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Reproduced with permission from 18 Journal of Law and Commerce (1999) 333-353

Defining the Undefinable: Good Faith and the United
Nations Convention on Contracts for the
International Sale of Goods

Paul J. Powers [*]

I. Introduction
II. The good faith obligation around the globe

A. The civil law concept of good faith
B. The common law concept of good faith
III. The good faith obligation under international conventions
A. CISG concept of good faith
B. UNIDROIT Principles concept of good faith
IV. A working definition of good faith
V. Conclusion

I. Introduction

Still, the lesson is there, and the Code's concepts of good faith performance and commercial reasonableness await development, even beyond the bounds of the Code, at the lands of resourceful lawyers and creative judges.[1]

This quotation from Professor Farnsworth carries with it a great deal of insight into a very complex term. The advent of the Uniform Commercial Code ["UCC"] [2] brought about concern over the meaning of good faith. Scholars acknowledged that good faith is an elusive term best left to lawyers and judges to define over a period of time as circumstances require.

The United Nations Convention on Contracts for the International Sale. of Goods ("CISG")[3] recently celebrated its tenth anniversary as a working document governing international sales between contracting parties. In the first ten years, many questions have arisen concerning the uniformity the CISG sought to build.[4] One concern in particular deals with the requirement of good faith under the CISG. Many commentators have observed the existence of good faith as a principle articulated in the [page 333] CISG [5] However, the CISG fails to adequately define what good faith requires. Many have come to believe that the definition of good faith under the CISG should and will be supplied by each country's domestic law.[6] However, this method of defining good faith fails to secure the uniformity desired by the CISG.

This article attempts to define what is meant by the term good faith as it exists in Article 7(1) of the CISG.[7] It should be noted that as was feared by the drafters of the CISG, a precise definition may not be possible [8] Defining such an elusive term requires a review of the history of the good faith obligation in contract performance; this is the focus of the introductory section of Part II. The crux of Part II involves a comprehensive look at the concept of a good faith obligation from the civil and common law perspectives, including a historical look at the birth of the term. Tracing the roots of good faith produces a bundle of definitions varying in scope, and depending on where a dispute takes place.

The focus of Part III is good faith in international transactions. The focus is primarily on good faith contract performance under the CISG, but also includes a discussion of the meaning of good faith under the UNIDROIT Principles for International Commercial Contracts ("UNIDROIT Principles"). [9] While much debate has occurred over whether any obligation of good faith exists within the CISG, Part III assumes that there is an obligation of good faith in contract performance within the CISG. This assumption is based on commentaries from various CISG experts around the world.

Part IV takes the various definitions and/or meanings set forth in Parts II and III and attempts to mold them into a workable definition for courts to use in order to achieve uniformity when interpreting the CISG. The working definition remains somewhat vague, but it places the duty of good faith in perspective. A vague term is better than an open one in a vacuum, which is where good faith under the CISG currently stands. There is a need for a useable definition that extends beyond national boundaries, as does the CISG. The definition provides the uniformity the [page 334] drafters of the CISG sought to achieve. While this definition does not answer all the concerns about the inherent vagueness in a duty of good faith, it does contain good faith within certain boundaries and establishes a starting point for the courts.

It is conceivable that good faith in the CISG evades a precise definition. The purpose of this article, however, is to supply, or attempt to supply, judges and practitioners around the world with an international meaning of good faith which will supplant its meaning under their various domestic laws. The gap left by the CISG drafters in not defining good faith and in attempting to circumvent any duty of good faith in contract performance must be filled in order to achieve the uniformity sought by the drafters of the CISG.

In order to provide a framework for the reader, I have provided a working definition of good faith. The reader should keep this definition in mind while reading the following sections. The duty of good faith can be defined as an expectation and obligation to act honestly and fairly in the performance of one's contractual duties. A certain amount of reasonableness is expected from the contracting parties. This definition is international in character and captures the essence of various domestic definitions.

II. The Good Faith Obligation Around the Globe

The legal obligation of good faith has existed for a very long time. As early as Roman times, an obligation of good faith was required in commercial transactions.[10] The famous Roman orator Cicero has been given credit for setting forth the minimum requirements of good faith in commercial sales.[11] The basic tenet of good faith used in Roman times is very similar to what is required by the UCC's general good faith obligation today.[12]

The principle of good faith in contract performance surfaced again in the mercantile community during the eleventh and twelfth centuries.[13] This notion of a good faith obligation in contract performance which grew out of Roman law, now exists in the civil codes of many countries and, is evident especially in Germany.[14] Good faith has managed to [page 335] survive the test of time, but somewhere along the way its precise meaning was clouded.

Good faith differs in its scope and application depending on which legal tradition governs the particular commercial transaction. Civil law states tend to use a more expansive approach to the good faith obligation applying it to both contract formation and performance. Common law states prefer a more narrow good faith duty applicable only to contract performance. The socialist countries of the past also relied on good faith principles in commercial transactions. As one author stated, "[t]he universality of good faith in contract formation and performance is evident when reviewing the legal regimes of planned or socialist economies.[15] General concepts of private contract law did not exist in socialist economies, but contracts between different state agencies did exist. The good faith duty attempted to insure that the contracting parties worked toward the state's goals because any breach of this duty would not only harm the other party, but also the state itself.[16] Thus, despite the socialist nature of Eastern Europe and the Soviet Union, the concept of good faith still played an important role in contract law.[17]

The requirement of good faith in contracting is evident in a variety of circumstances in many different legal and social traditions. A more in-depth discussion of various models will assist in determining the main requirements of a duty to act in good faith. Despite the differences on face, the duty of good faith is at its core, very similar throughout world.

A. The Civil Law Concept of Good Faith

The civil law approach to good faith is derived from a general philosophy of contract that focuses mainly on the relationship between the parties.[18] This type of focus promotes a good faith obligation before a contract even exists between the parties.[19] However, the basis of each country's good faith obligation varies. In France, for example, liability rests on tort principles during pre-contractual negotiations and on contract [page 336] principles once the contract is formed.[20] In Belgium the civil code requires all contracts to be executed in good faith and contractual interpretations are to be supplemented by custom and usage.[21] Many European countries have substantially the same requirement of good faith in contract formation and performance.

Germany legislatively requires contracting parties to observe good faith not only in contract negotiation, but also in contract performance [22] Section 242 of the German Civil Code, known as the Treu und Glauben provision (loosely meaning faith and credit), states that "the debtor is bound to effect performance according to the requirements of good faith, giving consideration to common usage."[23] This definition of good faith incorporates the customs practiced by the contracting parties as well as a general requirement to act reasonably. The German Code also provides that any terms or agreements contrary to the public policy of good faith are void.[24] The German concept of good faith includes the negotiation stage of the transaction, thus, a pre-contract breach of good faith can result in a tort or contract remedy.[25] The party alleging a breach of good faith must prove that he or she used all diligence necessary to avoid a condition violating the commercial course of dealings.[26] The German duty of good faith is more than simply a requirement to act reasonably. It requires a relationship of trust based on the commercial dealing of the parties in a particular transaction.

The German requirement of good faith has been recognized for a very long time and Germany has built up an extensive library of relevant case law, without actually establishing a definition. One must read between the lines to find a definition. German good faith requires a contracting party, before and after a contract is formed, to respect the trusting relationship between the parties and to act reasonably in not breaching that relationship.

Italy has a pre-contract duty of good faith in negotiating as well as a contract performance duty. "Good faith is a limitation on private autonomy [page 337] that restricts, during negotiation as well as in execution of a contract, the freedom of the parties; private control of legal transactions is not indiscriminate freedom to act, but freedom to act in good faith."[27] This duty of good faith includes a duty to disclose information to the other party during negotiations.[28] Italy treats good faith like an ethical obligation which is an integral part of public policy.[29] Good faith is defined, at least for practical purposes, as "openness, diligent fairness, and a sense of social solidarity."[30] This definition forces contracting parties to recognize the importance of good faith and, at a minimum, to act reasonably. Parties must recognize the public policy behind good faith and respect its importance when contracting.

The civil law approach to good faith is more encompassing than its common law counterpart. A civil law contracting party owes a pre-contract duty of good faith to negotiate fairly and openly with the other party.[31] This obligation extends to contract performance and requires parties to act reasonably, or more specifically, not to breach the relationship of trust with those with whom they negotiate and contract [32] Good faith is an important public policy in countries adhering to the civil law approach. In these countries, good faith can be relied upon by both parties to a contract.

B. The Common Law Concept of Good Faith

The most prominent example of a good faith requirement in a common law state exists in the Uniform Commercial Code of the United States. Section 1-203 of the UCC imposes an obligation of good faith in the performance and enforcement of every contract.[33] The term good faith is defined as "honesty in fact in the conduct or transaction concerned."[34] The UCC further elaborates on its good faith requirement by explaining what constitutes bad faith: "failure to perform or enforce, in [page 338] good faith, a specific duty or obligation under the contract, [which] constitutes a breach of that contract or makes unavailable, under the particular circumstances, a remedial right or power."[35] The UCC also provides a higher standard of good faith for merchants by requiring them to abide by reasonable commercial standards for their trade.[36]

The good faith duty in contract performance is measured against an objective standard. This objective standard is based on "the decency, fairness or reasonableness of the community, commercial or otherwise, of which one is a member."[37] Courts enforcing the good faith duty apply this objective standard when analyzing the actions of a contracting party.

"Good faith performance has always required the cooperation of one party where it was necessary in order that the other might secure the expected benefits of the contract. And the standard for determining what cooperation was required has always been an objective standard, based on the decency, fairness or reasonableness of the community and not on the individual's own beliefs as to what might be decent, fair or reasonable. Both common sense and tradition dictate an objective standard for good faith performance."[38]

Professor Farnsworth reiterated his thoughts on good faith some thirty years after his initial discussion, explaining that good faith is specifically mentioned in fifty different UCC provisions [39] While giving all the credit for the contemporary doctrine of good faith to Professor Karl Llewellyn, who was one of the primary drafters of the UCC, Professor Farnsworth notes that the UCC's definition of good faith was actually inspired by the German Civil Code.[40] Good faith under the UCC "imports affirmative obligations on the parties to communicate during performance and to cooperate in the cure of defects and the modification of obligations in unforeseen circumstances."[41][page 339]

The Restatement (Second) of Contracts also imposes a duty of good faith in the performance and enforcement of contracts.[42] Good faith is defined in the Restatement as a "faithfulness to an agreed common purpose and consistency with the justified expectations of the other party."[43] Good faith and fair dealing in contract performance requires more than mere honesty.[44] The Restatement does not specifically define or give examples of good faith in section 205, but instead provides a list of examples of bad faith.[45]

At least one commentator suggests that the best way to define good faith is to do so indirectly, through a definition of bad faith.[46] Professor Summers concludes that "some words and phrases do not have a general positive meaning of their own within the contexts or realms of discourse in which they are at home."[47] Good faith is among these types of phrases, and so must be defined not by what it is, but by what it is not. Good faith functions as an excluder, ruling out a wide range of forms of bad faith.[48] The excluder concept means that a duty of good faith excludes certain types of conduct from what is considered acceptable good faith.[49] The excluded conduct can be more easily referred to as bad faith. Under this method of conceptualizing good faith, it is defined indirectly through what is considered to be bad faith. According to Professor Summers, defining good faith in this manner serves to "provide judges with indispensable guidance and may even serve as a kind of unifying 'theory' that, if anything can, ties various [judicial] decisions together."[50]

The United States is not the only common law country to recognize the need for good faith in commercial transactions [51] Although Australia does not yet have a similar concept of good faith, many Australian commentators have suggested that Australian contract law is headed toward [page 340] recognizing good faith.[52] The Australian judiciary has stressed the importance of recognizing a good faith duty to perform contract obligations and will most likely define the parameters of the duty from that already established in civil and common law jurisdictions.[53] Justice L. J. Priestley of the Court of Appeals of New South Wales explained in a published court opinion that "the kind of reasonableness I have been discussing seems to me to have much in common with the notions of good faith which are regarded in many of the civil law systems of Europe and in all States in the United States as necessarily implied in many kinds of contracts."[54] In establishing a duty of good faith, Australia is following the good faith model utilized throughout the world.

Canada has also expressed an interest in establishing a doctrine of good faith contract performance.[55] Two studies conducted in Canada concluded that there is a need for a good faith standard for performance in contracts of sale [56] The reports recommended the adoption of a good faith doctrine very similar to that set forth in the Restatement (Second) of Contracts.[57]

Good faith surfaces in common law states as a contract performance and contract enforcement doctrine. Although the application may be different under the common law, the meaning is essentially the same as in civil law states. Good faith requires parties to perform their obligations under the contract fairly, honestly, and in a manner acceptable in their trade or business. An obligation of good faith in the United States exists under the UCC, the Restatement (Second) of Contracts, and in federal legislation.[58] Good faith may be defined more narrowly, or may be more limited in its scope in common law countries, but the message is the [page 341] contracting parties owe one another a duty to act in good faith. England has also expressed an interest in the duty of good faith in contract performance.[59] However, English lawyers have to resort to the common law to find their duty to promote good faith.[60]

III. The Good Gaith Obligation under International Conventions

The duty of good faith plays an important role in the domestic contract law of many states. It seems logical that the same duty would extend to international agreements and international contract law. A problem develops, however, as to how broad in scope the duty of good faith will be and the extent to which it will govern the relationship between contracting parties. The question that must be addressed is whether the obligation of good faith extends to contract negotiations, contract performance and/or contract enforcement. Moreover, what exactly is a duty of good faith?

A. CISG Concept of Good Faith

The debates and conferences leading up to United Nations Convention on Contracts for the International Sale of Goods went on for many years. Resolving the divisions regarding the parameters of good faith in the CISG presented one of the most challenging problems. There were many different drafts and proposals for what eventually became Article 7 of the CISG.[61] One early draft submitted by Hungary required contracting parties to "observe the principles of fair dealing and act in good faith" in the formation of the contract.[62] This proposal was the subject of much debate and, ultimately, was altered significantly.

"The general concept that the draft Convention should contain provisions to good faith and fair dealing was supported by a majority of the representatives. It was pointed out that such principles are expressly stated in many national laws and codes and that it was thus appropriate that similar provisions be found in international conventions. It was also pointed out that such provisions on good faith and fair dealing contained in national laws had in some legal systems become useful regulators of commercial conduct."[63][page 342]

One of the main arguments in opposition to the inclusion of an article providing for a duty of good faith was that the good faith concept was that the good faith concept was too vague and would not result in uniform interpretation.[64] There was concern that Hungary's proposal would not have much effect until it could be judicially interpreted, and that judicial review could result in different interpretations depending on the country in which the dispute arose.[65] The first round of debates produced a one paragraph article dealing with good faith which stated, "[I]n the course of the formation of the contract the parties must observe the principles of fair dealing and act in good faith."[66]

The second round of debate over the inclusion of a good faith provision in the CISG produced even more heated discussion. Opponents argued that such a provision focused on the role of morality.[67]They argued that a convention like the CISG should not include a term based on morals because moral principles should not be developed into legal principles.[68] It was also argued that the term good faith was too vague and that the present draft provision did not include specific consequences for failing to act in good faith.[69] Despite much opposition, supporters of a good faith duty still existed. Those in favor of a good faith obligation explained that good faith is a universally recognized contract term which should be extended to an internationally created body of contract law.[70]

This debate induced the CISG drafters to organize a specific working group in order to reach a compromise article on what was then numbered Article 5 of the Convention.[71] The working group proposed a compromise requiring consideration of uniformity in the Convention's interpretation of the good faith principle: "In the interpretation and application of the provisions of this Convention, regard is to be had to its character and to the need to promote uniformity and to observe good faith in international trade.[72] The working group considered this compromise article as protecting the CISG's international character while promoting uniformity and good faith.[73] [page 343]

The working group's proposal was sent to the Diplomatic Conference for final debate. Once again, the vagueness argument against a good faith provision was raised by the common law states.[74] The Italian delegate, Mr. Bonell, proposed that only internationally accepted aspects of good faith, would apply to the CISG.[75] Norway proposed that good faith be restricted to the relationship between the parties and not in the Convention's interpretation.[76] The United States objected to a good faith provision, largely on the basis of vagueness.[77]

After voting on the various proposals and debating the arguments for and against the inclusion of a good faith provision, the First Committee on drafting finally agreed on a compromise provision.[78] The actual provision dealing with good faith was to read: "In the interpretation of this Convention, regard is to be had to its international character and to the need to promote uniformity in its application and the observance of good faith in international trade."[79] Although a compromise was reached and a good faith provision for the final draft was selected, the debate did not end. A new argument arose as to whether "the need to promote" phrase applied to the "observance of good faith" as well as "uniformity."[80]

The compromise left the common law states, in particular the United States, feeling they had won the battle. Good faith, however, was mentioned in Article 7 of the CISG, but only time would reveal its exact function. Professor Honnold argues that good faith in the CISG acts only as a principle for the interpretation of the Convention itself.[81] Professor Honnold acknowledges that good faith is and will be promoted by other articles of the CISG, but more in the interpretation of the CISG than in practice or contract performance.[82] Professor Honnold relies on the exact text of Article 7 and its drafting history in concluding that the role of [page 344] good faith is only in the interpretation of the CISG.[83]

This view is shared by many other commentators, but a contrary interpretation does exist. Peter Schlechtriem argues that the good faith mentioned in the CISG "should amount to a general principle, such as section 242 of the German BGB" even though the term is limited to interpretation.[84] Even if good faith is not expressly required by the CISG, it still exists in the Convention because legal principles, such as good faith, can be derived from the CISG.[85] Schlechtriem warns against using domestic definitions of good faith to develop the CISG definition of good faith, and urges that good faith "be developed using international recognized principles of honorable conduct and, as far as possible, with the maximum measure of agreement between the courts of the Contracting States."[86]

The academic world has continued debating whether a duty of good faith exists in the CISG and the actual definition of good faith. Numerous commentators have concluded that a duty of good faith exists in the CISG that requires good faith in contract performance [87] Others have specifically argued that a good faith obligation not only exists for contract performance, but also for contract formation, as in the civil law systems [88] There is also a third group of commentators who believe that the good faith requirement exists only for the CISG's interpretation, but not for contact performance.[89] Others have argued that the drafters expressly [page 345] rejected having a duty of good faith in the CISG and that lawyers lack the authority to find one now.

As this debate rages on, a clear definition of good faith which judges may use in adjudicating disputes and interpreting such duty of good faith has not surfaced. Until a clear definition is agreed upon, judges have to rely on the commentaries in deciding a dispute under the CISG.

Many commentaries were written when the CISG came into force in 1988.[90] Professor Amy H. Kastely concluded that the "notion of good faith in international trade is explicitly stated as a principle of the Convention in Article 7."[91] She cites the CISG provisions dealing with preservation of goods and mitigation of damages as examples of good faith.[92] Professor Kastely is adamant in her conclusion that good faith is a requirement of contracting parties under the CISG.[93] Professor Peter Winship was not persuaded by this argument and chose to rely instead on the actual text of Article 7.[94] Relying on the drafting history of Article 7, Professor Winship concluded that a more limited reading of the role of good faith should be adopted.[95] He stated, "[t]he additional dynamic at the conference, however, was the feeling shared by many delegations that the hard-won compromises reached within UNCITRAL should not be overturned unless significant new arguments were made."[96] Professor Winship concluded that the good faith question was more complex than he originally suggested and that interested constituencies would have to await the interpretation of the courts.[97] In the first ten years of the CISG, courts have recognized a good faith obligation in contract performance as a requirement for contracting parties.[98]

It has been suggested that there are three alternative interpretations of the Convention which will govern whether a duty of good faith is [page 346] imposed on the parties.[99]

"First, the Convention might be read literally, so as not to expressly settle the question. In addition, it might be found that a duty of good faith cannot be extracted from the general principles on which the Convention is based. In that event, an answer must be sought in the rules of private international law, such as conflicts laws. Therefore . . . domestic law would apply. Secondly, the Convention might be read literally, so as not to expressly to settle the question, but a duty of good faith might be extracted from the general principles on which the Convention is based. In that event, the parties would be held to that duty, within whatever contours a court deems to be warranted by the Convention. Thirdly, the convention might not be read literally. The provision that requires the interpreting court to consider the observance of good faith might instead be read to impose that same duty on the parties. In that event, the parties would be held to that duty, whatever its contours might be."[100]

A significant number of the commentators have recognized the need for courts to uniformly interpret what, if any, duty of good faith exists. Regardless of their position as to the existence of good faith, uniformity of interpretation was seen as being of the utmost importance. Now that the Convention has been in existence for over ten years, a body of case law interpreting its provisions is evolving. This case law further emphasizes the importance of a uniform interpretation of the CISG.

An Australian court has recognized the importance of good faith under the CISG.[101] Although the case did not deal with an international transaction, but rather a domestic Australian contract, the opinions expressed the need for a duty to perform contract obligations in good faith, with specific reference to CISG Article 7 as an international recognition of the duty to act in good faith.[102]

Other domestic courts have recognized the good faith duty under the CISG, but there is a definite lack of uniformity in their interpretation. A French court explained that the CISG requires parties to perform their contract obligations in good faith.[103] The court specifically concluded that [page 347] the conduct of the buyer was contrary to the duty of good faith.[104] Both the French court and the Australian court interpreted Article 7 as requiring the contracting parties to perform their obligations in good faith. While the CISG sought to provide uniformity to international contracts, allowing different domestic courts to provide different interpretations will not bring about a uniform obligation of good faith.

Other courts have reached different interpretations of Article 7. A Hungarian arbitration decision explained that the good faith provision of the CISG is to be used both when interpreting the CISG and as a standard for contract performance.[105] This arbitral award goes beyond previous cases by acknowledging that the requirement of good faith extends to the interpretation of the CISG itself. This acknowledgment, however, is not very significant because most commentators agree that at a minimum, the CISG provides for a good faith interpretation of its provisions.[106] In contrast, an arbitral decision in France observed that the Article 7 duty of good faith only extended to the interpretation of the CISG, but not to the parties' performance under the contract.[107] While some commentators may agree with this interpretation, it is inconsistent with the way in which other courts around the world have interpreted Article 7.[108] The controversy surrounding a good faith obligation still exists. Simply because some courts have found a good faith obligation in the CISG does not invalidate the argument that courts cannot de facto amend the CISG and insert that which the drafters expressly rejected.

Taken as a whole, there are many arguments for and against the identification of any type of good faith requirement in the CISG. It is clear that a good faith requirement in interpreting the provisions of the CISG exists and should be observed by courts. However, the arguments against including a vague, moral term rejected at the drafting stage have merit. The question is whether the duty extends to contract performance, as some courts have held, and whether a pre-contractual duty of good faith exists. The only thing that seems clear through all of these competing arguments is that the uniformity sought by the CISG is definitely [page 348] lacking with respect to the existence and extent of a good faith obligation.

B. The UNIDROIT Principles Concept of Good Faith

The UNIDROIT Principles of International Commercial Contracts [the "UNIDROIT Principles"] impose a greater duty of good faith on contracting parties than the CISG does.[109] Article 1.7 of the UNIDROIT Principles requires parties to "act in accordance with good faith and fair dealing in international trade" and prohibits the parties from limiting or excluding the duty in their contracts.[110] While this duty is expressly stated, the UNIDROIT Principles are not binding unless specifically assented to and therefore do not carry the same force of law as the CISG.[111] However, the UNIDROIT Principles are meant to be a culmination of international contract law and should assist one in interpreting the CISG.[112] The UNIDROIT Principles, where they apply, also specifically extend the duty of good faith to pre-contractual negotiations and require parties to negotiate in good faith.[113] Parties are free to incorporate UNIDROIT Principles into their contract, but will likely be even more hesitant than with the CISG.

The duty of good faith is also incorporated in other provisions in the UNIDROIT Principles.[114] Specifically, the UNIDROIT Principles require good faith in the negotiation stage of the contract, in the performance of contract obligations, in the interpretation of the contract, and in the event of a breach of the contract.[115] The UNIDROIT Principles are not mandatory law for parties to international contracts, but they do provide [Page 349] a model for contracting parties and judges which may aid in the interpretation of some of the provisions in the CISG.

An obligation of good faith is also imposed by other international agreements. For example, the Principles of European Contract Law include provisions requiring good faith generally and in negotiating a contract [116] The good faith provisions of the European Principles are very similar to those in the UNIDROIT Principles.[117] Taken together, these two documents strengthen the argument that good faith is an internationally recognized principle that should be found to be a requirement of the CISG.

IV. A Working Definition of Good Faith

Black's Law Dictionary defines good faith as "an intangible and abstract quality with no technical meaning or statutory definition, and it encompasses, among other things, an honest belief, the absence of malice and the absence of design to defraud or to seek an unconscionable advantage. . . ."[118] While the definition of good faith is somewhat elusive, it is still capable of being defined.

There are several different applications of a duty of good faith. It can be a pre-contractual duty to negotiate, a duty to perform one's contractual obligations, or a method for interpreting international conventions. However, the difficult issue is determining what a good faith obligation requires, not when it applies. Thus, this section combines these different examples and attempts to define the parameters of a good faith obligation in contracting.

First, it must be determined if a definition of good faith is needed. Many states have good faith requirements in their domestic contract law, but do not include a definition. These systems function without a definition of good faith.[119] The UCC vaguely defines good faith, and courts still require it in everyday contracting. However, there is still a need for a definition of good faith.

One reason for defining and requiring good faith is purely economic.[120] [page 350] According to Professor Garvin, "a world saturated in bad faith is very costly."[121] There are certain costs associated with mistrust, which make contracting more difficult and inefficient."[122] Promoting good faith allows contracting parties at least a modicum of assurance that the other party will carry his obligations specified in the contract. The economic risks increase as trade and contracting for the sale of goods become more global increasing the need for a definable good faith duty. A pre-existing duty of good faith replaces the task of building trust between parties who may be separated by thousands of miles. Therefore, economics and efficiency concerns require a reliable definition of good faith.

These explanations for requiring good faith also explain the need for trust and a good faith duty in the CISG. One very important reason for defining good faith is to settle the debate over what good faith means in the CISG. It is even more important to promulgate a definition in order that judges adjudicating disputes involving CISG contracts may resolve these disputes under a uniform concept of the good faith obligation.

The various meanings of good faith that have been discussed have one underlying theme. They all include some form of honesty in contracting. Whether it is pre-contractual or performance based, contracting parties expect to have honest relations with one another. This same feeling of honesty should be promoted by the CISG, as a culmination of domestic contract law.

This article examined both the UCC and Restatement (Second) of Contracts definitions of good faith.[123] It looked at the different models in Europe and in different civil law systems.[124] The international concept of good faith was found both in the UNIDROIT Principles and in the CISG.[125] In all of these, the definition of good faith was different, but the same underlying theme was present. At a very minimum contracting parties must act in some manner of good faith in their contract performance.

Good faith is defined by what it is not. The concept of bad faith can be relied upon to show what is not good faith performance. Good faith is defined as "an absence of intention to harm . . . conduct consist[ing] of action according to reasonable standards set by customary practices and [page 351] by known individual expectations."[126]

By compiling these domestic interpretations, good faith can be defined as an expectation of each party to a contract that the other will honestly and fairly perform his duties under the contract in a manner that is acceptable in the trade community. The duty of good faith is an international doctrine that requires parties to an international transaction to act reasonably, as they would expect the other party to act. This definition is international in spirit and captures the best of domestic definitions around the world. Good faith is a lot like the golden rule: treat others as you wish to be treated. Performing contract duties in a manner which is honest, fair, and reasonable will almost always be considered good faith performance.

This definition is admittedly vague and may not answer all of the concerns voiced by the drafters of the CISG regarding the vagueness of good faith obligation. However, a definition provides a starting point in order for courts and contracting parties to know what is expected. If a good faith obligation exists in the CISG, a vague definition is better than none. This definition places limits on good faith and provides judges with a place to start.

V. Conclusion

Article 7 of the CISG requires contracting parties to perform their contract in good faith. The good faith required is a loose norm incapable of an easy definition. However, good faith can be defined. It is a way of acting, one which most people know but cannot put into words. The obligation of good faith is the duty to act reasonably and to avoid a breach of the trusting relationship that exists between contracting parties.

This very important duty does exist under the CISG and must be enforced uniformly in order to be truly effective. Judges adjudicating contract disputes under the CISG must recognize that a good faith duty in contract performance exists, and they must supply an internationally acceptable meaning to that duty. Proceeding in this manner will promote the CISG, a result the drafters sought to achieve.

In order to have uniformity, the duty of good faith must be recognized by all the Contracting States of the CISG. Although the drafters of the CISG clearly omitted this duty of good faith from the version finally enacted, courts are finding the existence of such a duty and are in need [page 352] of guidance. The courts interpreting the duty must use the same uniform results. The CISG duty of good faith is a very important tool in establishing a uniform body of international contract law, and a tool that demands respect and adherence.

The delegates who argued for and against a good faith provision made a compromise with which they felt secure. The common law countries thought they won the battle by keeping this vague term out of the CISG. They may have won the battle, but they will lose the war. Courts are confused as to whether a good faith obligation exists and are rendering inconsistent decisions, adversely affecting efforts to achieve a uniform interpretation of the CISG. Even though some believe that finding a duty of good faith in the CISG is a de facto amendment to the Convention expressly rejected by the drafters, there is justification for this interpretation. The duty of good faith is an internationally recognized term and therefore, must be made a part of any international agreement on contracts.[page 353]


FOOTNOTES

* Paul J. Powers is a May, 1999 graduate of the University of Pittsburgh School of Law, B.A. 1996, Utica College of Syracuse University. The author would like to thank Professor Harry M. Flechtner for his enthusiasm and dedication to the CISG. Professor Flechtner has inspired many students to research, write about, and become involved with the Convention. His teachings will assist the next generation of lawyers in using the CISG. This comment is dedicated to my wife and family, who have always believed in me even when I had my doubts.

1. E. Allan Farnsworth, Good Faith Performance and Commercial Reasonableness Under the Uniform Commercial Code, 30 U. Chi. L. Rev. 666, 679 (1963) [hereinafter Farnsworth, Good Faith Performance].

2. All references to the Uniform Commercial Code are to the 1991 Official Text with Comments.

3. United Nations Convention on Contracts for the International Sale of Goods, April 11, 1980, S. Treaty Doc. No. 98-9 (1983) 19 I.L.M. 668 (1980) [hereinafter CISG] (entered into force on Jan. 1, 1988), available in 15 U.S.C.A. app. At 49 (West Supp. 1996), 52 Fed. Reg. 6262-80, 7737 (1987), U.N. Doc. A/Conf. 97/18 (1980).

4. See id. art. 7.

5. See infra note 82 and accompanying text.

6. See infra note 82 and accompanying text.

7. See CISG, supra note 3, art. 7(1). Art. 7(1) provides: "In the interpretation of this Convention, regard is to be had to its international character and to the need to promote uniformity in its application and the observance of good faith in international trade." See id.

8. See John O. Honnold, Documentary History of the Uniform Law for International Sales (1989), at 298 [hereinafter Honnold, Documentary History]. The drafters feared good faith was too vague a term and did not want courts supplying a variety of meanings.

9. International Institute for the Unification of Private Law, Principles of International Commercial Contracts (1994) [hereinafter UNIDROIT Principles].

10. See Nicola W. Palmieri, Good Faith Disclosures Required During Precontractual Negotiations, 24 Seton Hall L. Rev. 70, 80 (1993).

11. See id. at 81-82.

12. See Farnsworth, Good Faith Performance, supra note 1, at 670.

13. See Jill P. Anderson, Lender Liability for Breach of the Obligation of Good Faith Performance, 36 Emory L.J. 917, 919-920 (1987).

14. See Larry A. Dimatteo, The CISG and the Presumption of Enforceability: Unintended Contractual Liability in International Business Dealings, 22 Yale J. Int'l L. 111, 146 (1997) [hereinafter Dimatteo, The CISG and the Presumption of Enforceability].

15. Id. at 148.

16. See id.

17. Id.

18. See John Klein & Carla Bachechi, Precontractual Liability and the Duty of Good Faith Negotiation in International Transactions, 17 Hous J. Int'l L. 1, 17 (1994).

19. See id.

20. See id. at 16.

21. Larry A. Dimatteo, An International Contract Law Formula: The Informality of Business Transactions Plus the Internationalization of Contract Law Equals Unexpected Contractual Liability, L=(ii), 23 Syracuse J. Int'l L. & Com. 67, 72 (1997) [hereinafter Dimatteo, An International Contract Law Formula].

22. See Klein & Bachechi, supra note 18, at 17.

23. Section 242 Burgerliches Gesetzbuch, translated in The German Civil Code (Ian S. Forrester et al trans., Fred B. Rothman & Co. 1975).

24. See Dimatteo, The CISG and the Presumption of Enforceability, supra note 14, at 146.

25. See Palmieri, supra note 10, at 212.

26. See id.

27. Id. at 201-02.

28. See id. at 203. See also Article 1337 of the Italian Codice Civile, translated in The Italian Civil Code (Mario Beltramo et al., trans., Oceana Publications, Inc. 1991). Article 1337 provides: "The parties, in the conduct of negotiations and the formation of the contract, shall conduct themselves according to good faith." See id.

29. See Palmieri, supra note 10, at 204.

30. Id. (quoting the Corte di Cassazione, Cass. 27.10.1961, n. 2425, Foro, it.rep., 1961, voce "Obblig-e contr" n. 138).

31. See Klein & Bachechi, supra note 18, at 16-17.

32. See id.

33. "Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement." U.C.C. 1-203.

34. U.C.C. 1-201(19).

35. U.C.C. 1-203, cmt. 1. This distinction makes it clear that the doctrine of good faith merely directs a court towards interpreting contracts within the commercial context in which they are created, performed, and enforced, and does not create a separate duty of fairness and reasonableness which can be independently breached.

36. "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." U.C.C. 2-103.

37. Farnsworth, Good Faith Performance, supra note 1, at 671.

38. See id. at 672.

39. See E. Allan Farnsworth, Duties of Good Faith and Fair Dealing Under the UNIDROIT Principles, Relevant International Conventions, and National Laws, 3 Tul. J. Int'l & Comp. L. 47, 52 (1995) [hereinafter Farnsworth, International Conventions].

40. See id. at 51-52.

41. Dimatteo, An International Contract Law Formula, supra note 21, at 86 (quoting Arthur Rosett, Critical Reflections on the United Nations Convention on Contracts for the International Sale of Goods, 45 Ohio St. L.J. 265, 290 (1984).

42. "Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement." Restatement (Second) of Contracts 205 (1981).

43. Id. cmt. a.

44. See id. cmt. d.

45. The Restatement provides:

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

46. See Robert S. Summers, The General Duty of Good Faith -- its Recognition and Conceptualization, 67 Cornell L. Rev. 810, 818 (1982).

47. Id.

48. Id. at 819.

49. See id. at 820.

50. Id. at 826.

51. See Farnsworth, International Conventions, supra note 39, at 52.

52. See id.

53. See Renard Constructions (ME) PTY LTD v. Minister for Public Works, 26 New South Wales Law Reports 234 (1992), abstract available in UNILEX.

54. Id.

55. See Farnsworth, International Conventions, supra note 39, at 53.

56. See id. at 54 (citing Ontario Law Reform Commission, 1 Report on Sale of Goods 103-61 (1979) and Ontario Law Reform Commission, Report on Amendment of the Law of Contract 165, 176 (1987)).

57. See Farnsworth, International Conventions, supra note 39, at 54 (citing Ontario Law Reform Commission, Report on Amendment of the Law of Contract 165, 176 (1987)).

58. See, e.g., Federal Automobile Dealers Franchise Act, 15 U.S.C. 1221-1225 (1998) (providing "[t]he term 'good faith' shall mean the duty of each party to any franchise, and all officers, employees, or agents thereof to act in a fair and equitable manner toward each other so as to guarantee the one party freedom from coercion, intimidation, or threats of coercion or intimidation from the other party"); National Labor Relations Act, 29 U.S.C. 158(d) (1998) (providing that "[t]o bargain collectively is the performance of mutual obligation of the employer and the representative of the employees to meet at reasonable times and to confer in good faith").

59. See Farnsworth, International Conventions, supra note 39, at 54.

60. See id.

61. See Honnold, Documentary History, supra note 8, at 298.

62. Id.

63. Id.

64. See id. at 299.

65. See id.

66. Id. at 298.

67. See Honnold, Documentary History, supra note 8, at 369.

68. See id.

69. See id.

70. See id.

71. See id. at 370.

72. Id.

73. See Honnold, Documentary History, supra note 8, at 370.

74. See id. at 478.

75. See id.

76. See id. at 479.

77. See id.

"As had been pointed out, there was some degree of uncertainty as to how the concept of good faith was to be interpreted in an international context. . . . Although all would agree that, in theory, it was desirable to behave in good faith, he felt that a provision such as the one proposed would be uncertain and dangerous in practice." See id.

78. See id. at 659.

79. Id. See also CISG, supra note 3, art. 7.

80. See John O. Honnold, Uniform Law for International Sales Under the 1980 United Nations Convention 146-147 (2d ed. 1991) [hereinafter Honnold, Uniform Law].

81. See id. at 146.

82. See id. at 147.

83. See id.

84. Peter Schlechtriem, Commentary on the UN Convention on the International Sale of Goods (CISG) 61 (Geoffrey Thomas trans., Clarendon Press 2d ed. 1998).

85. See id. at 65.

86. Id. at 63.

87. Although not expressly provided for in the CISG, these commentators have concluded that the duty of good faith in contracting is such an internationally recognized principle in domestic contract law that it must be a general principle of the CISG. The following references provide a more adequate explanation than is possible here. See, e.g., Dimatteo, An International Contract Law Formula, supra note 21, at 93-97; Phanesh Koneru, The International Interpretation of the UN Convention on the Contracts for International Sale of Goods: An Approach Based on General Principles, 6 Minn. J. Global Trade 105, 139-141 (1997); Dimatteo, The CISG and the Presumption of Enforceability, supra note 14, at 145-146; Franco Ferrari, Uniform Interpretation of the 1980 Uniform Sales Law, 24 Ga. J. Int'l & Comp. L. 183, 210-212 (1994); Klein & Bachechi, supra note 18, at 19-21.

88. This article does not deal directly with pre-contractual duties of good faith in negotiating, but it should be pointed out that some commentators believe the CISG includes not only a performance based duty of good faith, but also a pre-contractual duty derived from the civil law model. See, e.g., Diane Madeline Goderre, International Negotiations Gone Sour: Precontractual Liability Under the United Nations Sales Convention, 66 U. Cin. L. Rev. 257 (1997).

89. See, e.g., Michael P. Van Alstine, Dynamic Treaty Interpretation, 146 U. Pa. L. Rev. 687, 779-782 (1998); Andrew Babiak, Comment, Defining "Fundamental Breach" Under the United Nations Convention on Contracts for the International Sale of Goods, 6 Temp. Int'l & Comp. L.J. 113, 117-118 (1993); Helen Elizabeth Hartnell, Rousing the Sleeping Dog: The Validity Exceptions to the Convention on Contracts for the International Sale of Goods, 18 Yale J. Int'l L. 1, 45-50 (1993); Note, Unification and Certainty: The United Nations Convention on Contracts for the International Sale of Goods, 97 Harv. L. Rev. 1984, 1991 (1984).

90. See, e.g., Symposium, The United Nations Sales Convention, 8 J.L. & Com. 1, (1988).

91. Amy H. Kastely, Unification and Community: A Rhetorical Analysis of the United Nations Sales Convention, 8 Nw. J. Int'l L. & Bus. 574, 597 (1988).

92. See id. (citing CISG arts. 85-88).

93. See id.

94. See Peter Winship, Commentary on Professor Kastely's Rhetorical Analysis, 8 Nw. J. Int'l & Bus. 623, 631 (1988).

95. See id.

96. Id. at 632.

97. See id. at 633.

98. See infra notes 101-06 and accompanying text.

99. See Farnsworth, International Conventions, supra note 39, at 56.

100. Id. Professor Farnsworth explained these three interpretations under a hypothetical sale contract between an American seller and a Dutch buyer. He concluded that his preference was for the initial solution, which would not imply a duty of good faith. See id.

101. See Renard Constructions (ME) PTY LTD v. Minister for Public Works, 26 New South Wales Law Reports 234 (1992), abstract available in UNILEX.

102. See id.

103. See SARL Bri Production "Bonaventure" v. Socit Pan African Export, Journal du Droit International 632-639 (Cour d'Appel de Grenoble Chambre Commerciale 1995), abstract available in UNILEX.

104. See id.

105. See Failure to Give Guarantee (Aus. v. Hung.) Hungarian Chamber of Commerce and Industry Court of Arbitration, UNILEX, No. VB 94124 (Nov. 17, 1995).

106. Based on the actual text of article 7 of the CISG, the conclusion that good faith should be applied when interpreting the provisions of the Convention is only logical. See, e.g., Honnold, Uniform Law, supra note 80.

107. See W. v. R. (F.R.G. v. Spain), ICC Court of Arbitration, UNILEX, No. 8611/HV/JK (Jan. 23, 1997).

108. See supra notes 101-06 and accompanying texts.

109. See UNIDROIT Principles, supra note 9, art. 1.7, 2.15.

110. Id. art. 1.7.

111. See Alejandro M. Garro, The Gap-Filling Role of the Unidroit Principles in International Sales Law: Some Comments on the Interplay between the Principles and the CISG, 69 Tul. L. Rev. 1149, 1163 (1995).

112. See id.

113. Article 2.15 of the UNIDROIT Principles addresses negotiations in bad faith and provides that:

"(1) A party is free to negotiate and is not liable for failure to reach an agreement. (2) However, a party who negotiates or breaks off negotiations in bad faith is liable for the losses caused to the other party. (3) It is bad faith, in particular, for a party to enter into or continue negotiations when intending not to reach an agreement with the other party." See UNIDROIT Principles, supra note 9, art. 2.15.

114. See Farnsworth, International Conventions, supra note 39, at 49 (explaining that articles 3.5, 3.10, 4.8 and 7.1.6 incorporate a duty of good faith when contracting parties fall under their rule.)

115. See Boris Kozolchyk, The UNIDROIT Principles as a Model for the Unification of the Best Contractual Practices in the Americas, 46 Am. J. Comp. L. 151, 172-75 (1998).

116. See The Principles of European Contract Law, Commission on European Contract Law (last modified 1997) "http://www.kclc.or.jp/EUDialogue/lando.htm". It should be noted that these are draft Principles which are heavily dominated by the civil law influence present in most of Europe.

117. Compare id. arts. 1.201, 2.301, with UNIDROIT Principles, supra note 9, arts. 1.7, 2.15.

118. Black's Law Dictionary 693 (6th ed. 1990).

119. The United States UCC system, for example, has survived the test of time and the scrutiny of the courts even though the UCC does not specifically define what good faith requires and relies more on what good faith is not. See discussion supra Part II.B.

120. See Larry T. Garvin, Adequate Assurance of Performance: Of Risk, Duress, and Cognition, 69 U. Colo. L. Rev. 71, 120 (1998).

121. Id.

122. See id. at 121.

123. See discussion supra Part II.B.

124. See discussion supra Part II.A.

125. See discussion supra Part III.A-B.

126. Summers, supra note 46, at 829.


Pace Law School Institute of International Commercial Law - Last updated September 1, 2000
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