Contract Law Lecture 15 Good Faith and Inequality of Bargaining

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Contract Law Lecture 15
Good Faith and Inequality of Bargaining Power
Track/slide 1
So far when looking at contract law we have been looking at specific ‘rules’ – of offer
and acceptance, consideration, terms and so forth. We have noted some background
themes such as laissez-faire and sanctity of contract but we have not acknowledged
any wide sweeping ‘general’ doctrines in English contract law.
Two possible general doctrines that have caused debate are:

A general doctrine to provide relief against the abuse of inequality of
bargaining power

A general doctrine to incorporate the notion of good faith into contract
negotiation, content and performance
What we shall see is that :
‘English lawyers tend to be hostile to broad general principles.
They are much more comfortable when reasoning incrementally
And by analogy with the existing body of case law.’
Whilst a general doctrine to provide relief against the abuse of inequality of
bargaining power seems unlikely to become a reality due to Lord Scarman’s hostile
words against it in National Westminster bank v Morgan 1985, in contrast it could be
argued that at some point in the future English contract law may well have to accept a
general doctrine of good faith.
Track/slide 2
How the notion of good faith currently influences English contract law
Whilst there is no general doctrine of good faith in English contract law at present,
nevertheless it influences contract law as follows:

Unfair terms in consumer contracts regulations 1999 regulation 5

Unfair contract terms act 1977 s 11

Economic duress

Undue influence

The rules on incorporation of onerous, unusual or outlandish terms

Penalty clauses

Misrepresentation/mistake

Frustration

Insurance contracts uberrimae fidei

The implication of terms into contracts

Promissory estoppel

frustration
We will concentrate on economic duress and undue influence starting by
consideration of the UTCCR 1999.
Track/slide 3
UTCCR 1999
We know that the concept of good faith is integral to these regulations as expressed in
regulation five:
‘a contractual term which has not been individually negotiated shall be
regarded as unfair if, contrary to the requirement of good faith, it causes a significant
imbalance in the party’s rights and obligations arising under the contract, to the
detriment of the consumer’.
There was some initial panic after the initial regulations were introduced in 1994
thinking that the English courts will not know how to deal with this notion of good
faith. However, English judges have not had many problems with the concept
because they have acknowledged its European origins and have translated it in the
civil law tradition. In the case of Director-General of Fair Trading v First
National Bank 2000 Lord Bingham in the House of Lords said that good faith is all
about ‘the notion of fair and open dealing’.
He noted that notions of good faith do
exist in English common law as we have listed above.
McKendrick notes that the regulations were important because they forced people to
debate the notion of good faith and indeed many commentators have argued that
English law ‘should’ recognise a general doctrine of good faith.
Track/slide 4
Walford v Miles House of Lords 1992
When considering whether or not English contract law should adopt a general
doctrine of good faith the starting point has to be this case as it did not recognise an
obligation to ‘negotiate’ the contract in good faith.
Lord Ackner said that an obligation to negotiate in good faith was unenforceable
because:

Such an agreement was too uncertain to be enforced – what is good faith?

He felt that a duty to negotiate in good faith was repugnant to the adversarial
position of the parties involved in negotiations – he said that each party to the
negotiations is entitled to pursue his or her own interest so long as he avoids
making misrepresentations
McKendrick states:
‘the conclusion that English law does not recognise the validity of the duty to
carry on negotiations in good faith makes it very difficult, if not impossible, for a
court to recognise the existence of the doctrine of good faith in English contract law.’
Criticisms of the decision in Walford v Miles
You should now refer to the McKendrick textbook and make notes on the criticisms
of the decision in Walford V. Miles.
Track/slide 5
Arguments for and against introduction of the doctrine of good faith in English
law, the neutral view and different models
McKendrick draws heavily on the work of Roger Brownsword ‘Contract Law: themes
for the 21st-century’ to discuss these issues.
Arguments against:
Please make notes on arguments against the doctrine of good faith from the
McKendrick textbook.
McKendrick states on page 556:
‘Thus the fact that there are individual rules of English contract law that are consistent
with the requirements of the doctrine of good faith cannot necessarily be used to
support the proposition that English law should recognise a general doctrine of good
faith. Provided that the individual rules work, why abandon them in favour of a
broad, general principle?’
Arguments for:
Likewise, please make notes on the arguments for a doctrine of good faith from the
McKendrick textbook.
Different models of good faith:
McKendrick seems to think that the pressures on England from these other
jurisdictions and the European and international principles will mean that sooner or
later English contract law will come to accept the existence of the doctrine of the day
despite Walford v Miles.
Recent Judicial Attitudes towards the doctrine of good faith
A more receptive attitude towards the introduction of a general doctrine of good faith
can be seen in the case of Petromec Inc v Petroleo Brasileiro SA Petroas 2005.
Longmore LJ’s remarks in the Court of Appeal are only obiter dicta but nevertheless
are significant. His Lordship notes that where there is an express obligation to
negotiate in good faith there is a stronger argument to enforce it [remember that in
Walford v Miles there was no express obligation – counsel argued for an implied
obligation of good faith] in order to honour the reasonable expectations of honest
men. His Lordship criticises the Walford decision and it is likely that if the House of
Lords has to re-examine Walford then it would not escape totally unscathed.
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