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Reproduced with permission from 15 Liverpool Law Review (1993) 115-141

Good Faith in International Transactions

John Klein [*]

Introduction

In the brave new world of the fax machine and computer modem international business deals are increasingly completed with little or no face-to-face contact. While parties to international sales transactions may save a few guilder by forgoing the proverbial business lunch in Rotterdam, the benefits of technology do not come without a price. More is lost than idle chatter about the markets or the folks back at the office — the parties also lose valuable opportunities to weigh the trustworthiness of prospective business associates and to signify with a closing handshake their intent to deal fairly with each other.

The importance of mutual confidence between parties to international sales transactions can hardly be underestimated. To ensure such confidence, all involved must possess an unambiguous understanding of the obligation to act in good faith. Unfortunately, formulating a clear picture of this obligation is not always easy given the varying constructions and inherent ambiguities which surround the notion of good faith. But even if these uncertainties are inescapable, one can nevertheless set out a thumbnail definition of the term by adopting the reverse of the famous test Justice Stewart used to give meaning to an unrelated but equally ambiguous expression.[1] In the case of good faith, you’ll know it when you don’t see it.

Ambiguous or not, good faith is typically expected at all levels of [page 115][**] the contractual process — beginning with the negotiation [2] stage and continuing through each level of performance. When disputes arise, the good faith obligation can extend even beyond the contractual process, governing conduct during subsequent litigation or arbitration proceedings. This paper will discuss the good faith obligation in the context of contracts formed under the United Nations Convention on Contracts for the International Sale of Goods (CISG).[3] Part I includes a brief overview of the historical underpinnings of good faith in the contractual process. Part II explains the CISG’s treatment of the good faith obligation, considering both the explicit and implicit demands of good faith on parties to international sales transactions. Part III discusses some of the practical considerations surrounding good faith as a cause of action in the international sales context.

I. A Historical Overview of Good Faith in the Contractual Process

A. Early Influences on the Modern Conception of Good Faith

At a fundamental level, the demands of good faith can be seen as having originated with the rise of civilization itself. As one commentator has noted, "[t]he development of human culture  . . . originated with the formation of human groups . . . Group-living at any level only becomes possible if there is some sort of minimal co-operation and tolerance  . . . From that necessity, the emergence of [the] concept of good faith would seem to be inevitable."[4] While such a generalized conception of good faith bears only the most basic relationship to its subsequent embodiment as a modern contractual principle, the continuing implications of good faith as "co-operation and tolerance" should be clear when one considers the intricate matrix of social and contractual relationships which characterizes modern society.

Good faith as a legal principle was first fixed by the Romans with the legislation of the Twelve Tables in 450 B.C.[5] The introduction of [page 116] the concept of good faith greatly extended the discretion afforded to Roman magistrates, allowing them to reach beyond strict statutory formalism and adjudicate claims ex fide bona, i.e., according to the requirement of contractual good faith. Over time, the good faith obligation extended to agreements covering partnerships, sales, land leases, tutelage, and the hire of services.[6] At the core of the Roman good obligation was the rule pacta sunt servanda, considered by many to be the "basic rule" of good faith.[7] According to the ancient jurist Justinian’s formulation, Pacta sunt servanda stands for the principle that "What is so suitable to the good of mankind as to observe those things which parties have agreed upon."[8]

The fall of the Roman Empire and the concomitant rise of Christianity as a dominant force in Western civilization led to further refinements in the principle of good faith. The notion of good conscience emerged as an important element in the "Christianization" of Roman law and was routinely employed by the Church in determining the obligations of its members.[9] But good faith obligations were by no means limited to purely religious considerations, for the spiritual realm was deemed to encompass virtually every aspect of human interaction. The Church began to exercise jurisdiction over civil matters as early as the Council of Nicea in 325, a practice which expanded through the Middle Ages.[10] The ecclesiastical courts asserted jurisdiction over contractual disputes on the theory that good faith was a test of the sanctity of contractual obligations.[11]

The notion of good faith was further refined by the development of Scholasticism in the Thirteenth Century. St. Thomas Aquinas, foremost among the Scholastic philosophers, first brought the concept of good faith under the natural law paradigm.[12] Thomistic philosophy regards good faith as a precept of natural law, and, consequently, as a precept of all laws, both canon and secular. Later Scholastics, notably [page 117] Francisco Suarez, worked to define more precisely the scope of the good faith obligation as applied to secular considerations.[13] The continuing relevance of the Scholastic view of good faith is readily apparent in light of the decline of the caveat emptor doctrine and the rise of criminal penalties for fraudulent business practices. Under the Thomistic view, contracts entered into under the influence of duress or fraud are "not only evil, but also invalid."[14]

However, religious influences represent only part of the picture. The rise of the merchant class in the eleventh and twelfth centuries also significantly influenced the development of the good faith obligation in contractual relationships. To facilitate the growth of the commercial sector, a new focus on reciprocity of rights was emphasized by Europe’s new class of professional merchants.[15] The focus on reciprocity envisions a fair exchange between the parties to commercial transactions, manifested by a roughly equal distribution the benefits and burdens of the contract.[16] While "fairness" was never characterized as complete equality under the bargain, the modern tendency of courts to scrutinize relative bargaining power as a factor in good faith analysis can be traced to these early mercantilist reforms.

B. Good Faith in Common Law Systems

The common law approach to good faith is marked by a distinctive emphasis of the economic consequences of the contractual relationship. The focal point of the common law consideration of good faith often rests on the relationship between law and equity "in terms of the attempt to enforce, as law, a minimum range of moral duties."[17] The early development of separate courts of law and equity in England adds an important dimension to any discussion of good faith in common law systems because this separation is considered by many to be the root cause of the common law’s relatively limited range of specific good faith duties. Beginning with Henry II, the [page 118] prelates of the Church controlled the English Court of Equity. As one commentator has noted, the emphasis on the good faith obligation was far greater in Court of Equity than in the Court of Law because for the former, "[t]he principle which lies deepest in its structure is good faith  . . . [T]he jurisdiction of the Court [of Equity] was based on it."[18]

However, as the influence of the English legal courts began to take precedence over that of the ecclesiastical courts, the notion of good faith assumed a more limited role. By the time the American legal system began to develop, the dominance of the legal courts had become so entrenched that the colonists dispensed with most of the old distinctions between law and equity. Economic, rather than strictly moral, considerations of good faith fit well with the individualistic, "manifest destiny" philosophy that characterized the American mindset in the nineteenth and early twentieth centuries. The treatment of good faith in the American Uniform Commercial Code (UCC) reflects the common law view of the good faith obligation by defining the term as "honesty in fact" in most situations. The "honesty in fact" [19] standard harkens back to the "white heart, empty head" standard of the common law — i.e., that good faith is generally best defined subjectively and without regard to the reasonableness of the party’s actions. As long as one’s heart is in the right place, uncomplicated idiocy of viewpoint is of no matter. However, the UCC is not devoid of reasonableness considerations with regard to good faith; when the party in question is a merchant, good faith is defined separately under Section 2-103(b):

" 'Good faith' in the case of a merchant means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade."[20]

C. Good Faith in Civil Law Systems

As in common law systems, the good faith principle in civil law countries owes much to the Roman and canon law traditions. [page 119] However, it has been said that while civil law formulations of the good faith obligation vary widely from nation to nation,[21] the following description of the German Civil Code’s approach to good faith may be applied by analogy to most civil law codifications:

"[The drafters of the German Civil Code] sought to lay down abstractly formulated rules , couched in terms of rigidly defined concepts and comprising as many individual solutions as possible  . . . Still, they had sufficient insight into the variety and variability of life-situations to insert into the Code a number of blanket concepts such as 'good faith' (Treu und Glauben), ‘good morals’ (gute Sitten), ‘fairness’ (Billigkeit), and the like, which gave some leeway for judicial law-finding.[22]

A much discussed difference between the common and civil law approaches to the good faith obligation hinges on the tendency of civil law courts to impose the duty of good faith at an earlier point in the contractual process — during the negotiation stage. For example, in Société Muroiterie Fraisse v. Micon et Autres,[23] a French Court of Appeals noted:

"[I]t must be recognised . . . that in the preliminary phase of negotiations, during which the conditions of the contemplated contract are studied and discussed, certain obligations of rectitude and good faith rest on the parties; these obligations clearly relate not to the conclusion of the eventual contract but to the conduct of the negotiators themselves."[24]

Thus, in civil law countries, refusing to continue with contractual negotiations without justification is often deemed violative of good faith.[25] In subsequent litigation over a bad faith refusal to continue negotiations or otherwise conform to the demand for good faith negotiations, the extent of the allegedly abusive behaviour is relevant to the determination of liability for damages resulting from the breach of the good faith obligation.[26] [page 120]

II. Good Faith in the CISG

A. Good Faith as an Explicit Requirement of the CISG —"Interpretation" as Safe Middle Ground

One of the primary differences between the treatment of good faith under the UCC and the CISG is the extent which the term is referred to in each system. While good faith requirements are found in some fifty separate provisions of the UCC, the CISG refers to the doctrine only once, in Article 7(1). Article 7(1) states that "[i]n the interpretation of [the CISG], regard is to be had  . . . to the need to promote  . . . the observance of good faith in international trade."[27]

Perhaps the most common misconception about the broad language of Article 7(1) is that it is intended to serve as an all-purpose or "catch all" provision, encompassing all conduct falling under the scope of the Convention. This misconception stems from the tendency to overlook the fact that Article 7 is limited to the interpretation of the CISG. In other words, Article 7 applies not to the interpretation of the contract itself, but rather imposes an obligation to interpret the Convention in good faith as it relates to the contract. Consequently, some commentators argue that Article 7, by itself, imposes no good faith obligation on the parties to the contract, at least to the extent that they are not required to look to the CISG to resolve disputes about good faith.[28] The absence of an explicit requirement for the parties to act in good faith is in marked contrast to the unequivocal language contained in the UCC’s primary good faith provision, Section 1-203: "Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement."[29]

B. Drafting History of Article 7

The limitations of Article 7 are perhaps best understood in light of [page 121] the controversy which surrounded the drafting of the provision, and mindful of the differences between common law and civil law conceptions of good faith as discussed above.[30] The exact nature of the Convention’s good faith obligation, and, indeed, whether any good faith requirement was advisable in the first place, were hotly contested issues within the United Nations Commission on International Trade Law ("UNCITRAL"), the body charged with drafting the CISG.[31]

Proposals representing both the civilian and common law perspectives were considered by UNCITRAL’s Working Group on International Sales. The civil law perspective is well-illustrated by a 1977 proposal from a Hungarian member of the Working Group: "In the course of the formation of the contract the parties must observe the principles of fair dealing and act in good faith."[32] Although the proposal was subsequently adopted by the Working Group, it was rejected by a majority of the UNCITRAL representatives.[33] And while most representatives disagreed with the language, the reasons for their dissatisfaction varied widely. The objections registered by various UNCITRAL members included charges that the proposal 1) was unnecessary because good faith was adequately dealt with under national laws; 2) lacked substance because it failed to provide penalties for its breach; 3) was too vague and thus was likely to generate uncertainty and non-uniformity.

The Working Group was then instructed to come up with a compromise provision. Its next proposal was accepted by UNCITRAL and incorporated in the draft sent to the 1980 diplomatic conference in Vienna.[34] While the Working Group’s compromise proposal was substantially similar to the language which ultimately became Article 7(1), several alternate proposals were also considered at the 1980 conference, measures which could have greatly altered the nature of [page 122] the CISG’s current good faith obligation. One of the most significant of these was a Canadian recommendation [35] to amend what eventually would become Article 6, the provision which, subject to certain restrictions,[36] allows "parties to exclude the application of [the] Convention or  . . . derogate from or vary the effect of any of its provisions."[37] The Canadian proposal would have added a North American slant to the CISG’s good faith requirement by injecting language similar to that found in UCC 1-102(3),[38] which prohibits parties from contracting out of the good faith obligation.

While the effect of the Canadian proposal would have been limited to the parameters of Article 7(1) (i.e., precluding only modifications to the requirement of good faith interpretation of the Convention), the fact that the proposal was rejected stands for the rather surprising possibility that the CISG’s good faith requirement, limited as it is, can nevertheless be disposed of entirely by contractual agreement. It is useful to note, however, that such an agreement is probably best regarded merely as a theoretical possibility; it is difficult to imagine a scenario where one would find it advisable to approach a potential business associate with a proposal to vitiate an obligation which is already so confined. In any event, even if such an agreement were to be undertaken, whether it would bind the courts in subsequent litigation is doubtful at best. Indeed, a judge faced with such a provision might not even need to resort to equitable principles to avoid its effect because Article 6 merely allows derogation from the CISG as between the parties. Article 7, however, speaks not only to the parties but to anyone in a position to interpret the legal effects of the Convention (e.g., a judge or arbitrator). Thus, if the judge’s obligation to interpret the Convention in good faith is regarded as independent of the parties’ good faith obligations, the judge would not be bound by the parties’ agreement to derogate from their own obligations under [page 123] Article 7(1).

C. Beyond Article 7 — Good Faith as an Implicit Obligation in International Sales Contracts

While the CISG’s only explicit reference to good faith is directed at those charged with the interpretation of the Convention, many of the provisions directed at parties to CISG contracts would be rendered meaningless without recognizing a general good faith obligation. These "implicit" good faith duties stem from two primary sources: 1) domestic law of individual member states and 2) provisions of the CISG which inherently require the parties to conduct themselves in good faith.

1. Article 4 — An Open Window to Domestic Conceptions of Good Faith

Perhaps the most far-reaching of the implicit good faith provisions is Article 4,[39] which preserves the rights of various member state tribunals to adhere to their respective national policies with regard to contractual validity. While the exact definition of "validity" is not addressed, judicial concerns about duress, fraud and unconscionability are clearly relevant to determinations of contractual validity. These concerns, of course, are inextricably bound to the concept of good faith.

The deference which the CISG pays to the autonomy of individual states with regard to these important policy concerns necessarily injects some uncertainty into any analysis of good faith as an implicit requirement of the CISG. However, Article 4 should not be viewed as offering individual tribunals carte blanche to invalidate contracts based on their own idiosyncratic notions of "unconscionability" and the like. Indeed, Article 4’s use of the term "validity" is in some sense paradoxical: On one hand, the term is broad enough to permit a relatively wide degree of latitude for the application of domestic law; on the other hand, the term makes Article 4 a rather unattractive candidate for frequent use given the often drastic and one-sided nature of decisions which follow invalidation.

It is also important to note that the latitude provided individual [page 124] tribunals under Article 4 is tempered by the CISG’s instruction that proper interpretation of the Convention requires due "regard [for its] international character and the need to promote uniformity in its application."[40] Uniformity of application is so fundamental to the proper workings of the CISG that recourse to domestic law on contractual validity must necessarily be limited. As one commentator has stated, one of the overriding objectives of the CISG is to forward "the development of a jurisprudence of international trade  . . . . The success of the Convention directly depends on the achievement of this goal."[41]

2. Implicit Good Faith Requirements in the CISG: Knowledge, Contrary Conduct and Mitigation

The foregoing discussion has centred on the role of good faith in shaping judicial interpretation of the CISG. As a practical matter, however, the most important aspects of the CISG’s good faith obligations relate to the parties’ interpretations of the CISG’s demands with regard to their relationships to each other. As stated in the Convention’s preamble, the CISG contemplates international trade based on the principle of "equality and mutual benefit."[42] Clearly, an ongoing goal of any systematic regulatory approach to contractual relationships is to head off disputes before they arise, and, failing that, to minimize the problems which inevitably result from complex human interaction. Many of the CISG’s provisions are designed with these objectives in mind. These so-called implicit good faith provisions can be grouped according to three primary goals of good faith and fair dealing: 1) to promote full and frank exchange of relevant information; 2) to prevent parties from benefiting from conduct undertaken [page 125] to frustrate their own contracts; and 3) to salvage agreements wherever possible and minimize damages resulting from failed transactions.

i. Provisions Requiring Good Faith Communication

Of all elements of fair dealing, perhaps none is more indispensable than the ability to rely on the representations of one’s business associates. A contract is, in essence, simply the formal embodiment of the parties’ intentions with regard to an anticipated transaction. As such, a contract made in good faith must not contain representations designed to mislead the other party about one’s true intentions. Clearly, many contracts, especially standard or "form" contracts, often contain provisions which are not expressly negotiated and upon which there is no true meeting of the minds. But just as clearly, good faith requires that where such ambiguities exist, the parties must work to eliminate them in an even-handed manner. The obligation to communicate essential information at the time the agreement is reached, and afterward if problems arise, stands as a basic precept of good faith. Given the fundamental and comprehensive nature the good faith obligation, it should not be surprising that the duty to communicate in good faith is implicit in many of the CISG’s provisions.

With regard to communication during the pre-contractual stage, Article 8(3) [43] demands that in determining the intent of the parties, due regard is to be had for statements made during the negotiation process. This provision prevents one party from exploiting the other with the so-called "bait and switch"[44] manoeuvre — making oral assurances that the contract means one thing and later demanding something else during performance. The focus on intent in Article 8, as measured by a reasonable person standard, serves to disable bad [page 126] faith alterations of the agreement as a whole, typically attempted by parties who creatively "reinterpret" previous oral assurances, later emphasizing what remains within the "four corners" of the written contract.

Article 21 [45] also promotes good faith communication by demanding that when an acceptance is late, the offeror promptly inform the offeree of his intent to treat the acceptance as effective or, alternately, as ineffective because the offer has lapsed. The prompt notification requirement prevents either party from employing a "wait and see" posture towards untimely acceptance, and thus effectively eliminates the exploitation of what is often regarded as a technical problem in formation.

Other provisions implicitly demand good faith communication during the performance stage by requiring the parties keep each other abreast of information necessary for the smooth completion of the contract. For instance, Article 32(1) [46] requires that the seller give the buyer specific notice of the consignment of goods which were not clearly identified when placed in the possession of a carrier. Likewise, under Article 32(3), the seller who is not bound to insure the goods must nevertheless provide, at the buyer’s request, documents necessary to allow the buyer to obtain his own insurance.

With regard to open terms relating to the performance of the contract, Article 65(1) [47] states that if a buyer who is required to communicate his specifications fails to do so within a reasonable time, the seller is allowed make the specifications himself. This prevents the buyer from avoiding the contract in bad faith by deliberately failing to communicate information essential to the seller’s performance. Article 65(2), in turn, prevents the seller from making such specifications in an abusive or self-dealing manner, requiring him to advise the buyer of the details of the chosen specifications, and to give the buyer a "second chance" to set the specifications within a reasonable time.

Another duty of good faith communication arises in the risk of loss context. Article 68 [48] provides that even where the risk of loss [page 127] normally would have passed to the buyer, the seller is nonetheless liable for loss or damage if he knew of the loss or damage when the contract was concluded and failed to disclose this information to the buyer. Such a provision is implicitly designed to prevent sellers from knowingly exploiting the risk of loss rules to put the buyer at an unfair disadvantage.

Under Articles 47 [49] and 63 [50], if either party [51] voluntarily allows additional time for performance, he or she must refrain from initiating suits for breach of contract unless the other party communicates an intent not to perform within the extended time period. This prevents parties who allow additional time for performance from reneging on their promises. But because these articles preserve the right to sue for damages due to delays in performance, the party who receives the additional performance time cannot benefit from bad faith attempts to "string the other party along" by making insincere requests for additional time. Thus, Articles 47 and 63 serve to counteract possible bad faith motivations to seek additional performance time.

Article 79 [52] states that a party is not liable for failure to perform where his performance is prevented by circumstances beyond his control and reasonable anticipation. However, Article 79(4) states that the party who fails to perform must notify the other party of the circumstances at issue within a reasonable time. This provision serves to dissuade parties who, anticipating difficulties in performance, might otherwise to adopt a "wait and see" approach in the hope of getting the best of both worlds — keeping open the possibility of salvaging the deal while leaving the risks involved on the shoulders of the other party.

Under Article 72(2),[53] where one party anticipates that the other will fundamentally breach the contract and therefore believes he has the right to avoid the agreement, he must communicate his intent to avoid the contract in order to give the other party an opportunity to assure performance. This prevents bad faith attempts to take another [page 128] party by surprise with a cursory announcement that the contract is avoided. Similar analysis is applicable to Article 71(3),[54] which demands good faith communication by a party who wishes to suspend performance in response to a serious deficiency in the other party’s credit-worthiness or conduct in preparation for performance.

Likewise, under Article 26,[55] where a party believes that a fundamental breach has already occurred, she must nevertheless notify the allegedly breaching party of her intent to avoid the contract. This provision works to dissuade parties from making bad faith declarations of avoidance, because the required notice can help the opposite party prepare quickly for subsequent litigation over whether a fundamental breach actually occurred. Prompt notice also facilitates the mitigation of damages, another fundamental goal of good faith (See "Mitigation of Damages", supra).

The duty to communicate in good faith is also implicit in Article 48’s procedures relating to the seller’s right to cure. Under Article 48(2),[56] the buyer must make known whether he will accept curative performance if the seller so requests. A buyer who fails to communicate his objections will lose his right to contest the curative performance. Thus, Article 48 is yet another provision which prevents one party from taking a "wait and see" posture to the detriment of the other. Without Article 48(2), the buyer could make arrangements for his own cure and cause the seller unnecessary damages by refusing the seller’s curative performance. Article 48 also imposes obligations on the seller, requiring him to notify the buyer of his intent to make the curative performance.

ii. Provisions Requiring Parties to Refrain from Conduct Knowingly Calculated to Frustrate the Contract

The implicit obligation to communicate in good faith often centres on the affirmative duty to speak up when remaining silent would put the other party at an unfair disadvantage. Another general principle of good faith — the obligation to refrain from conduct designed to frustrate the purposes of the contract — is better conceptualized as a negative obligation, i.e., a duty not to act in a manner inconsistent [page 129] with the agreement. As in the previous section, much of the "conduct" described in this section turns on communication between the parties. However, the conduct described here must be distinguished conceptually in that it is tied to a different sort of good faith communication obligation — the obligation to communicate in a manner consistent with one’s actions so as to avoid the purposeful frustration of the contract.

Perhaps the best illustration of the implicit good faith demand for consistency between word and deed is found in Article 29,[57] which recognizes the practice of many international traders to provide that any agreement to modify or terminate a written contract must also be in writing. Article 29 states that these "no oral modification" clauses are generally enforceable. However, the Convention shows a distinct willingness to put aside the so-called "four corners" of the agreement where justice demands that one should be "precluded by his conduct from asserting [a no oral modification provision] to the extent that the other party has relied on that conduct."[58]

Consider, for example, a scenario in which X contracts to deliver to Y one thousand cases of a certain type of wine for $50.00 per case and, by written agreement, oral modifications are precluded. Before delivery, Y calls X and says he wishes to modify the contract and take delivery of two thousand cases at the same price. X agrees. Y leases additional warehouse space to store the extra wine and X procures the two thousand cases immediately. Neither party demands written confirmation of the modification. Under Article 29, the modified agreement is enforceable by either party in the event of the other’s breach, because each has relied on the conduct of the other. Neither party will be allowed to invoke the no oral modification provision because neither, in common law parlance, can come to the table with "clean hands." While the words "good faith" are nowhere to be found in Article 29, it is clear that the outcome in this scenario is grounded largely on the good faith obligation, for there is nothing in X and Y’s written agreement that would otherwise preclude the avoidance of the agreement as modified.

The Convention’s treatment of the duty to inspect goods is another area which illustrates how a party’s actual or constructive [page 130] knowledge can affect liability issues which would otherwise be settled as a matter of course. Under Article 38,[59] the buyer has a duty to inspect the goods promptly. In the event of non-conformity, he must specify the nature of the problem.[60] If the buyer does not make such notification within a reasonable time, he loses the right to contest the non-conformity. At one level, this provision simply forwards the goal of promoting the finality of international sales within a reasonable time after delivery. But on another level, it serves also to prevent bad faith attempts by a buyer who, upon discovering a non-conformity, might be tempted to wait in order to thwart the seller’s right to cure or drive up his own losses in anticipation of litigation. Article 38 also works to prevent attempts by the buyer to "create" a non-conformity through sabotage (i.e., by damaging the goods himself after delivery), as could occur where the buyer discovers some months after delivery that the transaction has lost its overall profit potential — perhaps because a related resale contract has fallen through.

However, Article 40 [61] states that notwithstanding any failure of the buyer to conform to the demands of Articles 38 and 39, if the seller knew or could not have been unaware of the non-conformity and did not disclose his knowledge to the buyer, the seller loses the right to invoke Article 38 and 39 as a defence. To properly construe the good faith obligation implicit in the Convention’s delivery provisions, it is important to note the different standards of knowledge applicable to buyers and sellers in the delivery context. The buyer must report non-conformity within a reasonable time after he "discovered it or ought to have discovered it," thus implying an objective, "reasonable man" standard. The seller, on the other hand, loses his right to rely on the buyer’s failure to properly inspect the goods where he "knew or could not have been unaware" of the non-conformity, implying a subjective, "actual knowledge" standard. Thus, while both provisions carry good faith implications, Article 40’s limitation on the seller would be virtually meaningless without good faith at its foundation — few scenarios exist in which a seller could fall under the scope of Article 40 and not be in bad faith. Article 40, at its core, is designed to prevent sellers from attempting to "pass off" defective goods in the [page 131] hope that the buyer will not notice the non-conformity until it is too late. Thus, this provision stands as strong evidence of the vitality of good faith as an unspoken yet omnipresent requirement of the CISG.

iii. Provisions Requiring Good Faith Effort to Save the Contract or Mitigate Damage Resulting From Breach

a. The Right to Cure

Another fundamental requirement of good faith is fixed in the parties’ duty to work together to solve problems which arise in the contractual process. Articles 34 [62] and 37 [63] are the Convention’s main provisions on the seller’s right to cure. Article 34 covers the right to cure defects in documents relating to the transaction. Article 37 treats the right to cure defects in the goods themselves. These articles provide the primary mechanisms by which the contract can be saved from an otherwise untimely end. They promote fair dealing by discouraging bad faith attempts to frustrate the contract by exploiting minor deficiencies in performance. Similarly, Article 46 [64] allows the buyer to demand proper performance, but again under an implicit good faith obligation. Article 46(3) states that any request for repair must be reasonable under the circumstances, thus disallowing demands for repairs which are motivated by a bad faith desire to charge unreasonable costs to the seller.

b. Mitigation of Damages

Should attempts to cure performance prove ineffective or impossible, both parties are under a duty to minimize damages resulting from the failure of the agreement, regardless of fault. The duty to mitigate damages serves several important functions; some are essentially economic in character, while others are bound to the goals underlying the normative demands of good faith. Perhaps the most fundamental of the good faith rationales behind damage mitigation is the elementary principle that one should refrain from engaging in practices designed solely to inflict injury on another. A party may be [page 132] tempted to inflict unnecessary economic injury in order to gain a competitive edge. In other cases, it may simply be a matter of spite. Regardless of the underlying motivation, the failure to mitigate damages is properly characterized as strong evidence of unfair dealing.

It should be noted that several of the "good faith communication" provisions discussed previously also serve to insure that the parties work to mitigate damages. The provisions setting out the duties to inform the other party of an inability to perform (Article 79(4)),[65] the intent to suspend performance (Article 71),[66] or to avoid the contract altogether (Article 26),[67] all carry clear implications of a good faith duty to limit damages caused by the partial or total failure of the agreement. Even the communication by the seller of his intent to cure has implications for damage mitigation; the seller mitigates not only his own potential liability through the curative process, he also assists the buyer by notifying her not to undertake unwarranted actions toward mitigation. Thus, in certain circumstances, the duty underlying the seller’s right to cure can be conceptualized as "mitigation squared" (or "mitigation 2") — i.e., the duty to mitigate the costs associated with mitigation.

Article 77 [68] is the CISG’s primary provision on the duty to mitigate losses caused by another party’s breach. Article 77 applies equally to buyers and sellers, and demands that "[a] party who relies on breach of contract must take measures as are reasonable  . . . to mitigate the loss  . . . resulting from the breach . . . ."[69] Failure to mitigate is likely to result in a reduction of the breaching party’s liability for damages. Thus, Article 77 sets out mitigation as an affirmative duty. Given the provision’s reasonableness requirement, it may be argued that because a reasonable man would act in good faith, the duty to mitigate in good faith — i.e., to mitigate reasonably — is implicit.

The good faith obligation is equally implicit in the provisions relating to the duty to preserve goods [70] belonging to the other party.[page 133] The duty can arise in a number of circumstances,[71] but in every situation the onus is on the party in possession of the goods to take due care of them. In the mitigation context, the duty to preserve the other party’s property is a strong indication of good faith as a pervasive force within the convention, as it often requires parties to go "out of their way" to protect the interests of their business associates. For instance, where the goods are perishable, the party in possession is typically obliged to sell them if the owner is too remote to effectively dispose of them himself. This duty arises even when the possessor is not in the business of selling such goods on a wholesale basis, as in the case of a restaurateur who, in exercising his right to reject non–conforming produce from a remote supplier, must nevertheless attempt to sell the produce on the local market. Clearly, although the restaurateur could not be expected to get the highest possible price on such short notice, it would be a breach of good faith to sell the produce at an unreasonably low price as a favour to a friend.

III. Good Faith as a Cause of Action

Any examination of good faith as a legal construct would be incomplete without a discussion of the practical aspects of its application to real world disputes. This section considers good faith as a cause of action in the international sales context by setting out the areas in which allegations of bad faith commonly serve as a focal point of litigation. Charges of breach of contract due to the bad faith actions of another party typically fall into one of two primary categories: 1) allegations of bad faith during the negotiation or performance of the contract; and 2) allegations of procedural abuses employed to gain an unfair advantage during litigation.

A. Bad Faith During the Contractual Process

1. The Duty to Negotiate in Good Faith

As noted previously,[72] the duty to negotiate in good faith is stressed more often under civil law systems [page 134] than common law systems. In the French case Société Muroiterie Fraisse v. Micon et Autres,[73] Société, the plaintiff, contended that while no contract had been "definitively concluded," [74] defendant Micon was nonetheless liable for failure to perform a supply contract for "fault in contrahendo."[75] The court agreed with Société, noting that Micon had breached its obligation of good faith due to the "conduct of [its] negotiators . . ."[76] And while it is true that claims of bad faith negotiation are more likely to be raised in civil law courts, common law courts may reach similar results by implying the existence of a contract or specific contractual provision.[77]

2. The Duty to Further the Contract

The duty to make a good faith effort to satisfy one’s contractual obligations typically becomes the centre of controversy when a party, often in response to a change in economic conditions, decides that it can improve its position by unilaterally attempting to "remake" or avoid an established contractual arrangement. Maritime International Nominees Establishment (MINE) v. Republic of Guinea [78] illustrates the problems that can arise when a party adopts such a posture. In this case, the MINE company contracted with the Republic of Guinea to establish a partnership for the exploitation of certain mineral deposits. Guinea initially contracted with a subsidiary of MINE for the shipment [page 135] of the minerals after their extraction.[79] It later entered into another more advantageous arrangement with a third party for the shipment of the same minerals. MINE brought suit, alleging that Guinea had breached the MINE contract by attempting to prevent its performance. In awarding over twelve million dollars in damages to MINE, an arbitrator found that Guinea had entered into a secret agreement with the third party and had ignored MINE’s repeated requests to move forward with the shipping arrangements.[80] The arbitrator held that Guinea’s entry into the secret negotiations conflicted with its duties of good faith performance as set out in the French Civil Code.[81] As one commentator on the case has noted, "the [MINE] decision stands for the simple proposition that contracting parties — both private parties and states — must act in good faith both to further the purposes of the contract and to refrain from hindering the contract."[82] Thus, Guinea was found to have breached the contract through both action and inaction. "Affirmative" bad faith was found in Guinea’s secret third party negotiations, while "negative" bad faith was found in its failure to respond to MINE’s calls to make arrangements necessary for performance.

3. Third Party Fraud

In alleging bad faith as a defence for non–performance, one should be aware that the bad faith or fraudulent acts of a third party are unlikely be of much use in litigation. The necessity to allege the bad faith of the opposing party is illustrated by the customs dispute in United States v. Bealey.[83] In Bealey, the defendant signed a consumption entry bond in connection with the importation of an automobile.[84] The purpose of the bond was to insure that Bealey would comply with certain vehicle emissions requirements of United States Environmental Protection Agency.[85] When Bealey was fined for failing to comply with the regulations, he claimed he had been fraudulently [page 136] induced to sign the bond by third parties who were the "actual importer[s]" of the vehicle.[86] The court held that regardless of Bealey’s claims about fraudulent inducement, he was liable for the fines because the alleged fraud was not "perpetrated by a party to the contract," i.e., the United States Customs Service, which had accepted the bond.[87] The court went on to outline the limited circumstances where third party fraud serves as a legitimate defence:

"Where fraud is committed by someone not party to a contract, a contract is voidable only . . . if a party’ s manifestation of assent is induced by either a fraudulent or a material misrepresentation by one who is not a party to the transaction and upon which the recipient is justified in relying . . . unless the other party to the transaction in good faith and without reason to know of the representation either gives value or relies materially on the transaction."[88]

Since the U.S. Customs Service had materially relied on the transaction by releasing the automobile to Bealey, the third party fraud was immaterial. Indeed, there are probably relatively few scenarios in the international sales context where this "no material reliance" exception would apply.[89]

B. Bad Faith During Litigation

In many cases, allegations of bad faith arise not in connection with the contract itself, but rather during litigation stemming from the contractual dispute. While the CISG does not control procedural issues, they are discussed here to illustrate an area in which the good faith obligation plays a key role in the context of international sales disputes. Charges of bad faith can arise during any stage of litigation, but they often centre on the initial complaint, answers to the complaint, discovery, and various other pre- and post–trial motions. Although procedural rules vary widely among the CISG member states, every nation has adopted measures to counter the bad faith abuse of the judicial process. Thus, while the following cases are governed by American procedural rules, their holdings are nevertheless [page 137] generally illustrative of the procedural good faith "fault lines" common to many countries.

1. Pleadings

In the United States, disputes involving international transactions are typically handled within the federal judiciary. From a procedural standpoint, this means that unless the contract includes a choice of law clause to the contrary, the Federal Rules of Civil Procedure (FRCP) will generally apply. Cases tried before the United States Court of International Trade are governed by the Rules of the Court of International Trade (RCIT). However, for the purposes of this paper, each of the RCIT provisions mentioned in the following discussion corresponds exactly to its numerical equivalent in the FRCP. Therefore, in the interest of simplicity, the following discussion shall denote the procedural rules by number only.

From a pre–trial standpoint, Rule 11 is often the flash point for allegations of bad faith in the litigation process. Rule 11 states:

" . . .The signature of the attorney or party constitutes a certificate by the signer that . . . to the signer’s best knowledge [the motion] . . . is well grounded in fact and is warranted by existing law or a good faith argument for the extension, modification or reversal of existing law, and that it is not interposed for any improper purpose . . ."[90]

In most cases turning on charges of procedural bad faith, the plaintiff alleges a Rule 11 violation by "piggybacking" the charge on the breach of a separate and more specific procedural rule. For instance, in Beker Indus. Corp. v. United States,[91] the plaintiff alleged that the United States had breached its good faith duty under Rule 11 by failing to comply with the provisions of Rule 8(c), which sets out a separate procedural duty to state the defence or defences which a party plans to invoke in answering a complaint.[92]

In Beker, an importer of Canadian sulphur challenged an administrative determination of the United States Department of Commerce [page 138] that the company had violated certain anti–dumping regulations. Beker alleged that the Department’s answers to its complaint were "inadequate and uninformative, not made in good faith and  . . . not in accordance with Rules 8(c) and 11."[93] While the specific nature of the alleged inadequacies of the Department’s answers is not relevant for the purposes of this discussion, the court’s holding is indicative of the stringent burden one must carry to prove that the opposing party’s pleading was made in bad faith:

"[P]leadings have served their functions once they have framed the issue  . . . We believe the [Commerce Department’s answers] do just that: we are apprised of the issues in dispute  . . . Although some of the defendant’s answers should have been more accurate  . . . the plaintiff has not sufficiently demonstrated a lack of good faith."[94]

2. Court Orders

As noted previously, the question of which procedural rules will apply is a function of the court in which the litigation take place. However, this does not mean that the court with jurisdiction over the controversy will turn a blind eye to conflict of laws considerations. In the context of international litigation, certain conflicts are bound to arise, as was amply illustrated in Remington Products, Inc. v. North American Phillips Corp.[95] In Remington, the United States District Court for the District of Connecticut faced an interesting but complex marriage of good faith and conflict of laws analysis.

The primary issue in Remington was whether Phillips, the defendant, was in bad faith when it refused to comply with a discovery order from the court.[96] Phillips justified its refusal by arguing that it was prevented from complying by Article 39 of the Dutch Economic Competition Act,[97] a Netherlands statute which forbids the disclosure [page 139] of certain business–related information in foreign judicial proceedings.[98] Although Phillips fell squarely under the Dutch statute, the district court nevertheless awarded Remington over $178,000 [99] under Rule 37, the American procedural rule which permits courts to sanction parties for litigation costs incurred due to unjustified refusals to comply with discovery orders.[100]

In refusing to recognize Phillips’ "foreign sovereign compulsion" defence, the court characterized as illusory Phillips’ claim that it would be subject to criminal penalties if it complied with the discovery order. The court noted that the Dutch government had never prosecuted one of its own nationals under the statute and that in any event, Phillips could have invoked a necessity defence in response to any possible charges.[101] The court attached special significance to the fact that Phillips had already disclosed the same information in a previous, unrelated antitrust action. The court concluded that Phillips’ true motivation was simply to put Remington at a disadvantage, and therefore sanctioned Phillips for breaching its obligation to comply in good faith with the discovery order.[102]

Conclusion

Historically, the conception of good faith has been shaped by a variety of forces — political, mercantile and religious among them. Similarly, the CISG also treats the duty of good faith in a holistic manner; rather that attempt to explicitly define the good faith obligation in isolated provisions, the drafters of the CISG marked good faith as an integral and pervasive requirement. The drafters rightly understood that unfair dealing is best recognized in specific factual scenarios; [page 140] judges and arbitrators will know bad faith when they see it. Thus, the drafters designed a systematic approach to international sales transactions with the assumption that the basic obligations of good faith and fair dealing are understood by the parties. In so doing, they have provided a source of confidence to traders who, due to the nature of the modern international marketplace, must forge their agreements fax–to–fax rather than face–to–face.[page 141]


FOOTNOTES

*. Law Clerk, Allan Kanner & Associates, New Orleans, Louisiana. B.A., 1989, Georgetown University; J.D. candidate, 1994, Tulane Law School. For their many valuable suggestions, grateful acknowledgement is made to Chris Anderson, Carla Bachechi and Joachim Zekoll.

** The bracket phrase page followed by a number is used to identify the page number of the original publication.

1. After recounting the history of the United States Supreme Court's many failed attempts to define "obscenity," an exasperated Stewart finally concluded, "I know it when I see it." Jacobellis v. Ohio, 378 U.S. 184, 197 (1964)(Stewart, J., concurring).

2. Common and civil law systems have adopted different approaches to the good faith obligation at the negotiation stage. See infra notes 17-26.

3. United Nations Convention on Contracts for the International Sale of Goods (CISG), U.N. Doc. A/CONF.97/18, Annex 1 (signed by original Contracting States on 11 April 1980).

4. J.F. O'Connor, Good Faith in International Law, Dartmouth, 1991, 5-6.

5. Ibid. at 19.

6. Ibid. at 20.

7. See generally, J.F. O'Connor, Good Faith in English Law, Darthmouth, 1990, 18.

8. Justinian, Digest II.XIV.1, Scott, 1932.

9. O'Connor, supra n.4 at 25.

10. Ibid. at 26.

11. H. Berman, Law and Revolution: The Formation of Western Legal Traditions, Harvard University Press, 1983, 344-45.

12. O'Connor, supra n.4 at 27.

13. See generally, ibid.

14. Ibid., at 29.

15. Susan Wegner, "Section 1-208: Good Faith and the Need for a Uniform Standard", 73 Marquette Law Review (1990), 639, 642.

16. Ibid.

17. O'Connor, supra n.7 at 1.

18. Ibid. at 2 (quoting Sir Henry Maine, Ancient Law, ed. Sir Frederick Pollock, J. Murray, 1930, 52).

19. UCC 1-201(19), in Selected Commercial Statutes (West, 1992).

20. UCC 1-103(b), in Selected Commercial Statutes (West, 1992).

21. O'Connor, supra n.7 at 85.

22. Ibid. (quoting Rumelin, "Erlebte Wandlungen in Wisenschaft und Lehre", (1930), translated in Jurisprudence of Interests: Selected Writings 17-18, ed. M. Magdalena Schoch, Harvard University Press, 1948).

23. Société Muroiterie Fraisse v. Micon et Autres, Cour d'appel de Pau, 14 Janvier 1969, 1969 Dalloz et Sirey 716.

24. See O'Connor, supra n.7 at 97.

25. Ibid.

26. Ibid.

27. CISG, supra n.3, art. 7(1).

28. Others, however, do maintain that Article 7(1) imposes a general good faith obligation on the parties, similar to that found in the UCC. See, e.g., Arthur Rosett, "Critical Reflections on the United Nations Convention on Contracts for the International Sale of Goods", 45 Ohio State Law Journal (1984), 265, 289.

29. UCC 1-203, in Selected Commercial Statutes (West, 1992) (emphasis added).

30. See supra n.17-26 and accompanying text.

31. See generally, Peter Winship, "Reflections on the International Unification of Sales Law: Commentary on Professor Kastely's Rhetorical Analysis", 8 Northwestern Journal of International Law and Business (1988), 623, 632.

32. Report of the Working Group on the International Sale of Goods on the Work of Its Ninth Session, para. 70, U.N. Doc. A/CN./142 (1977).

33. Ibid. at para.s 70-87.

34. Winship, supra n.31 at 631-32.

35. Report of the First Committee, U.N. Doc. A/CONF.97/11 (1980).

36. See CISG, supra n.3 arts. 6, 11,12, 96 and Part II.

37. CISG, supra n.3 art. 6.

38. UCC 1-103 states: "The provisions of this act may be varied by agreement . . . except that the obligation [] of good faith . . . may not be disclaimed by agreement of the parties but the parties may determine the standards by which the performance of [the good faith] obligation [] is to be measured if such standards are not manifestly unreasonable." UCC 1-103, in Selected Commercial Statutes (West. 1992).

39. CISG, supra n.3 art. 4.

40. Ibid. at art. 7(1).

41. Amy Kastely, "Unification and Community: A Rhetorical Analysis of the United Nations Sales Convention", 8 Northwestern Journal of International Law and Business (1988), 574, 600-01. See also ibid. at 601 n. 127, quoting, "Working Group in International Sale of Goods: Report on Work of Second Session", 2 Year Book of the United Nations Commission of International Trade Law (1971), 50, 62 ("It was . . . suggested that the provision would contribute to uniformity by encouraging recourse to foreign materials, in the form of studies and court decisions, in construing the Law").

42. See CISG, supra n.3, preamble.

43. See Ibid. at art.8. Cf. Kastely, supra note 41 at 595-99 (discussing contractual commitment, forthright communication, good faith, and forgiveness of human error as underlying values of the CISG).

44. "Bait and Switch" is a pejorative term to describe a marketing tactic used by unscrupulous retailers. Potential customers are drawn by advertisements of unusually low sale prices on certain items (the bait), only to be informed upon arrival that the store is "sold out" of the featured merchandise. They are then encouraged to purchase alternate merchandise (the switch).

45. See CISG, supra n.3 art. 21.

46. See ibid. at art. 32.

47. See ibid. at art. 65.

48. See ibid. at art. 68.

49. See CISG, supra n.3 art. 47.

50. See ibid. at art. 63.

51. Article 47 covers the buyer's right to allow the seller additional performance time. Article 63 parallels Article 47, setting out the seller's right to allow additional performance time to the buyer. See ibid., art.s 47 and 63.

52. See CISG, supra note 3, art. 79.

53. See ibid. at art. 72.

54. See ibid. at art. 71.

55. See ibid. at art. 26.

56. See CISG, supra n.3 art. 48.

57. See ibid. at art. 29.

58. Ibid.

59. See CISG, supra n.3 art. 38.

60. See ibid. at art. 39.

61. See ibid. at art. 40.

62. See ibid. at art. 34.

63. See CISG, supra n.3 art. 37.

64. See ibid. at art. 46.

65. CISG, supra n.3 art. 79. See also supra n.53 and accompanying text.

66. CISG, supra n.3 art. 71. See also supra n.55 and accompanying text.

67. CISG, supra n.3 art. 26. See also supra n.56 and accompanying text.

68. See CISG, supra n.3 art.77.

69. Ibid.

70. See CISG, supra n.3 art.s 85-88.

71. See generally, ibid.

72. See supra n. 23-26 and accompanying text.

73. Société Muroiterie Fraisse v. Micon et Autres, Cour d'appel de Pau, 14 Janvier 1969, 1969 Dalloz et Sirey 716; see also supra n.23-24 and accompanying text.

74. See O'Connor, supra n.7 at 97.

75. The doctrine known as culpa in contrahendo describes "the liability which attaches to breach of contract, especially a breach by the offeror after the offeree has begun performance in a unilateral contract . . ." Black's Law Dictionary, West, 1990, 379, 6th ed.

76. See O'Connor, supra n.7 at 97.

77. See generally, ibid.

78. Maritime International Nominees Establishment v. Republic of Guinea, Case No. ARB 84 4 (International Center for the Settlement of Investment Disputes 1988); see generally, Monroe Leigh, American Society of International Law, Case Note: "Maritime International Nominees Establishment v. Republic of Guinea", 82 American Journal of International Law (1988), 598.

79. See Leigh, supra n.79 at 598.

80. See ibid. at 598-99.

81. See ibid. at 599.

82. Ibid.

83. United States v. Bealey, 1990 WL 138543 (Ct Int'l Trade 1990).

84. Ibid. at *1.

85. Ibid.

86. Ibid. at *2.

87. Ibid.

88. Ibid. at *2 - *3, (quoting section 164(2) of the Restatement (Second) of Contracts (1979) (citations omitted).

89. That is, one would expect that relatively few cases would be litigated in which there had been no material reliance.

90. FRCP Rule 11, in Federal Rules of Civil Procedure and Selected Other Procedural Provision (Foundation Press, 1991).

91. Beker Indus Corp. v. United States, 585 F.Supp 663, 664 (Ct International Trade 1984).

92. See generally, FRCP Rule 8(c), in Federal Rules of Civil Procedure and Selected Other Procedural Provision (Foundation Press 1991).

93. Beker, 585 F.Supp at 664.

94. Ibid. at 667 (quoting Berkely Technical Corp. v. United States, 380 F.Supp 786, 789 (1973).

95. Remington Products, Inc. v. North American Phillips Corp., 107 F.R.D. 642 (D Conn 1985); see generally, Monroe Leigh, American Society of International Law, Case Note: Remington Products, Inc. v. North American Phillips Corp., 80 American Journal of International Law (1986), 664.

96. See Leigh, supra n.98 at 664.

97. Article 39 of the Dutch act forbids deliberate compliance with "any measures or decisions taken by any other State, which relate to any regulations of competition, dominant positions or conduct restraining competition." See Dutch Economic Competition Act of June 28, 1956, Staatsblad voor het Koninkrijk der Nederlanden (Official Journal) (1956), 413.

98. See Leigh, supra n.97 at 664 n.1.

99. See ibid. at 664.

100. See FRCP Rule 37, in Federal Rules of Civil Procedure and Selected Other Procedural Provisions (Foundation Press 1991).

101. See Leigh, supra n.97 at 665.

102. See ibid.


Pace Law School Institute of International Commercial Law - Last updated January 18, 2000
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