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 0
142 R
UCL Jurisprudence

Good Faith and Freedom of Contract

Reshma Korde

Introduction

'Without a principle of good faith a judge might, in a

particularcase, be unable to do justice at all, or he might be
able to do it only at the cost of fictionalising existing legal
concepts and rules, thereby snarling up the law for future
cases. In begetting snarl, fiction may introduce inequity,
unclarity or unpredictability....]

In 1968 Robert Summers argued that a general requirement of good faith was
required in the English law of contract. More recently, Sir Thomas Bingham of
the Court of Appeal has indicated an increasingly favourable attitude towards
the imposition of duties of fairness and good faith as an implied constraint on
the exercise of superficially unlimited contractual rights and remedies.
Exceptionally though, were the words of Raphael Powell during his inaugural
lecture of 1956 when he invited his audience to entertain the concept that that
common law of the land may be improved if it were to adopt an explicit
doctrine of good faith. Labelled as radical and ahead of his time, Powell's
invitation was predominantly unheeded for some years to come. However,
recent years have brought good faith back to the forefront of legal and
philosophical debate.
Primarily though, a fundamental aim of the law of contract is to
facilitate the pursuit of individual projects, which emphasises their free choice
of aims and lifestyles and the essentially purposive nature of human social
existence. With this in mind, can the adoption of a good faith doctrine remain
justified? Classical contract law as it has been described over much of the 2 0 1h
Century, is seen as fostering freedom of contract founded upon the centrality
of the individual, the creed in the creative power of his will and a restricted
role of intervention for the courts and the state.2 Although labeled historically

1 Robert S. Summers, 'Good Faith in General Contract Law and the Sales
Provisions of the Uniform Commercial Code', (1968) 54 Virginia Law Review 195,
198-199.
2 P.S. Atiyah, The Rise and Fall of Freedom of Contract
(1979), p2 5.
 Good Faith and Freedom of Contract 143

inaccurate, this interpretation remains influential. Classical contract theory is

now advanced in a new form using the tools of micro-economic analysis.' This
modem and sophisticated representation endeavours to develop a general
structure applicable in all contract law. Would the incorporation of good faith
obscure this body of law?
The concept of good faith has increasingly drawn the attention of
lawyers and academics in England. This essay aims to examine whether the
law of contract should adopt a doctrine of good faith, and if it were to adopt
such a doctrine, how would this effect the notion of freedom of contract? This
investigation will require analysis of the concept of freedom of contract and
the notion of good faith. Furthermore, examination of the development and
effects of good faith within the existing legal system is necessary. I will then
analyse the general ideology of freedom of contract and the qualifications to
the concept, including common law and statutory intervention. This essay
finally attempts to analyse whether a doctrine of good faith should be adopted,
with regards to its impact on the opposing concepts of contractual freedom
and intervention. Is a good faith doctrine rationally defensible in respect of the
fundamental aims of contract law?

Freedom of Contract
The concept of freedom of contract has in its history a twofold meaning. Isaiah
Berlin distinguishes between its positive aspect, namely the creative power of
the participants in the contractual process to act as private legislators and the
negative aspect, the freedom from obligation unless consented to. 4 Positive
liberty, or the freedom to self-accomplishment means that the parties are free
to create a binding contract and legislate rights and duties binding upon
themselves, whilst reflecting their free will. Negative liberty is the freedom
from intervention, which means that the parties are free from obligations so
long as a binding contract has not been concluded.
Principally, parties are free to negotiate the formation of a contract, and,
the selection of the terms are the result of the free will of the parties. Freedom
of contract admits contest between the contracting parties themselves. But the
value of reinforcing self-reliance and initiative underlying the contest is not an
absolute freedom. The use of violence, fraud or other unlawful means can
never be legitimate as these illegalities subvert the very notion of positive
freedom. This is not linked to the concept of good faith, but is about the fact
that fraud and violence constitute civil wrongs and may impose liability in tort.

3 R.A. Posner, Law and Economics (1992), ch4.

4 Isaiah Berlin, 'Liberty', in Four Essays on Liberty (1969), p 1 18 .
144 UCL Juris

p
rudence Revie 0

Good faith may come into play considering the fact that the freedom of action
upon which freedom of contract is founded is a relative one. Violence is
clearly incompatible with freedom of contract, but what is the position with
regard to economic or emotional compulsion? There is also no doubt that fraud
is incompatible with contractual autonomy, but what about non-disclosure of a
material fact of which the other party is unaware? Legal systems desire rules
that impose liability on those who violate the notion of freedom of contract.
Determination of the pre-requisites that guarantee this positive freedom is
prevalent within the legal system. In this respect the absence of a duty to act in
good faith during the negotiation stages and subsequently the implementation
of a contract, remains controversial.
Freedom of action is the underlying notion of freedom of contract, but it
may be abused, particularly during the pre-contract stages of an agreement.
Where a party makes a promise that is not binding according to the formal
rules of contract law, should he always be entitled to renege from this non-
contractual promise, even where he induced the other party to rely on that
promise? English law settles this tension between the need to keep formal
requirements and the protection of misplaced reliance, by enabling the
contracting party to benefit from a freedom granted by legal rules. By contrast,
in Continental systems, even a non-contractual promise or a mere expectancy
may have binding force under the doctrine of good faith. This imposition of
good faith in the bargaining process means a rejection of the adversarial
process, which characterises the position of the bargaining parties in English
law.5 The contracting parties are not strangers, they have to be considerate and
the reliance they place on each other is translated into a legal duty of fairness
and trust.
The freedom of contract approach has led to the reduction of
supervision of contractual terms to a bare minimum. It is not the role of some
notion of unfairness or unreasonableness to invalidate an otherwise formal
contract. Contractual justice means that such matters are for the parties to
decide and their decisions must be honoured. Historically, there was little
control over an agreement with tools of regulation having little effect. 6 The
recognition of harsh or unfair terms was insufficient to term a contract as
against public policy. The doctrine of consideration was defined by purely its
formal meaning and although on occasion it was utilized to invalidate unfair

H.K. Lucke, 'Good Faith and Contractual Performance', in P.D. Finn (ed.)
Essays on Contract(1987), 170-17 1.
6 P.S. Atiyah, 'Freedom of Contract and the
New Right', in Essays on Contract
(1986), p3 5 5 -3 5 8 .
Good Faith and Freedom of Contract 145

agreements, it could not be invoked to engage contractual justice. Similarly, a

term was not be implied into a contract merely because it was just or
reasonable, it had to be based on the parties' consent.8 The reluctance to
impose obligations led to the attribution of a substantial part of contract law to
the parties' agreement on a theoretical level. Even in the case of implied terms
based on trade custom there had to be more than a course of conduct which
was habitually followed, and, the doctrines of mistake and frustration were
said to be based upon the parties intent.9 The requirement of stability and
predictability was reflected by this rigid adherence to the rules of contract,
which assumed an almost mathematical guise.
However a fundamental incongruity could be noted between the ethos
of the will of the parties and the quest for certainty in the law. Supremacy of
the parties' intentions meant that where consent was artificial due to some
vitiating factor, the contract should be avoided. But the requirement of
reliability led to the restriction of the grounds upon which contractual
obligations could be avoided. Furthermore this has resulted in the upholding of
contracts that did not reflect the genuine intention of parties. 10 With this
narrowed scope of the doctrines of duress and mistake, freedom of contract
meant that the content of agreements was almost completely exempt from
external supervision. This enabled business corporations to draft their
contracts as they pleased, with very narrow routes of escape. On the other
hand contractual liability was often dependent upon formal requirements
which parties could avoid at the last minute, with undesired repercussion on
parties in reliance. In Pitt v. P.H.H Asset Management Ltd" Sir Thomas
Bingham described the process of conveyancing as profoundly depressing and
frustrating. Even after a deal is struck either party may decide not to proceed
without any explanation.' 2
Despite these general broad trends, the importance of exceptions was
recognised and although equitable rules were accorded a marginal role, they
did lead to some deviation from the strict classical model. In Redgrave v.

Stilk v. Myrick (1809) 2 Camp 317; 170 ER 1168.

8 G.H. Treitel, The Law of Contract (1991), p1 8 7 .
9 G.H. Treitel, The Law of Contract (1991), p8 18 -8 19 .
10 Bell v. Lever Bros Ltd [1932] AC 161.
1 Pitt v. P.H.H Asset Management Ltd [1994] 1 WLR 327, at 333-334.
12 A purchaser and vendor are able to act in an unprincipled manner and indulge in
their self-interest without exposing themselves to any legal penalty because of the
requirement that contracts for the sale of land be evidenced in writing and that
terms agreed subject to contract do not give rise to a binding contract.
146 UCL JurisorudenceReview 2000

Hurd13 it was held that a contract can be avoided for misrepresentation, even
if it is innocent and furthermore, various cases advocated the doctrine of undue
influence, which expands the possibility of avoiding unfair contracts. 14 As the
context of law shifted from classical to a more modem model of contract law,
there has been evidence of the reshaping of the legal system. 5 The decision of
High Trees' 6 was perhaps the most significant in a long line of cases involving
the expansion of non-contractual liability. The case of Hillas & Co v. Arcos
Ltd 7 demonstrated a realistic and fairly relaxed approach to requirements of
contractual certainty. Also, the well known case, Hong Kong Fir Shipping,'8
demonstrated an approach to discharge of contract, whether by breach or
frustration, that gave greater emphasis to the consequences of an event, rather
than to the intentions of the parties:

'...we understand today a great deal more about the problem of

externalities. In the first part of the 19 Century... there was a
widespread belief in the harmony of interests, an idea which
underlays much classical economic thought and also much
utilitarian thought. Today we know that, even if we accept the
fundamentals of private enterprise economics, it can only be
assumed that private agreements are in the public interest if we
ignore the effects on third parties. And where there are grounds
to think that a contract may have harmful effects on third
parties or the public at large, there is nothing contrary to
economic theory in recognizing these harmful effects and
nullifying or even prohibiting such contracts.'19

The evolution of new doctrines or inexactitudes to the historically unfettered

freedom of contract has been gradual. But at the turn of the century the
transformation from this contractual autonomy to a more limited and regulated
modem model of law is clear. The contrast between duress and frustration is
instructive in this context. Whereas it took frustration almost 100 years to

'3 Redgrave v. Hurd (1881) 20 ChD 1.

14 See Wright v. Carter[1903] 1 Ch 27.
15 J. Beatson and D. Friedmann (eds) Good Faith and Fault in Contract Law
(1995), pp7 - 9 .
16 CentralLondon Property Trust Ltd. v. High Trees House Ltd. [ 1974] KB 130.
17 Lord Wright, Hillas & Co v. Arcos Ltd. (1932) 147 LT 503.
Hong Kong Fir Shipping Co Ltd. v. Kawasaki Kisen Kaisha Ltd. [1962] 2 QB
26.
19P.S. Atiyah, 'Freedom of Contract and the New Right', n.6 above, p359.
Good Faith and Freedom of Contract 147

develop its rejection of the implied contract theory,20 the process was achieved
in a decade in the case of duress.' Characterized by increased control over the
contractual regime, modern contract law is reflected by the general supervision
of the process of formation and by intervention in the very contents. Under US
law this 'procedural unconscionability' is basically concerned with ensuring
that the contract once created is free from elements which vitiate consent. 22 It
is stated that this intervention by the courts does not conflict the 'freedom of
contract' paradigm, leaving them free to reshape the law.
When taking into consideration the inclusion of exemption clauses and
unfair terms in the contract, English law requires the notice to be manifested in
a way that is proportionate to the onerousness or unusualness of the term. In
extreme cases the well known words of Lord Denning are repeated, 'Some
clauses I have seen would need to be printed in red ink on the face of the
document with a red hand pointing to it before the notice could be held to be
sufficient.' 2 3 As a result of such avid development in the law, the grounds for
rescinding a contract due to some lack of consent have greatly expanded. The
restrictive approach of Bell v Lever Bros. Ltd in the field of mistake has been
circumvented by resorting to the equitable jurisdiction, as was demonstrated in
Solle v. Butcher in 1950.2 In Leaf v. InternationalGalleries25 doubts as to the
extent of the right to rescind a contract due to some innocent misrepresentation
were removed and the law of undue influence has been subjected to pre-
eminent reform. In the context of guarantees, it may be incumbent upon a
lender, who knows or ought to know that the debtor has a dominating
influence over the guarantor, to ensure that there is no undue influence exerted
by the debtor. 26
Statutory intervention such as the Consumer Credit Act 1974, s.67-68,
has also curtailed the requirement that a transaction be predominantly
disadvantageous to the party suffering the loss, enabling consumers to rescind
a contract on grounds of undue pressure. Protection of the mortgagee has

20 The doctrine was recognised in Taylor v. Caldwell (1863) 3 B&S 826, 122 ER
309 and the alternative was found in Davis Contractors Ltd v. Fareham UDC
[1956] AC 696.
21 The Evia Luck [1992] AC 152.
M.A. Eisenberg, 'The Bargain Principle and its Limits', (1982), 95 Harvard
Law Review 741.
23 Lord Denning, J Spurling Ltd v. Bradshaw [1956] 1 WLR 461.
24 Bell v. Lever Bros Ltd [1932] AC 161 and Solle v. Butcher [1950] 1 KB 671.
25 Leaf v. InternationalGalleries [190] 2 KB 86 as in Treitel, The Law of Contract

(1991), p3 3 5 .
26 Barclays Bank v. O'Brien [1994] 1 AC 180.
 R 0
148 UCL Jurisprudence

developed remarkably over the past decades and there is nothing primarily
objectionable about provisions requiring information to be given to the
consumer, nor about the 'cooling off' provisions. The main purpose here is to
ensure that contracts do indeed have the full consent and understanding of the
consumer and the giving of information about true rates of interest available
from suppliers of credit can be justified as an aid to the competitive market.
Interestingly though, the courts have sought to achieve a balance for the
protection of consumers, whilst also recognising their position as rational
adults, especially where they have been legally advised. In Multiservice
Bookbinding Ltd v. Malden27 where consumers were advised by their own
lawyers and understood the nature and essential elements of the transactions,
the contracts were upheld, although the terms were harsh and unfair.
The law of contract visibly possesses tools that enable control over the
formation and implementation of a contract. However, once a contract has
passed the initial test of validity, regulation of its terms on grounds of
unfairness is problematic as this primarily conflicts with the ideology of
freedom of contract. Despite this, the doctrine of public policy and the
development of equitable maxims have been utilized in an effort to promote
contractual justice. Agreements such as those detrimental to the institution of
marriage or those involving sexual immorality have been regulated by the
public policy doctrine and in a purely economic context to those agreements
which had the effect of restraining or adversely effecting competition.28
However, other contracts that are prima facie grossly unfair or economically
immoral are beyond the reach of public policy principle. The doctrine was
naturally viewed as a threat to the freedom of contract and classical contract
theorists attempted to restrict the exercise of this 'unruly horse.' 29 It was even
suggested that the courts may 'not invent a new head of public policy.' 30
This halt in the recognition of any new public policy restraints on
freedom of contract gave for the recognition of a new doctrine. A principle
that has long been recognised in continental law and which will provide
another important tool for the control of contractual terms and their application
in conformity with contractual justice. Despite its recognition in other
jurisdictions, English law has hitherto declined to adopt a general doctrine of
good faith. Would the adoption of such a doctrine create undesired conflict
with the notion of freedom of contract or will it offer a prima facie solution to

27 Multiservice Bookbinding Ltd v. Malden [19791 Ch 84.

28 G.H. Treitel, The Law of Contract, (1991), p3 8 7 .
29 Richardson v. Mellish (1824) 2 Big 229.
30 Lord Halsbury, Janson v. Driefontein ConsolidatedMines Ltd [ 1902] AC 484 at
491.
Good Faith and Freedom of Contract 149

a wide range of issues that have been dealt with erratically and ambiguously
by the courts?

Good Faith Defined

Professor Roy Goode told an audience without regret that 'we in England find
it difficult to adopt a general concept of good faith.. .we do not know quite
what good faith means.' 3' Despite the vast array of debate and academic
publication surrounding the issue, noticeably lacking is a clear and
unequivocal definition of the term 'good faith'. The EC Directive on Unfair
Terms in Consumer Contracts and the implementing Regulations in the UK
have generated increasing interest in the topic. Regulation 4(1) provides that a
term is unfair if 'contrary to the requirement of good faith, it causes significant
imbalance in the parties' rights and obligations...' Lack of clear definition and
therefore understanding has resulted in comment such as that by Michael
Bridge. He contended that:

'good faith and fair dealing.. .is an imperfect translation of an

ethical standard into legal ideology... an invitation to judges to
abandon the duty of legally reasoned decisions...' 3 2

Good Faith may be defined in terms of a 'good faith requirement' which

suggests that contractors should perform and enforce their contracts in line
with the spirit of the agreement. 33 The pursuance of individual self-interest
should be in a way that is consistent with the community's sense of fair
dealing. A 'good faith regime' has also been advocated, which would
incorporate the systematic ethics of co-operation as a replacement for the
traditional adversarial ethic of contract as it is known. This draws upon the
element of moral judgement within contract law. Yet according to Powell,
.only foolhardiness or presumptuousness would permit a lawyer to trespass in
the field of morals.' Despite this he attempts to demonstrate that the concept
of good faith is in fact already bedrock within the English legal system,
existing without the classification of a doctrinal namesake. In Ingham v.
Emes 34 Powell points out that the court could have arrived as their result more
directly if a good faith doctrine had been available, the plaintiffs non-

3' R. Goode, The Concept of' Good Faith' in English Law (Rome, 1992).
32 M.G. Bridge, 'Does Anglo-Canadian Law Need a Doctrine of Good Faith?'
(1984) 9 CanadianJournal of Business Law 385, 412-413.
33 R. Brownswood, 'Good Faith in Contracts Revisited' [1997] CLP 111.
34 Ingham v. Emes [1955] 2 All ER 740.
150 UCL Juris rudence Re
0

disclosure being in bad faith. Powell appeared to favour equating good faith
with honesty and fair dealing, in an objective manner.
Conversely, skepticism of the adoption of the good faith requirement is
increased by the charge that the concept is shrouded in such vagueness that its
adoption would obscure the law by introducing an unacceptable degree of
uncertainty. The Uniform Commercial Code has been highlighted as response
to these concerns. Disregarding issues of formation and disclosure of good
faith, it is the performance and enforcement of contracts that lies at the heart of
section 1-203, which provides that 'Good faith performance or enforcement
emphasises faithfulness to an agreed common purpose and consistency with
the justified expectations of the other party...'
There is at present no defined doctrinal requirement of good faith in
England. The thrust of a party's grievance is often that the other party has not
performed in accordance with the spirit of the deal. In Suisse Atlantique36
there was an opportunity for the House of Lords to address the question raised
some forty years earlier. However, upon the facts of the case the House was
not tempted to let good faith intervene and reconstruct the bargain. The time
was not right, with standard form contracts and exclusion clauses being the
burning issue of the day.
In Scally v. Southern Health and Social Services Board37 a good faith
requirement could be seen as remaining faithful to the parties' expectations.
Advocates of the requirement illustrate its merit by the case of Arcos v.
Ronnasen38 where although the House of Lords was well aware of the buyers
real reasons for wishing to withdraw from the contract, it was uninterested in
acting against such conduct. Whether such opportunistic action is contra to
good faith remains a subjective argument as it involves the courts re-writing
the parties' bargain and reconstructing the market within which the parties
were situated. A regime would incorporate the underlying values of co-
operation and solidarity, whereby parties must be considerate to each other
and rely on each other. This presupposes a very different morality from the
adversarial ethic apparently accepted by English law and so 'on the face of it,
a good faith regime is unlikely to have many friends in England.' 39

3 R. Powell, 'Good Faith in Contracts', (1956) 9 CLP 16.

36 Suisse Atlantique Society d'Armement Maritime SA v. NV Rotterdamsche Kolen
Centrale [1976] 1 AC 361.
3 Scally v. Southern Health and Social Services Board [ 1991] 4 All ER 563.
Arcos v Ronnasen [1933] AC 470. The facts of this case were that the buyer
rejected timber for breach of s13 Sale of Goods Act 1979, although in reality this
was to take advantage of the falling market price of timber.
3 R. Brownsword, 'Good Faith in Contracts Revisited', n.33 above.
 Good Faith and Freedom of Contract 151

English lawyers, not surprisingly, appear to find good faith an elusive

concept. In CentralEstates Ltd v. Woolgar,40 Phillimore LJ remarked:

'One said a claim was not made in good faith when it was
made in bad faith. Another said that a claim must be dishonest
if it was to be made otherwise than in good faith...if the facts
showed that it was untrue to the tenant... or made for some
ulterior motive...'

Unfortunately, it would appear that the English jurisprudence of good faith

remains primitive even today. Farnsworth distinguishes between 'good faith
purchase,' which connotes an innocent state of mind, free from suspicion or
notice, and 'good faith performance and enforcement,' which purports
decency, fairness or reasonableness and is linked to the idea of an implied
term of co-operation. 4 ' This provides definition, yet does not ascertain whether
good faith is to be judged subjectively, objectively, or by some inter-subjective
standard?
A central question that surrounds the meaning of good faith involves the
prioritisation of self-interest. How far will one party be allowed to put his own
selfish interests above those of his contractual partner? A good faith
requirement impinges upon purely self-interested dealing, and it is claimed that
the theory characteristically requires that contractors respect one another's
legitimate interests, distinguishing between good faith as an exception and
good faith as a rule. 4 2 Perhaps in attempting to define an unambiguous concept
of good faith, Summers' analysis should be regarded: '...good faith is an
"excluder... a phrase without general meaning, which serves to exclude a wide
range of heterogeneous forms of bad faith...' 43 With this in mind it might well
be impossible to frame a universal definition of good faith. What remains
fundamental is the objective that the concept hopes to accomplish. 'Courts and
businessmen can deal with and handle concepts and understand them, without
getting "hung up" on definitions.'"

40 Central Estates (Belgravia) Ltd v. Woolgar [(1971] 3 All ER

647.
41 A. Farnsworth, 'Good Faith Performance and Commercial Reasonableness
Under the Uniform Commercial Code', (1962) University of Chicago Law Review
666.
42 J. Adams and R. Brownsword, Key Issues in Contract, (1995), ch.7.
43 R.S. Summers, 'The General Duty of Good Faith - It's Recognition and
Conceptualisation' (1982) 67 CornellLaw Review 810.
44 R.A. Eisenberg in J. Adams and R. Brownsword, Key Issues in Contract, n.42
above.
152UCJrspuecReiw20 UCL JurisprudenceReview 2000

Good Faith in Existence

While the creation of a doctrine of good faith has yet to crystallise in a direct
decision, it is apparent that the concept has surfaced on numerous occasions
acting as a restraint on the freedom of contract. As Lord Mansfield stated in
Carter v. Boohm,45 good faith is the governing principle applicable to all
contracts and dealings.' Also, contracts uberrimae fidei or contracts of the
utmost good faith are established, including insurance contracts where the
insured is under a duty to disclose all facts that a reasonable or prudent insurer
would regard as material. There is also a limited class of fiduciary
relationships in which the party in whom the trust is reposed is under an
obligation to disclose information to the person who has placed the trust in
him.
Increasing interest on the concept of good faith has undoubtedly centred
on the aforementioned Unfair Contract Terms Regulations, in which the
general test for an unfair term has, as it's first element a violation of the
requirement of good faith. This has reflected the growing awareness that 'good
faith, far from being a uniquely civilian phenomenon, has made significant
impact on the jurisprudence of much of the common law world.' 4 6 With the
implementation of the EC Directive, the doctrine may be treated as part and
parcel of English law, yet there is still lacking, any express provision that must
be adhered to. According to Powell, English law would benefit from an
enforceable doctrine of good faith. But surely in a system where issues are
sufficiently dealt with by other areas of the law of obligations, adoption of a
new doctrine would merely be counter-productive and hence unnecessary?
Conversely, it is argued that the indirect strategies which the courts
have previously enacted to disallow bad faith withdrawal are perfect examples
of what Powell calls the 'contortions or subterfuges to which the courts must
typically resort.' Why, instead of reverting to this covert manipulation of a
potential doctrine, can the courts not simply apply the law in accordance with
traditional classification of a good faith doctrine? Good faith has surfaced
concealed by other terms, in various other cases over the years and through the
courts' interpretations and parties' own provisions the courts have showed a
clear willingness to speak the language of good faith.47 Moreover, it is felt that
the lack of a doctrine of good faith denies litigants the protection they deserve.
In Walford v. Miles48 the House of Lords was unsympathetic of the plaintiffs
attempt to construct an enforceable lockout agreement. Brownsword states

45 Carterv. Boohm [1766] 3 Burr 1905.

46 R. Brownsword, 'Good Faith in Contracts Revisited', n.33 above.
4 Timeload v. BT (1993) and PhilipsSA v. B Sky B (1994).
48 Walford v. Miles [1992] 1 All ER 453.
 Good Faith and Freedom of Contract 153

that if there had been a suspicion of bad faith, the House would have either
had to turn a blind eye, or force the facts to fit the classical mould. However,
Lord Ackner clearly rejected the idea of good faith, saying that the concept
was both unworkable in practice and repugnant in principle to the adversarial
ethic upon which the freedom of contract law is premised. In the Interphoto
case,49 Sir Thomas Bingham suggested that a requirement of good faith is:

.essentially one of fair and open dealing, its import going

beyond the regulation of active deception, such that its effect is
perhaps most aptly conveyed by such metaphorical
colloquialisms as "playing fair" "coming clean" or "putting
one's cards face upwards on the table".'

However there is a clear distinction between condemning non-disclosure as in

Ingham v Emes, mentioned above, and hard cases of the business world where
buyers and sellers simply take advantage of the other party's ignorance of
price-sensitive information. Enthusiasm for good faith may give way to the
increased scepticism and recognition of party autonomy, with English lawyers
becoming uneasy at the abstract idea of 'playing fair'.
The traditional approach of English law appears to be that a
contractually-expressed right to terminate can be exercised regardless of
whether its exercise would be fair, reasonable or justifiable in the given
circumstances.50 There is in existence a common law gloss on the exercise of
contractually defined remedies, operating to restrain opportunistic acts of bad
faith. Areas of law such as Misrepresentation, Undue Influence and
Anticipatory Breach appear to incorporate some underlying concept of good
faith. What remains to be decided is whether an enforceable doctrine should
be adopted? Furthermore, how would such reform affect the ideology of
freedom of contract? I will now examine the general arguments surrounding
intervention of the freedom of contract. Is such interference justified? And
subsequently would intervention on the grounds of good faith be justified?

Freedom or Intervention
The law may explicitly override the freely arrived at agreements of parties,
resulting in the nullification of express contractual terms. Although this is a
direct challenge on the fundamental principle of freedom of contract, these
49 Interphoto v. Stilletto [1989] QB 433.
so This is consistent with the decisions of White and Carter (Councils) Ltd v.
McGregor [1962] AC 413 and Clea Shipping Corporation v. Bulk Oil Terminal
Ltd, The Alaskan Trader [1984] 1 All ER 129.
154 UCL Jurisprudence R w 2000

interference's can be justified, as demonstrated in the aforementioned cases.

Also, for example much modem anti-discrimination legislation raises issues of
fairness and equity, but also raises matters of profound national policy. The
requirement for regulation of controlled tenancies and minimum wages are a
violent interference on freedom of contract, however, this form of statutory
intervention is indeed indispensable to society. This essay seeks to examine
the more contentious interference's with freedom of contract, which have
traditionally been justified on grounds of fairness or equity, without reference
to the public interest or third parties.
Such interference is a highly paternalistic process that conflicts with the
freedom of contract. Despite this abrogation from contractual autonomy, the
law has commonly interfered with contractual terms on grounds of unfairness.
The Unfair Contract Terms Act 1977 (UCTA) may be viewed as a highly
paternalistic measure which deals with all kinds of contracts, but only in
relation to exclusion and limitation clauses. In broad terms it prohibits the use
of some exclusion clauses in consumer contracts and subjects others to a test
of reasonableness. This seems to mean much the same thing as 'fairness' but
English law has historically preferred the use of the term 'reasonable' perhaps
because of its pragmatic common sense, rather than 'fairness' with its moral
suggestions. However, despite the desired impact of UCTA 1977, it must be
considered that in some situations the 'beneficiaries' of protective legislation
may not always appreciate the value of the benefits bestowed upon them.
The Sex Discrimination Act 1986 repealed many statutory restrictions
on the working hours of women as a result of the action of many feminist
groups which felt that such restrictions actually penalized women in the labour
market. The government recognised the freedom that women should have in
selecting whether to work longer hours and benefiting from extra remuneration
if they wished. Similarly, it may be argued that in attempting to protect the
consumer, UCTA may confer unwanted protection. The ordinary consumer
may be protected against unfair or unreasonable clauses, but this may be a
protection he does not want, for a price he does not wish to pay.
Recognition of the notion of freedom of contract is perhaps
demonstrated by the fact that paternalistic interference has been left to
Parliament. In Photo Production Ltd v. Securicor Transport Ltd51 the House
of Lords reaffirmed their general faith in the freedom of commercial parties to
make their own contracts, subject only to the terms of the Act. More recently
in National Westminster Bank v. Morgan52 the House of Lords 'questioned'

5I Photo ProductionLtd v. Securicor TransportLtd [1980] AC 827.

52 National Westminster Bank v. Morgan [ 1985] AC
686.
 Good Faith and Freedom of Contract 155

whether any general principle of 'unconscionability' is needed to protect even

consumers against unfair contracts. Hence, freedom of contract seems to have
been re-established as the ideology of the common law. However, in the case
of George Mitchell v Finney Lockseedsthe House of Lords intervened in the
contract and held that the clause was unreasonable under UCTA.
The point of conclusion for the law Lords was that the suppliers were
shown not to rely on such clauses in practice. Suppliers put such clauses into
contracts because they want to reserve the right to judge for themselves
whether they think a claim is well founded, and not to be brought before the
courts, who may not understand the realities or be deceived by the buyers.
There is very good reason for striking down such clauses, even though
contrary to the freedom of contract. Although parties do not intend to deny the
right to compensation, they do intend to deny the jurisdiction of the courts to
decide on what is a legitimate complaint. This is inadmissible because it seeks
to make the guilty party a judge in his own cause. This is in itself a procedural
monstrosity, which is contrary to the most fundamental principles of justice.
These appear to be justified grounds for striking down exclusion or limitation
clauses, and that doing so is not a violation of the fundamental principle of
contractual freedom, rather it seeks to give effect to the intention of the parties
at a fundamental level.
So it is apparent that in certain circumstances the common law and
statutory intervention upon the freedom of contract in the interests of fairness
and equity, is a welcomed mechanism for regulating contractual justice. There
are indeed real grounds for interfering with freedom of contract, which do not
conflict with its ideology. However, upon analysis it is visible that there
remain some controversial areas where paternalism of any sort is unjustified.
Primarily the issue of compulsory insurance must be considered. When a
consumer is given statutory rights in respect of defective goods, or misleading
holiday brochures, the other contracting party is liable as though he were
insuring the consumer against risk of buying a defective car or a miserable
holiday. If these 'rights' cannot be bargained away by exclusion clauses, the
consumer is in effect being given a form of compulsory insurance, which he
undoubtedly has to pay for in the form of increased charges. This would
appear a distortion on the market. By forcing the consumer to spend money
contrary to his own inclination and interfering with his private rights there

53 George Mitchell Ltd v. Finney Lock Seeds Ltd [1983] 2 AC 803. The case
involved the sale of cabbage seeds of inferior quality that led to the loss of many
thousands of pounds. The contract contained a tight limitation clause under which
the sellers liability would have been confined to refunding the initial value of the
seeds.
156 UCL JurisprudenceReview 2000

appears to be a form of paternalism that interferes with the notion of freedom

of contract. The law tells the buyer that he does not know what is in his own
best interests, and that if he wants to buy certain goods or services he must
buy certain rights as a compulsory extra. Why should buyers be prevented
from exercising their freedom of choice? Surely an option of lesser conflict,
such as throwing the onus on a seller requiring him to show that an exclusion
clause has been thoroughly explained to the buyer, is a possibility?
Also to be considered is the fact that although markets are in practice
very imperfect, there has in recent years been a shift in the favour of variety
and consumer choice. Consumers have a wide choice as to the kinds of goods
or services they wish to buy and the terms upon which they are supplied. The
UCTA actually restricts this choice by stating that certain things may not be
purchased unconditionally. It is argued that in reality, given the choice most
consumers would purchase the protective terms and so the issue of compulsion
is irrelevant, as only the minority would suffer a diminution of their freedom of
choice in the market. Although legitimate, this claim depends on the precision
of the empirical data, which may or may not be accurate. A similar problem
arises in such cases where the court awards substantial damages for distress
caused by an appalling or disagreeable holiday.54 Although there may be a
clear breach of contract some people will be more affected than others will.
The present situation requires all to pay insurance premiums regardless of
whether they desire this added protection.
The difficulty of the justification for statutory provisions, which are
contrary to the notion of freedom of contract, appears to be increasing
steadily, as even the application of the reasonableness test is somewhat
onerous. Professor Atiyah55 raises one problematic illustration of the tension
between contractual freedom and protection. Surveyors who value houses and
flats on behalf of mortgagees commonly use disclaimers limiting their liability.
Where contracts are completed and subsequent defects with the property are
discovered the purchaser was traditionally left with no remedy. It was only
recently that the House of Lords held that a buyer could sue a surveyor in tort
for a negligent valuation in these circumstances. 56 The purchaser relies on the
valuation and it acts as a form of compulsory insurance. The question that
arises here is whether purchasers should be compelled to pay for the
mortgagee's valuation? In some cases they are not even permitted to see the
report, but are forced to rely on it, unless they also contract a surveyor of their

54 Jarvis v. Swan Tours [1973] QB 233.

5s P.S. Atiyah, 'Freedom of Contract and the New Right', n. 6 above, p378.
56 Smith v. Eric Bush [1989] 2 All ER 514.
Good Faith and Freedom of Contract 157

own, an added cost to that already paid for. This compulsion to purchase the
mortgagee's survey appears to be a fundamental breach of the freedom of
contract. The market does not appear to effectively give the buyer free choice;
but is there an answer to this problem? Professor Atiyah proposes that markets
develop a form of insurance that is clearly and easily available to buyers: an
insurance that advocates the freedom to choose to contract, rather than one of
compulsion.
There is also here, a broader area that cannot be explored in this essay,
and that concerns the interrelationship between the law of contract and the rest
of the law of private obligations, in particular the law of tort. On this issue
Professor Fried has argued rightly that there is nothing inconsistent with
classical contract theory in developing and expanding non-consensual forms of
liability, through the medium of tort and unjust enrichment. 57

Adoption of the Doctrine

'The most direct challenge to the conception of contract law as

a coherent expression of the principle of autonomy is thought
to come from the doctrines of good faith, unconscionability and
duress. These doctrines explicitly authorise the courts in the
name of fairness to revise contractual arrangements or overturn
them altogether. Good faith is a way of dealing with a
contractual party: honestly, decently. It is an adverbial notion
suggesting the avoidance of chicanery and sharp practice (bad
faith) whether in coming to an agreement or in carrying out its
terms.' 58

Some forty years on from Powell's radical lecture introducing the possibility
of the adoption of a good faith doctrine within the law of contract, English law
may be inching closer to such an implementation. It is however still some way
short of making such a commitment. English law continues to administer bad
faith, yet the laws concern with good faith remains somewhat an open secret.
The current suppression has been purported to lead to 'contortion' and
'subterfuge'. This is in Fullerianterms, an example of a lack of congruence
between the law that is declared and the law that is actually administered. It
would appear that the absence of an explicit good faith doctrine obstructs the

5 C. Fried, Contractas Promise:A Theory of Contractual Obligation(1981).

58 ibid, p.74.
158 UCL JurisprudenceReview 2000

likelihood of disputes being resolved in a way that remains faithful to the

parties' expectations.
It is relevant here to consider the rational defensibility of good faith.
What would be the most rationally defensible doctrinal option? No good faith
provision, an explicit good faith requirement, or a more radical regime of good
faith? According to Robert Nozick, rationality:

'...is a crucial component of the self-image of the human

species, not simply a tool for gaining knowledge or improving
our lives and society... To term something rational is to make
an evaluation: its reasons are good ones and it is fully rational
when it meets all the standards that it should meet... There also
may be a graded notion, one that speaks of degrees of
rationality... when something meets all of the standards but not
all, or meets some to a certain degree but not completely.' 5 9

Applying this to a context of law, if legal doctrine and its administration are to
be fully rational, it must satisfy the criteria of being formally rational,
instrumentally rational and substantively (morally) rational. Formal rationality
requires that a legal doctrine must not be contradictory, for example where
penalty clauses are condemned on the ground that they unjustly enrich the
innocent party. Is it not then contradictory to enforce cognate provisions like
deposits, for over-compensation even they do not fit the formal definition of a
penalty clause? Instrumental rationality requires law to be capable of guiding
action, focusing upon the efficacy of the steps taken to secure the facilitative
and protective purposes of contract law. Finally substantive moral rationality
requires legal doctrine to be justifiable when set against rationally defensible,
legitimate moral criteria.
Does a good faith doctrine meet these criteria? What is the most
rationally defensible doctrinal option? Powell advocated what could now be
termed as the good faith requirement, in the hope that this would remove some
of the irrationality of English contract law. However he opposed the
incorporation of abstract moral theory that many sought to entice within good
faith. Brownsword appears to promote what he labeled the good faith regime,
as the most doctrinal option for the future of English contract law, stating that
Powell's failure to engage with moral theory would inhibit development for
such a regime. Unarguably, if a basic purpose of contract law is to underpin
the parties' expectations, and if a good faith requirement promotes this

59 R. Nozick, The Nature of Rationality (1993), p.xii.

Good Faith and Freedom of Contract 159

purpose, then an attempt to keep this faith is more rational than the covert and
inconsistent approach of today.
However, English courts have energetically rejected the concept of a
doctrine of good faith for many years, treating it like a 'contagious disease of
alien origin',"o which will be unworkable in practice. The repulsion or
interaction of the principle needs to be considered, but opponents clearly
express the adoption of a good faith doctrine as a 'legal irritant'. Legal rules
should be general, promulgated, prospective and clear; they should not require
more than is humanly possible. The argument against a good faith doctrine
runs akin to that of relaxing the strict doctrine of privity. In both cases,
contractors who are properly advised can draft their way around the difficulty
and the default rules that run against the grain of commercial expectation can
be defended. Clearly problematic, is that even if the decision to adopt a
doctrine of good faith is made explicit, which concept would be the most
appropriate? Although theoretically well founded, a good faith regime is a
revolutionary idea that the English legal system is currently unprepared for,
failing to meet the criteria of a rationally defensible doctrine.
A good faith requirement will invite dual uncertainty, based on the
expectations under which the parties have dealt and may necessitate difficult
inquiries into a party's reasons for action. Judges would be encouraged to
revise agreements made by contractors in a way that would be arbitrary and
inconsistent with respect for the parties' intentions. Action such as this is
wholly contra to the fundamental ethos of freedom of contract. The courts
have demonstrated their willingness to apply the protective measures enacted
by Parliament in assuring a balance between contractual autonomy and
contractual justice. These rules are indispensable to the continuation of a legal
system that is respondent to the needs of society. Paternalism is an issue that
will continually be debated, remaining contentious in its application and
objectives. What is not called for is the continued debate on the adoption of a
doctrine that is counter-productive and wholly irrational.
Bad faith is sufficiently dealt with by the courts' application of the
existing doctrines of Misrepresentation, Mistake, Duress and Undue Influence.
As exceptions to the principle of freedom of contract, these concepts are
fundamental to the legal system, in ensuring that contracts are not subject to
any vitiating factors. It is asserted that the underlying values of good faith are
co-operation and solidarity as opposed to the classical values of certainty and
security.

60 G. Teubner, 'Legal Irritants: Good Faith in British Law or How Unifying Law
Ends Up in New Divergences', (1998) Modern Law Review 61.
160 UCL JurisprudenceReview 2000

'The contracting parties are no strangers. They have to be

considerate towards each other. They rely on each other. This
reliance is translated into a legal duty of fairness, the breach of
which usually entails liability in damages.' 61

If this is what a co-operative ethic of good faith requires, then it is liable to be

resisted not only by those who oppose it, but also by those who have followed
the arguments of jurists such as Powell. The dangers of lawyers dabbling in
moral metaphysics remains a contentious point and based on this type of
definition, good faith is unlikely to have many friends. It is an idealistic claim
that once parties enter into negotiations for a contract, a relationship of trust
and confidence comes into existence, irrespective of whether the deal
succeeds. In reality it is impracticable that lawyers and business entities will
assume a position of trusteeship and reliance. Private individuals are
sufficiently protected by the paternalistic measures enacted by Parliament and
the ever-increasing European counterparts. So then to argue that 'snapping up'
a bargain between two corporate parties permits bad faith due to the non-
existence of some doctrinal protection, is a delusional contention. An explicit
good faith doctrine would require contractors to offer acts of support and
assistance to one another, an idealistic and indeed unfeasible notion in reality.
It is not the position of the courts to reopen commercial transactions and
attempt to police the fairness of every contract with reference to is
jurisprudence and morals. There appears to be no justification for uprooting
the law of contract and attempting to adopt a doctrine that has not been
unequivocally defined. The doctrine remains superfluous in its objectives and
aims to deal with issues presently administered by the English legal system
efficaciously.

Good Faith within a Contractual Institution

It would appear that a doctrine of good faith is unincorporatable within the
system of contract law. Barry Reiter states that the basic function of contract
law 'is to facilitate exchange by adding the law's authority and force as
security for the due performance of what can reasonably be expected.' 6 2 This
can be analysed with the notion of 'exchange' to be the key to contract. This
may require a balanced transaction, or on a less stringent view, any exchange
61 N. Cohen, 'Pre-Contractual Duties: Two Freedoms and the Contract to
Negotiate', in J. Beatson and D. Friedmann (eds), Good Faith and Fault in
ContractLaw (1995), p.28.
62 B.J. Reiter, 'Good Faith in Contracts', (1983) 17 Valparaiso ULR 750, 714.
Good Faith and Freedom of Contract 161

may suffice and what can reasonably be expected is no more and no less than
one has bargained for. Institutionally contract law is therefore dedicated to the
facilitation of mutually beneficial transactions. Although this is rather
vulnerable, as it is not the only possible conception of contract, and vague
because its implications on the elaboration of a doctrine of good faith are
unclear, it may be clarified if it is analysed in terms of a society where
autonomy is valued.
Joseph Raz has elaborated that the essence of autonomy is that
individuals attach value to being able freely to choose and to act on their own
purposes, projects and plans that require co-ordination and exchange.
Accordingly, it is rational to choose an institution of contract that is designed
to facilitate the making of mutually advantageous transactions rather than an
institution that is designed to facilitate one-sided advantage taking. However,
where parties act autonomously they will make deals that promise to advance
their individual self-interest anticipating that their position will be better ex
post than ex ante, otherwise the deal would have no appeal. This means that
parties must regard the institution of contract as setting a secure framework for
dealing that promises to be mutually beneficial, however it does not mean that
opposing parties will be inherently concerned whether the deal is highly
beneficial to their fellow-contractor.
Brownsword argues that there may be deficiency in defining an
institution of contract as purely autonomy-driven, without drawing on a sense
of fair dealing.64 He states that to begin to serve as a template for a good faith
regime an institutional theory of contract requires further enrichment. This
concerns the question of how much trust contract law needs to secure, drawing
on standards of fair dealing prescribed by a complete moral theory. However it
was Powell who warned jurists not to dabble with the incorporation of abstract
moral theory, whilst he engaged in advocating a requirement for good faith.
Despite the sound arguments put forward by proponents of a moral
interpretation of good faith,65 is it realistically appropriate to develop a co-
operative ethic for commercial corporate dealers from a model of individual
agents making their exchanges? In practice the law of contract needs settled
and workable rules, not the unending uncertainty that a moral interpretation of
good faith would bestow. As Brownsword later concedes, 'to attempt to
translate general moral principles into concrete legal particulars will prove
controversial and difficult.'

6 J. Raz, The Morality of Freedom (Oxford, 1986) p3 6 9 -3 8 1.

' R. Brownsword, 'Good Faith in Contracts Revisited', note 33 above, p143.
65 A. Gerwirth , Reason and Morality (1978) as cited in R Brownsword,
'Good
Faith in Contracts Revisited', note 33 above, pp.144-149.
162 UCL JurisorudenceReview 2000

Conclusion

'Between adult members of a family the sharing must come

freely. Where the will is lacking, then in due course the
sounder, healthier instinct dictates that the unit be dissolved.
Nor in commercial relations is there any imperative that
contractual partners refuse to share. In fact there are many such
motives for such sharing in most commercial contexts: from the
desire to maintain goodwill, to a generally altruistic concern for
one's fellow man, customer or business partner. Nothing in the
liberal concept of contract, nothing in the liberal concept of
humanity and law makes such altruism improbable or
meaningless. The disposition to view one another with
kindness and forbearance is an affirmative good, which
liberalism is in no way committed to deny. But, just as in the
family, the enforcement of such a posture itself tends to
tyranny. Parties enter into contractual relations with certain
expectations; for the state to disappoint those expectations is
on its part a form of tyranny and deception.'66

A fundamental aim of the law of contract is to facilitate the pursuit of

individual projects, which emphasises their free choice of aims and lifestyles
and the essentially purposive nature of human social existence. Courts
currently concentrate on administering concrete cases of bad faith effectively,
without attempting an unnatural evolution of commercial standards or
demanding the development of co-operative dealing. As Charles Fried has
propagated, this is paramount to the objectives of the liberal democracy,
whose most basic commitment is to the freedom and equality of its individual
citizens. The defining feature of liberalism is indeed that it ascribes certain
fundamental freedoms to each individual, granting people choice. Paternalistic
restrictions on liberty often do not work, due to the idiosyncratic needs of
individuals, which are difficult for even a well-intentioned government to
account for. Lives do not go better by being led from the outside, in
accordance with unendorsed values. To interfere with freedom on the grounds
of some altruistic desire of contractual justice would be to administer
superfluous and unjustified intervention.
Based on the findings of this essay, there is no need for an explicit
doctrine of good faith, whatever that is. To adopt a concept that is ill defined
66 C. Fried, Contract Promise, n.57 above, pp90-91.
Good Faith and Freedom of Contract 163

and counter-productive would be a travesty on the law of contract. With

implications that are wholly contra to the fundamental ethos of freedom of
contract, a doctrine of good faith could well work practical mischief if
carelessly implanted in our system of law.

Bibliography

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Arcos v. Ronnasen [19331 AC 470
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Carterv. Boohm [1766] 3 Burr 1905.
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Clea Shipping Corporationv. Bulk Oil Terminal Ltd, The Alaskan Trader
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Davis ContractorsLtd v. Fareham UDC [ 1956] AC 696.
Evia Luck [1992] AC 152.
George Mitchell Ltd v. Finney Lock Seeds Ltd [1983] 2 AC 803.
Hillas & Co v. Arcos Ltd (1932) 147 LT 503.
Hong Kong FirShipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB
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Ingham v. Emes [1955] 2 All ER 740.
Interphoto v. Stilletto [1989] QB 433.
Janson v. Driefontein ConsolidatedMines Ltd [ 1902] AC 484 at 491.
Jarvis v. Swan Tours [1973] QB 233.
Multiservice Bookbinding Ltd v. Malden [1979] Ch 84.
National Westminster Bank v. Morgan [ 1985] AC 686.
Pitt v. P.H.H Asset Management Ltd [ 1994] 1 WLR 327, at 333-334.
Photo ProductionLtd v. Securicor TransportLtd [ 1980] AC 827.
Redgrave v. Hurd (1881) 20 Ch.D 1.
Scally v. Southern Health and Social Services Board [1991] 4 All ER 563.
Smith v. Eric Bush [1989] 2 All ER 514.
Solle v. Butcher [1950] 1 KB 671.
Spurling Ltd v. Bradshaw [1956] 1 WLR 461.
Stilk v. Myrick (1809) 2 Camp 317; 170 ER 1168.
Suisse Atlantique Society d'Armement Maritime SA v. NV Rotterdamsche
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Taylor v. Caldwell (1863) 3 B&S 826, 122 ER 309
Good Faith and Freedom of Contract 165

Walford v. Miles [1992] 1 All ER 453.

White and Carter(Councils) Ltd v. McGregor [ 1962] AC 413
Wright v. Carter[1903] 1 Ch 27.