Good faith in the performance of a contract: building bridges - - PowerPoint PPT Presentation

Dr Séverine Saintier Good faith conference Montreal (10-11 May 2018)

Good faith in the performance of a contract: building bridges between common and civil law systems

Introduction (1)

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— Good faith: divisive doctrine creates enduring paradox: notion

present in most legal systems and in numerous EU/international texts yet notion still misunderstood and controversial

— Aim of presentation: attempt to untangle some of the tensions

surrounding the notion, with specific reference to English, Canadian and French laws, to see whether indeed the concept ‘in itself should not keep common and civil lawyers divided’ (Hesselink).

— Civil /common law divide still present and relevant for debate

— Yam Seng v ITC [2013] EWHC 111 (QB) (Leggatt J) and Bhasin v

Hrynew 2014 SCC 71 SCC (Cromwell J): lack of GF is a gap in English and Canadian laws BUT clear determination not to emulate civilian cousin

— Impact in UK and Canada: lukewarm/mixed judicial response:

traditional hostility against (civilian) GF: incompatible with

• commerce. Doctrine divided too. But (in UK) signs that things are

changing?

Introduction (2)

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— Divisiveness surprising since questions/fears at the core

(definition/role/function of good faith) transcend frontiers.

— Obsession with definition of good faith: far more important:

consider how the notion is applied by the civil and common law courts to highlight similarities.

— Part 1: English (and Canadian) positions: cautious acceptance of

good faith as a comportmental norm with a basis on honesty and cooperation: social contractual norm: (express and implied terms

• f good faith). Similarities with France.

— Part 2: good faith beyond honesty? More difficult BUT notion has

not disappeared in the UK: Al Nehayan v Ionnis Kent [2018] EWHC 333 (Comm): relational contracts: emerging concept? Ted Baker v AXA Insurance [2017] EWCA Civ 4097: commercial world: no cut- throat business: duty to speak. For Canada, position seemingly more mixed: BC Ltd v Timber West 2014 BCSC 2433 and Greater Vancouver Sewerage v Wastech 2018 BCSC 605

Yam Seng and Bhasin: one step forward?

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— Leggatt J in Yam Seng and Cromwell J in Bhasin:

— Lack of good faith: a gap in England/Canada compared to the rest of the world — For GF to work: need to place the notion in the English/Canadian context: duty

• f honesty: logical step in the development of English common law as can be

drawn from existing norms: contextual approach. (recognition of the dichotomy between fiduciary relations and other contracts: too simplistic for Leggatt J: reference to cooperation and loyalty: good faith as a spectrum of obligations); for Cromwell J, cooperation: to have appropriate regard for the other party’s interests

— Contextual approach also in France: good faith not defined but notion used by

French courts as comportmental norm, rule of conduct:

— Courts require particular duties of the parties arising out of good faith: loyalty,

cooperation (and coherence): compensation if broken. ‘Cooperation’ varies depending on nature of contract: contextual approach: good faith as a spectrum

• f obligations. Distinction ‘contrats échange’and ‘contrats relationnels/alliance’

— Parties required to use their contractual duties in good faith, not to abuse them:

‘cooperation’ also relevant

— In both instances, control exerted by courts to preserve equilibrium of contract

Post Yam Seng and Bhasin: 2 steps back?

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— Reaction to Yam Seng? Reaffirmation that NO general duty of good

faith by CA: Compass Group UK v Mid Essex [2013] EWCACiv 200, MSC Mediterranean [2016] EWCACiv 789

— Reaction to Bhasin: particularly critical in Greater Vancouver Sewage

District v Wastech Service 2018 BCSC 605

— Weaknesses of Yam Seng:

— Has to be seen in light of Marks & Spencers v BNP Paribas (addressed by Leggatt

J in Al Nehayan v Kent [2018] EWHC 333 (Comm) at [174])

— Clear limits to implied term as a method to introduce good faith

(implication in fact must give way in the face of inconsistent terms: TSG Building Services [2013] EWHC 1151 (TCC) and nature of the relation: Acer Investment Management v Mansion Group [2014] EWHC 3011 (QB)

— Good faith ONLY a component of the implied term and not overarching

principle (McKendrick).

Fear of wide good faith requirement (1)

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— Hamsard 3147 Ltd v Boots: good faith: ‘to approach one

another on an open and collaborative basis, so as to ensure that they maximised the net profits generated under the agreement’. Norris J ‘there could be an implied term not to do anything to frustrate the purpose of the contract’ but this would not imply ‘a positive obligation to subordinate its own commercial interests to those of the other contracting party’

— Link with contractual discretion: cannot impinge a decision

whether to terminate the contract: Ilkerler Otomotiv [2017] EWCACiv 160

— Fear of subordination of interest to other party: UK clearly

not alone (France, Canada, Australia). Linked to misunderstanding of notion of cooperation (and relational contracts)

Fear of wide good faith requirement (2)

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— Same fear in France and rebutted: cooperation: altruism part

• f good faith/cooperation but NO need for complete

subordination

— Although good faith in France used to protect economic

substance of the deal: limited to a particular type of contract (Cass Com 3-11-1992, BP v Michel Huard; Cass Com 24-11-1998 Danone v Chevassus Marche) and now covered by imprévision and NOT good faith following 2016 reform of civil code

— No need for submission of interest of other party also adopted

in US, Australia, Canada: cooperation has clear limits

Breach of GF: not defined

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— A further parallel with French law: breach of GF not clearly

defined in Yam Seng. Leggatt J could be forgiven for this for 2 reasons:

— To define GF by reference to what it is not serves limited purpose — Difficult to establish what behaviour goes against GF: subjective

element

— Solution in France: objective assessment which Leggatt J also does: : ‘a

key aspect of GF is the observance of standards’ [138]. Notion developed in Bristol Groundschool Ltd [2014] EWHC 2145 and D&G Cars Ltd v Essex Police Authority [2015] EWHC 226 (QB): integrity.

— GF in this context used as a standard, social contractual norm.

Parallels with French notion of GF

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— GF applied by UK/Canadian courts in areas of implied

and express terms, although it has limits

— Yet, broad consensus that GF includes honesty as a

minimum but broader than merely avoiding fraud and deception and clear that only a serious breach will amount to bad faith.

— Good faith as cooperation is a tool to combat dishonest/

disloyal behaviour: common step between both systems is important to highlight similarity (parallel with US notion of excluder).

— GF not easily defined: vagueness is also an asset as

flexible.

— A wider role for good faith: good faith beyond honesty?

Good faith beyond honesty (1)

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— Good faith’s role in the control of contractual discretion noted by Supreme Court:

Braganza v BP Shipping [2015] UKSC 17 approving Socimer.

— Precise role unclear (Hooley) — Scope of control limited: Compass Group UK v Mid Essex Hospital CA held: only

applies where a discretion requires ‘making an assessment or choosing from a range of

• ptions’ which involves taking into account the interest of both parties, but not when the

discretion is simply ‘whether or not to exercise an absolute contractual right’ (at [83]). So, no impact on right to terminate: Ilkerler Otomotiv [2017] EWCACiv 183

— Leggatt’s challenge of distinction rejected by CA in MSC Mediterranean — Inconsistency in area: compare and contrast with Federal-Mogul Asbestos Personal Injury

Fund [2014] EWHC 2002 (Comm). Distinction unsatisfactory since basis for distinction unclear.

— Once again: question over the role of cooperation and fear of subordination of

• interest. How much the party exercising discretion has to take into account of the
• ther’s interests before exercising discretion.

Good faith beyond honesty (2)

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— French law: similar concern over the role of cooperation and how

much to pay attention to the interest of the other party when using discretion? Link with the second role of good faith through the notion of abus de droit (abuse of a contractual right): GF as a restrictive function

— French courts control over the arbitrary use of a contractual right

(Cass Civ 1ère, 10-11-2010): clear parallel with Socimer where held that the decision-maker must not abuse his contractual power.

— France: no criteria for ‘abus’, but relative strength of power of parties

important: parallel with Braganza v BP Shipping Ltd: ‘the party who is charged with making decisions which affect the rights of both parties to the contract has a clear conflict of interest’ which is heightened when there is a ‘significant imbalance of power’ (at [18], per Lady Hale).

Good faith beyond honesty (3)

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— Big difference: in France, abus can apply over termination clauses (Civ

1ère 14-3-1956).

— Scope of cooperation? How much consideration to pay to the other

party’s interests:

— UK: none: Ilkerler Otomotiv [2017] EWCA Civ 183: Longmore J: the

requirements of communication and cooperation apply during

• performance. To extend them at termination ‘would take one into a

different realm altogether’ (at [30]).

— France and Canada: answer more subtle: no obligation to assist (Cass Com

6-5-2002) BUT if one plays a part, the interests of the other party must be considered (Cass Com 8-10-2013). BC Ltd v Timber West: conflict of interest too strong [at 306-308]

— Can/should GF negate self-interest altogether? Resounding no in

France (Cass Com 6-5-2002, overruling France Motor v Garage Schouwer (Cass Com 17-1-2002)), the UK (MSC Mediterranean Shipping Co v Cottonex [2016] EWCACiv 789 and Monk v Largo Foods) and Canada (Bhasin; BC Ltd v Timber West)

So, where to now?

Tips for successful assessment in the LLM 13

— Common ground between UK/France/Canada:

— Similar distinction of ‘exchange contracts’ and ‘relational contracts’ — Control to prevent the ‘oppor tunity for manipulation or

exploitation’ (Markovits, US): conflict of interest in Canada, furtive/

• pportunistic behaviour in UK (Al Nehayan at [176].

— BUT still crucial differences between France and the UK over scope of control

(termination). How/can /should this be overcome?

— Potential solution: focus on relational contracts and notion of commonality of

interest (French notion in commercial agency contracts).

— Emerging paradigm of relational contracts: 4 criteria: a long-term relation;

investment of substantial resources by both parties; implicit expectations of co-

• peration and loyalty that shape performance to give business efficacy to the

project and implicit expectations of mutual trust and confidence (Prof. Collins)

— Most important one: commonality of interest (France) and good faith/

cooperation: not to each other but to the common interest: this understood by Leggatt J Al Nehayan v Kent [2018] EWHC 333 (Comm): interests interlinked [at 173]. Also present in BC Ltd v Timber through conflicting strategy (at [308])

Conclusion

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— Good faith: not as divisive in practice as perceived to be in

theory: similar underlying values in France and in the UK:

— Case law shows: — Good faith not the ‘danger’ it is perceived to be — Good faith in France, the UK and Canada has clear limits — As for a wider role for good faith: similar focus on avoiding

‘opportunity for exploitation’: France, the UK, Canada

— Bridging the common/civil (continental) divide: a

possibility (at least) to reconcile the dichotomy of adversariality (parties at arms’ length) and the theme of ‘reasonable expectations of honest men’