Author: Claire Hellweg**
| Jurisdiction: International |
Topics: Contract Interpretation |
The topic that Prof. Dr. Mohamed S. Abdel Wahab† discusses in this TagTime episode concerns a discussion about good faith.[1] This blog is a brief summary of Dr. Abdel Wahab’s presentation on this topic. All of the following points are taken from that presentation and are not my own.
There is a varying scope of good faith used in legal systems, but many authorities indicate that good faith is a general principle of law. However, within this overarching general principle, there is no established definition or scope of good faith that caters to all aspects and all jurisdictions. For example, in US law, the Uniform Commercial Code has references to good faith but in English law, there are only applications of good faith and there is no general doctrine.
There are also certain key misconceptions about good faith. These include:
(1) Good faith is inconsistent with pacta sunt servanda;
(2) Good faith can contradict express contractual terms;
(3) Good faith brings uncertainty;
(4) Invoking breaches of good faith demonstrate a weak argument;
(5) Good faith plays no role in sophisticated contracts;
(6) Good faith must be codified; and
(7) Good faith is only substantive.
Analyzing and dispensing with these misconceptions presents an opportunity to have a meaningful discussion and tolerate different views about what good faith is, how it should be applied, and the manner in which it should be invoked.
One way to examine good faith is to also examine neighboring doctrines in common and civil law jurisdictions, as well as in commercial and investment arbitration. “Neighboring doctrines” refers to concepts or applications that are similar to and/or connected to good faith. Some of these neighboring doctrines in commercial arbitration include pacta sunt servanda, abuse of rights in contracts, implied terms, estoppel, mitigation of harm, ratification, and equity. Some of the neighboring doctrines in investment arbitration include legitimate expectations, fair and equitable treatment, full protection and security, non-discrimination, and non-expropriation.
One way to examine the scope of good faith is to ask to what extent would good faith apply to:
(1) Precontractual negotiations;
(2) Conclusion of contracts.
(3) All or some contracts;
(4) Interpretation of contracts;
(5) Performance of obligations; and
(6) Termination and rescission.
Good faith plays a role in all of the above areas. However, the extent to which each of these areas includes aspects of good faith varies by jurisdiction. For example, one question to ask is whether good faith applies to all or some contracts. In some jurisdictions good faith requirements apply to all contracts but in others, it does not. For instance, England has found that the general principle of good faith does not apply to all contracts but it applies to certain contracts.
What is the scope of good faith in terms of the interpretation of contracts? One normally compares civil and common law principles and finds there are many aspects of interpretation that apply across the board with the likely difference being the label used. When you look beyond the label, you may well find similar concepts across jurisdictions. One example of this is the finding that absurd interpretations are generally not welcome. Another example of how good faith is used across jurisdictions relates to termination and recission. In some jurisdictions, to terminate a contract for breach by the other party, the terminating party must have “clean hands” (as in, acting in good faith).
One question that arises surrounding good faith disputes asks which specific obligations does each party owe? To help answer this question, one can look to derivative obligations. This idea comes from the chance that a tribunal might acknowledge a party is pleading good faith, but might ask, “How can we rule on the basis of good faith? What do we need to do to give you a judgment or award on good faith?” Some obligations to examine include:
(1) An obligation of cooperation amongst the contracting parties;
(2) An obligation to transparently disclose any matter or event that may impact or influence the performance of the contract;
(3) An implied obligation to avert any act or omission that may adversely impact the performance of the contract;
(4) An obligation to pursue the most suitable method of performance when there are two or more alternative methods;
(5) An obligation to act reasonably and avert abuse of discretionary power(s) or right(s);
(6) An obligation not to misrepresent facts;
(7) An obligation to notify the other contracting party within a reasonable period of time when a notification is required but no agreed time;
(8) An obligation to avert dilatory and surreptitious behavior;
(9) An obligation to act prudently and observe commercial standards of dealing;
(10) An obligation to act in accordance with the objective(s) of the contract and the justified [legitimate] expectations of the parties;
(11) An obligation not to deviate from the purpose the right was prescribed for;
(12) An obligation to give effect to the parties’ agreement and avoid absurd interpretations;
(13) An obligation to reasonably mitigate damage/harm;
(14) An obligation to avoid any third-party communications and dealings that jeopardize and/or adversely impact existing obligations; and
(15) An obligation to avoid reaping undue benefits and advantages at the expense (or to the detriment) of the other party.
It is worth pointing out that breach of any of these obligations does not automatically mean the party is acting fraudulently. This is because to make an allegation of fraud, there must also be intent. There must be something more, other than not being consistent with good faith. Violating the above obligations would not be in line with good faith principles.
After analyzing these good faith concepts, it is also important to consider its practical applications. In the international arbitration context, tribunals are not shying away from using and utilizing good faith when necessary. One award in the institutional arbitration area is particularly interesting. There was a case where the discussion involved a contract governed by English law, where there is no general good faith principle. However, even under English law, if the parties agreed to a good faith provision, then it becomes part of the applicable English law. Since the contract in the case contained express reference to good faith and fair dealing, the tribunal said the references must be given full effect and importance, which is in line with pacta sunt servanda.
Dr. Abdel Wahab concludes with few further remarks about good faith. Although good faith is a principle rooted in civil law and Islamic Shari’a systems, it is not alien to common law jurisdictions. Even in these common law systems, there are good faith applications and incorporation by express reference in legislative provisions. Everyone agrees that principles of good faith and fair dealing should be upheld. The disagreements about good faith revolve around the application or scope of fair dealing. Common law jurisdictions favor more concrete solutions and has developed a doctrine of precedents, but civil law jurisdictions proceed differently. In civil law, there is generally not the type of distinguishing, fact-specific test that exists in common law. Civil law instead uses the general law to apply to specific cases.
Further, good faith and pacta sunt servanda are not contradictory but rather complementary, as seen in the case discussed above. Good faith is not devised to contravene express terms. It is a tool used to give effect to the contract and supplement same to the extent necessary. Good faith is a principle that is capable of governing all aspects of the contractual relationship and remains a source of rights and obligations irrespective of the levels of sophistication of a contract. Good faith also has neighboring doctrines that should be considered by parties when making informed choices about their contracts and how they relate to governing laws. Good faith is not necessarily an uncertain or unpredictable concept. The lack of knowledge about its application contributes to uncertainty. However, considering its variants and derivatives can offer guidance to help dispel this common misconception (and other misconceptions). As of now, the codified UNIDROIT principles can also help determine the scope of good faith to offer further guidance. Arbitrators who are not familiar with the scope and specificities of good faith should be aware of their potential biases and should be willing to understand and learn.
Finally, Dr. Abdel Wahab offers a roadmap for tribunals and counsel seeking to create a well-reasoned award or a winning argument. To accomplish these goals, parties should be able to address and evidence the following:
(1) Is the doctrine invoked relied upon as an express or implied obligation?
(2) What is/are the base(s) for invoking that specific doctrine?
(3) What specific breaches of the invoked doctrine are claimed?
(4) What facts and authorities support the claim(s)?
(5) How and in what way does the doctrine invoked impact the relief sought?
(6) Is the relief sought declaratory or constitutive?
(7) To the extent monetary damages are claimed, how was the quantum calculated for the breach of the invoked doctrine?
Parties should analyze these questions to formulate a winning argument on good faith and neighboring concepts.
[1] Mohamed S. Abdel Wahab, Good Faith and Neighbouring Doctrines: Conceptual Considerations and Practical Application in International Arbitration, TagTime (June 24, 2020), available at https://member-delosdr.org/video-tagtime-prof-mohamed-s-abdel-wahab-on-good-faith-and-neighbouring-doctrines-conceptual-considerations-and-practical-applications-in-international-arbitration/.
* This post is part of a series summarizing episodes of Delos Disputes Resolution TagTime webinars. A list of past TagTime webinars is available at https://delosdr.org/index.php/past-webinars/.
** J.D. Candidate 2022, Columbia Law School.
† Founding Partner & Head of International Arbitration, Construction, Oil & Gas and Projects Groups, Zulficar & Partners. Prof. Dr. Abdel Wahab is the Chair of the Private International law Department and Professor of International Arbitration at Cairo University; Vice President of the ICC International Court of Arbitration; Member of the ICCA Governing Board; Vice- Chair, IBA Arab Regional Forum; Member of the CRCICA Advisory Committee; Member of the Advisory Board, Mauritius International Arbitration Centre (MIAC); Member of the Board of Trustees of the Chartered Institute of Arbitrators; Vice Chair, Academic Forum for Investor-State Dispute Settlement; Court Member of the CIMAC; Dean and Member of the Advisory Council of the Africa Arbitration Academy; Member of Arbitrator Intelligence’s Board of Advisors Member of AAA- ICDR International Advisory Committee; and Member of the SIAC African Users’ Council’s Committee.