: the Principles do not expressly state these duties, but they do state how these duties should be deduced or determined (see II.2.b.6 below).
20. Some commentators - and I agree with them - have already indicated that they wish the Principles to contain more rules on additional or ancillary duties in the general part of contract law.(13) It is indeed better to formulate such duties directly, instead of having them inferred indirectly from the rules on non-performance and remedies. On the other hand, we should not forget that most of these duties are not actionable in themselves (specific performance cannot be claimed) and thus become really relevant only when their violation causes non-performance (in the sense of Art. 1:301 (4) PECL).
In his PhD thesis, M. Hesselink has correctly analysed the doctrine of additional
duties by distinguishing four main categories:
One could also specify some typical categories of burdens leading to the loss of rights or remedies. Here, the most important ones can be deduced indirectly from the rules on remedies for non-performance (e.g. terminating or claiming specific performance within a reasonable time) or other chapters, such as prescription (interrupting prescription before the claim prescribes, etc.). But the burden not to behave inconsistently, and sanctioned by a loss of rights - venire contra factum proprium nulli conceditur - is only mentioned in the comments to the good faith article as a possible application (of the restrictive function of good faith).II.2.b.6 Other - sources of - implied terms
21. Finally, PECL contains a rule indicating the sources for further implied terms, thus
In sales law, the most important additional obligations are contained in the notion of (non-)conformity. The notion also covers additional terms, such as the required packaging (Art. 35 para. 2(d) CISG), the correct installation of the goods or correct installation instructions (Art. 2 para. 5 EC Directive 99/44), etc.II.3 Vague norms and multi-level European law
II.3.a The formal/institutional dimension of vague norms in the PECL
22. Flexibility can be organised in different ways. One way is that of the German BGB: in essence a large number of rather detailed rules, superseded by a super-norm like the good faith clause in BGB § 242. It has been contrasted to the Swiss Code, and the contrast is striking precisely because the two legal systems are substantively rather close to each other.
Zweigert and Kötz have argued that the style of the ZGB is the best style for a European code because of its wide meshes,(15) even the only one if we want to realise an appropriate unification of law in Europe.
Where do the PECL stand on this point? The PECL have to a large extent used that style.
Much more can be said about the style of the Principles - in other publications I have explained that the PECL to a large extent avoid definitions, and have a structure which is moderately effect-oriented (neither purely remedial, nor pseudo-naturalistic). Here, I only want to draw your attention to the fact that vagueness is structured not on the basis of one super-norm, but on a network of rather but not absolutely vague norms, such as good faith and fair dealing, reasonableness as to specific elements (e.g. reasonable time), usages and practices, nature and purpose of the contract, etc.
The authors clearly did not want to use good faith as a § 242 BGB in order not to scare common lawyers too much. We know the notion is, nevertheless, a legal irritant to them, as it is to some continental lawyers.(16)
On the other hand, I miss a principle formulated along the lines of the famous Art. 1 Swiss ZGB, as explained above.II.3.b Vague norms as an instrument to organise sustainable diversity
This brings me to the last question: What degree of uniformity of law do we reach in using such concepts in a European contract law? Meanwhile, it is a well-known criticism of uniform rules that they are not uniform at all, as lawyers tend to understand and apply these rules differently, each from the perspective and experience of their own national (or regional) backgrounds. However, I dare to say that this is partly the wrong discussion. Europe should be harmonised, not homogenised; our identity is multi-layered, and our law should to a certain extent correspond to that. European law may have its head in the sky, but it should not be floating there without also keeping its feet on the ground and keeping its diversity. The correct question in my view is: How can we organise a legal system which combines the necessary uniformity with an equally necessary degree of diversity? This is, first of all, a question of quantity: How uniform should contract law be? But it is also a question of technique. Diversity should be allowed, but a contained and predictable diversity. It must be sufficiently predictable to what extent the uniform rules will be uniformly applied and to what extent their application involves different practices. Therefore these rules themselves should organise diversity by indicating the elements of variety, which may and will play a role. Reference to usages and practices is clearly part of this technique. If correctly used, good faith and reasonableness are therefore instruments which allow us to take into account national and regional differences in an appropriate way.
1. Professor by special appointment at the Catholic University of Leuven and Professor at the University of Antwerp; member CECL and SGECC.
2. R. Zimmermann & S. Whittaker (eds.), Good Faith in European Contract Law, Cambridge [etc.], Cambridge University Press 2000. See also F. Ranieri, Europäisches Obligationenrecht, Wien/New York, Springer 1999, ch. 9 (pp. 225 ff.).
3. M. Auer, 'Good Faith: A Semiotic Approach', ERPL 2002, 279 ff.
4. See for this view e.g. M.W. Hesselink, De redelijkheid en billijkheid in het Europese privaatrecht. Good faith in European private law, Deventer, Kluwer 1999, also summarized as 'Chapter 18. Good faith' in A. Hartkamp et al. (eds.), Towards a European Civil Code, 2nd rev. and expanded edn., Nijmegen, Ars Aequi Libri/The Hague [etc.], Kluwer Law International 1998, pp. 285 ff.
5. Although not theoretically explicit on this point, a practical application is made by H. Kötz, Europäisches Vertragsrecht, I, Tübingen, Mohr 1996, as good faith is not at all a subject in this treatise, but the solutions based on good faith are widely dealt with.
6. E.g., Zimmermann & Whittaker, 'Coming to Terms with Good Faith', in Good Faith in European Contract Law, pp. 676 ff.
7. My PhD thesis, De invloed van de goede trouw op kontraktuele schuldvorderingen Leuven 1989/Antwerpen, Kluwer 1990.
8. Cf. the conclusion of Zimmermann & Whittaker, 'Coming to Terms with Good Faith', p. 699: 'Good faith is not devoid of meaning, a pious hope or simply a super-technique waiting to be put to whatever legal end a legal system wishes (though it may act as a super-technique if required).'
9. The doctrine of different function was revived by Siebert and Wieacker, tracing it back essentially to Papinianus' comment on the ius honorarium (or ius praetorium) as adiuvandi vel supplendi vel corrigendi iuris civilis; W. Siebert, Verwirkung und Unzulässigkeit der Rechtsausübung, Berlin 1934; F. Wieacker, Zur rechtstheoretischen Präzisierung des §§ 242 BGB, Tübingen 1956.
10. A classical example is the conversion of hardship into a duty to renegotiate.
11. See, e.g. H. Gross & F.J. Wittmann, 'Technischer Zuverlässigkeit als Gegenstand kaufvertraglicher Regelung', BB (Betriebsberater), 1988, 1126.
12. Cf. also P. Schlechtriem, '10 Jahre CISG. Der Einfluß des UN-Kaufrechts auf die Entwicklung des deutschen und des internationalen Schuldrechts', IHR 2001, (12) 14 No. 2.
13. E.g. M. Hesselink, Principles of European Contract Law, Preadviezen voor de Vereniging voor burgerlijk recht, [Deventer], Kluwer 2001, p. 62.
14. Hesselink, 'Good Faith', p. 295.
15. K. Zweigert & H. Kötz, Einführung in die Rechtsvergleichung auf dem Gebiete des Privatrechts, 3rd edn., Tübingen Mohr 1996, p. 175: 'Einmal deshalb, weil ohne gewisse kalkulierte Spielräume richterlicher Bewegungsfreiheit eine Rechtsvereinheitlichung europäischen Zuschnitts nicht realisierbar erscheint, zum anderen deshalb, weil wir den Vorgang, in dem der Richter die Tragweite einer geräumig gafaßten Gesetzesbestimmung allmählich entfaltet, inzwischen besser verstehen und schätzen gelernt haben und in ihm nicht mehr eine gefährliche Bedrohung der Rechtssicherheit sehen.'
16. See the article by G. Teubner, 'Legal Irritants: Good Faith in British Law or How Unifying Law Ends Up in New Divergences', 61 Modern Law Review 1998, 11.