Good faith and fair dealing definition
I. IntroductionSmall as it is, Singapore is part of the revived discussion of good faith in Commonwealth contract law in the wake of Bhasin v Hrynew.[1] This is not only because Singapore, as a hub of commerce, is seated where West meets East and therefore its contract law is particularly relevant to international trade, but also because recent Singapore contract law has undergone noteworthy judicial adjustments in the Supreme Court of Singapore (specifically its upper division, i.e. the Court of Appeal) in respect of good faith in commercial contracts. Show
This article aims to suggest an optional framework within which Singapore can “think big” over good faith in commercial contract so as to contribute to reconciling the apparent differences between West and East in this aspect of contract law. While this might be ambitious or even bold, the ambition is legitimate in principle at least. If eventually fulfilled it could help to “oil the wheels of [international] commerce”[2] and to enhance Singapore’s rising status “as a leading forum for legal services and commercial dispute resolution.”[3] For that purpose, Part II of the article briefly shows how the Singapore Court of Appeal (“SGCA”) adhered to the English orthodoxy in one case and took an Asian perspective in another in respect of good faith in commercial contract. Part III examines the difficulties in reconciling the differences between common and civilian contract law in this respect through choice of the law under either legal tradition or by recourse to international commercial law instruments. The hardly surmountable difficulties render it necessary for contract lawyers to depart from conventional wisdom, as the Justices did in Bhasin v Hrynew. In this spirit, Part IV argues that Singapore courts might as well think big over the judicial approaches to good faith. Such efforts could be made possible by learning partly from Bhasin v Hrynew, and specifically by concretising the idea of good faith within a framework consisting of enquiries concerning honesty, fair dealing, and on an organising principle of honouring the objectively reasonable expectations of the parties. This concretising framework is more likely to effectively reconcile the differences between common law of contract (which generally resists imposition of good faith duties) and civilian contract law (which is generally very receptive to the principle of good faith). Such reconciliation can pave the way for even better Singaporean resolution of international commercial disputes which concern the issue of good faith. A requirement of good faith can be established through express contract language by the contractual parties. However, an express term of good faith in a contract is not always free from dispute. This is so in the recent SGCA case HSBC Institutional Trust Services (Singapore) Ltd v Toshin Development Singapore Pte Ltd.[4] More often, the requirement of good faith can be set, if at all, by way of judicial implication of a term/duty (of good faith) into the contract in question. This is so in the SGCA case Ng Giap Hon v Westcomb Securities Pte Ltd[5] in which the issue of good faith was “raised squarely for the first time”.[6] Only occasionally is a requirement of good faith imposed by statute. For example, in Singapore it has been a statutory requirement that an application for collective sale of parcel by majority of subsidiary proprietors shall not be approved if the transaction is not in good faith.[7] A. Implied Term/Duty of Good Faith: The SGCA’s Adherence to the English OrthodoxyIn Ng Giap Hon, an issue considered by the SGCA was whether or not a term based on the doctrine of good faith could be implied into an agency agreement between the appellant remisier (a type of broker agent) and a stockbroking company, a first respondent. It was alleged that a director of the company intercepted the account-opening forms allegedly sent by the appellant to two of his customers. But for the interception, the customers would have opened their accounts with the appellant rather than the company. The appellant claimed remuneration from the company for the lost commission. His arguments were that in the agency agreement there was a duty of good faith implied in law, and that there was a term, implied in fact, that the company would not do anything to deprive him from earning his commission. In considering the appellant’s arguments above, Andrew Phang JA firstly combed the Singaporean law of implied terms, which is consistent with English law. He stressed that courts must be cautious to imply a term in law because that would involve broader policy considerations and would create a precedent of doing so in the future for all contracts of the same type.[8] In particular in this case, to imply the term in law “involves a concept [of good faith] which is itself controversial”.[9] Andrew Phang JA rightly found the controversies in his survey of the judicial and academic discussions of good faith in English, Australian, American, and Canadian contract laws.[10] Considering the extensive controversies over good faith in commonwealth contract law, he declined to imply in law a duty of good faith into contracts in the Singaporean context, because “[u]ntil the theoretical foundations as well as the structure of this doctrine [of good faith] are settled, it would be inadvisable (to say the least) to even attempt to apply it in the practical sphere”.[11] While good faith cannot be implied in law in Singapore, can it be implied in fact? For the same reason, this is only possible—but highly unlikely. Andrew Phang JA opined:
This is consistent with his response to the appellant’s argument for an implied-in-fact term of non-deprivation in the agency agreement. Assuming that non-deprivation could be part of fair dealing and hence good faith, one can see that the SGCA effectively refused to imply in fact a specific duty of good faith into the contract. For an analysis based on terms implied in fact, Andrew Phang JA opined that “whilst the concept of good faith (or, more likely, the elements thereof) might be present, the focus of the court would … be on the particular factual matrix before it.”[13] The orthodox necessity test or the “business efficacy” and “officious bystander” tests for determining a “term implied in fact” were applicable in this case. The SGCA found that the particular factual matrix in this case could not give rise to circumstances that would make it necessary to imply in fact the term based on the two tests. The Ng Giap Hon decision is consistent with the English orthodox rules for implied terms. In hindsight, one might ask: What would the decision have been had the case arisen soon after the fresh developments in Yam Seng Pte Ltd v International Trade Corporation Ltd[14] and Bhasin v Hrynew?[15] It might still be the same as Ng Giap Hon. In 2015, the SGCA, by Andrew Phang JA again, noted in obiter that “a close analysis of the judgment [of Yam Seng] itself…suggests that the English position is not that much different from the existing Singapore position in Ng Giap Hon.”[16] Also in obiter, the SGCA has noted that whether or not the Bhasin v Hrynew formulation of good faith “is too vague and general. . .ought best to be decided in a definitive fashion only when they next come directly for decision before the courts.”[17] “Where an express term (which does not lack any ambiguity) exists, that would of course be the ideal solution.”[18] Ideal as that might be, it does not warrant immunity from dispute. This was so in the second and more recent SGCA case on good faith. B. Express Term/Duty of Good Faith: The Singaporean ApproachThe second SGCA case on good faith in commercial contract is HSBC Institutional Trust Services (Singapore) Ltd v Toshin Development Singapore Pte Ltd.[19] In this case, for the purpose of rent review exercises under a commercial lease agreement, there was a clause providing that parties “shall in good faith endeavour to agree on the prevailing market rental value of the demised premises”. A central issue in this case was whether this express term of good faith was valid. Since the dispute concerned negotiation, Walford v Miles[20] is of course relevant in principle. The SGCA has rightly distinguished the two cases. In short, the Walford-type situation concerns negotiation for a contract which is yet to be concluded, whereas scenarios like this SGCA case involve negotiation during an existing contract which is already binding on the parties. Consequently, in this SGCA case, “the Parties are not free to simply walk away from the negotiating table for no rhyme or reason. By virtue of entering into the Lease Agreement, the Parties have committed themselves to a rent review exercise”.[21] In contrast, “in a Walford-type situation, the parties have much greater latitude as there is no [existing] overarching contractual framework binding them.”[22] Considering the foregoing distinction, the SGCA has held that Walford v Miles “does not have the effect of invalidating an express term in a contract which employs the language of good faith.”[23] Noting that “it is fairly common practice for Asian businesses to include similar clauses in their commercial contracts”,[24] the SGCA upheld the express “good faith clause” for the reason, inter alia, that such clauses are “not contrary to public policy … [but instead] are in the public interest as they promote the consensual disposition of any potential disputes.”[25] The SGCA has found that such clauses “are consistent with our [Asian] cultural value of promoting consensus whenever possible. Clearly, it is in the wider public interest in Singapore as well to promote such an approach towards resolving differences.”[26] The SGCA’s Asian-Singaporean perspective draws upon Philip McConnaughay’s observation of the Asian commercial contracting practices and culture, which are different from that in the West:
The Asian perspective could indeed be helpful where there is an express term of good faith in a contract between Asian parties, as is in this SGCA case. However, where there is only one Asian party, which is more often the case in Singapore’s own international trade,[28] or there is even no Asian-party at all, the SGCA’s Asian-Singaporean perspective is unlikely to be readily appreciated by a Western or non-Asian party. This is not unlikely in the Singaporean hub of international trade—and in the rising Singaporean forum for the resolution of international commercial disputes which might not involve a Singaporean or Asian party at all. III. Reconciling the Differences Beyond East and West: Mission Impossible?The differences in respect of good faith in contract law transcend the conceptual West versus East demarcation. They are apparently between West and East, but essentially between English(-Singaporean) common law of contract and European(-Asian) civilian contract law in this respect. Contract law in most Eastern or Asian jurisdictions mostly follows from their reception of the European continental civilian contract law. In sharp contrast to common law jurisdictions, Eastern/Asian systems recognise an overarching principle of good faith. The following fundamental differences are hardly reconcilable by choice of contract law of either legal tradition. This bare irreconcilability necessitates recourse to international contract law instruments such as the UNIDROIT Principles of International Commercial Contracts (PICC) and the United Nations Convention on Contracts for the International Sale of Goods (CISG). However, neither of these is as helpful as one would expect for reconciling the difference in good faith in contract law between the two legal traditions. A. Pre-contractual or Post-ContractualConsistent with English contract law, there is no pre-contractual duty to negotiate in good faith in Singapore, where Walford v Miles[29] remains good law.[30] In contrast, in Asian civilian contract law, the duty of good faith permeates the full life of a contract, and as a corollary it extends to the pre-contractual stage. The ubiquitous binding force of the duty often follows directly from a mandatory statutory provision of the general requirement/principle of good faith, often in a civil code or by a statutory enactment. This is so, for example, at least with mainland China,[31] Japan,[32] Korea,[33] the Taiwan region,[34] Thailand,[35] and Vietnam.[36] This is common in civil law jurisdictions including but not limited to those in Europe and South America. Post-contractual good faith does exist in common law, but its existence is very limited, as can be seen below. 1. Post-Contractual Good Faith: Express, Implied, or StatutoryWhere there is an express contract term of post-contractual good faith, Asian civilian contract law usually recognises the term as valid, whether it is general or specific, so long as the contract per se is valid too. English-Singaporean contract law can recognise an express term of post-contract good faith as valid provided that it is not a general term. This is more so in Singapore in the wake of HSBC Institutional Trust Services (Singapore) Ltd v Toshin Development Singapore Pte Ltd[37] as discussed above. By contract, English contract law recognises an express good faith term on narrower grounds. As was stated in Mid Essex NHS Trust v Compass Group, “care must be taken not to construe a general and potentially open-ended obligation such as an obligation to “co-operate” or “to act in good faith” as covering the same ground as other more specific provisions, lest it cut across…them.”[38] This reinforces English contract law’s persistent reluctance to recognise a general principle or general duty of good faith in commercial contracts. The scope of the binding force of an express clause of good faith “must be assessed in the light of the provisions of that clause, the other provisions of the contract, and its overall context.”[39] Where there is no express requirement of good faith, the difference is no less sharp. Under civilian contract law, a statutory, overarching, default and non-excludable requirement of good faith is binding to the contractual parties. The requirement applies to the whole process of a contractual transaction. In sharp contrast, “English law has, to its advantage, developed a nuanced conception of good faith in performance [of contracts] by using its chosen mechanism of implied terms.”[40] This approach has been followed in Singapore.[41] Due to the inherent limitation of implying terms under common law, there is only very limited space for courts to imply a term of good faith in commercial contracts. This is because “in order not to undermine the concept of freedom of contract itself, terms would be implied [in fact] only rarely—in exceptional cases where [the orthodox ‘business efficacy’ test or the ‘officious bystander’ test could be satisfied].”[42] There are practical consequences to such an approach, the most important of which is that the implication of a term or terms in a particular contract creates no precedent for future cases. In other words, the court is only concerned about arriving at a just and fair result via implication of the term or terms in question in that case – and that case alone. [43] In contrast, to imply a term in law is “the search, based on wider considerations, for a term which the law will imply as a necessary incident of a definable category of contractual relationship.”[44] A “term implied in law” is “grounded (in the final analysis) on reasons of public policy”,[45] a recourse to which is an exception in commercial contract law. “Under this category of implied terms, once a term has been implied, such a term will be implied in all future contracts of that particular type.”[46] Hence “courts ought to be as—if not more—careful in implying terms on this basis, compared to the implication of terms [in fact].” [47] Therefore, both approaches to implying a term, particularly of good faith, into a commercial contract are quite constrained. The English case Yam Seng [48] reportedly presaged an implied requirement of good faith in long-term or relational contracts as a category of contracts which may necessitate implied terms of good faith. Nevertheless, that was a dicta,[49] and instead Yam Seng was a case of implying a term (of good faith) in fact rather than in law. Hence unsurprisingly it creates no precedent for future cases. Yam Seng is not of determinative or precedential value for implying in law or in fact a term of good faith. That is so despite considerable strength has been given to Yam Seng in the very recent English High Court judgment delivered on 15 March 2019 in Bates v Post Office Ltd,[50] which in itself merits some reconsiderations. This new case (re)discovered—and expressly reiterated—the judicial recognition, over 2013-2018 mostly in the High Court and occasionally in the Court of Appeal, of the existence of relational contract. [51] In this case, Mr Justice Fraser has declared that “there is a specie of contracts, which are most usefully termed “relational contracts”, in which there is implied an obligation of good faith”. [52] In finding so, however, the learned Judge did not address in substance the prior judicial statement, made only less than three years ago and also in the High Court, that “the mere fact that a contract is a long-term or relational one is not, of itself, sufficient to justify such an implication [an obligation of good faith].”[53] Moreover, Mr Justice Fraser states that to find a contract to be relational, “[t]here must be no specific express terms in the contract that prevents a duty of good faith being implied into the contract”, [54] and that this is a “determinative” [55] characteristic of a relational contract. Nevertheless, it seems that here the cart draws the horse. Whether or not a contract is relational should not depend on whether it has express terms of good faith. If it has, certainly it is unnecessary to imply a requirement of good faith, and the contract is more likely to be relational. If it does not have such express requirement, then it might be necessary to imply good faith into the contract. This returns to the established test of necessity, rather than readily creating a new specie of contract for which a term can be implied due, at least apparently, to the contract specie or type per se. The latter approach is underpinned by public policy considerations which underlie implication of terms in law.[56] However, for commercial contracts or in commercial context, public policy considerations hardly have a place under the common law tradition. This is because public policy, like “a very unruly horse”,[57] often leads to uncertainty, which is the last the commercial world would find ease with. Therefore, given the limited receptiveness of Yam Seng and the arguable reflection on Bates v Post Office Ltd, [58] it is perhaps still premature—as it was when the Yam Seng judgment was made in February 2013—to indisputably find any category of commercial contract, even apparently of relational characteristics, which would automatically warrant judicial implication of a term in law or in fact, let alone a term of good faith.[59] That being said, an implied-in-fact requirement of good faith is mainly recognised for the exercise of contractual discretion in the performance of contract.[60] In this regard, it is now more well-settled that “in the absence of very clear language to the contrary, a contractual discretion must be exercised in good faith and not arbitrarily or capriciously.” [61] Under English-Singaporean contract law, there is no implied duty of good faith in exercising a right to terminate a contract, regardless of whether the right of termination rests in the contract or in common law. An implied term of good faith would not and could not circumscribe or restrict what the parties had expressly agreed in a clause of termination.[62] A contractual right to terminate a contract may be exercised irrespective of the exercising party’s reasons or justifications for doing so, as long as the contractual conditions (if any) for the exercise of such a right have been satisfied.[63] Where a party has a common law right to terminate the contract for repudiatory breach, the innocent party’s right to elect to accept the breach and terminate the contract, or to affirm the contract and keep the parties’ respective rights and obligations alive, is clearly a legal discretion concerning potential termination. It is not a matter of contractual discretion for which a requirement of good faith can be implied in fact. As a corollary, a contractual party’s decision concerning its common law right to terminate a contract is not in itself subject to the requirement of good faith either. [64] 2. Irreconcilability—Recourse to the PICC and the CISG?The non-existence of the requirement of pre-contractual good faith and the fairly limited scope of post-contractual good faith in English-Singaporean contract law contrasts sharply with the ubiquitous, overarching scope of the requirement of good faith under civilian contract law. This renders the differences between the two legal traditions in this respect barely reconcilable by choice of legal rules under either legal tradition. While civilian contract lawyers might hardly find it challenging to accept that the requirement does operate in some scenarios in common law, they will meanwhile be concerned that such scenarios are very limited and uncertain. Likewise, it is most challenging for their common law counterparts to accept the ubiquity of the requirement of good faith in civilian contract law. This means that, for contracts between parties of the two legal traditions, the law of good faith under either legal tradition cannot effectively solve this problem of irreconcilability. In response to the problem above, a natural and possible solution would be to have a neutral or eclectic legal instrument for international trade as the model (choice of) law. This naturally brings us to the UNIDROIT Principles of International Commercial Contracts (PICC) and the United Nations Convention on Contracts for the International Sale of Goods (CISG). However, neither can be truly helpful for the reconciliatory purpose. The current PICC (2016), like its predecessor versions, in Article 1.7 provides for the general principle that “(1) Each party must act in accordance with good faith and fair dealing in international trade [and] (2) The parties may not exclude or limit this duty.” Essentially this is the same as—almost in verbatim with—Article 1:201 of the Principles of European Contract Law (PECL). Such a civilian-style broad general duty of good faith makes it clearly unfit for our reconciliatory purpose where one of the contractual parties is from common law tradition. That being said, the PICC is useful for reconciliation only to the extent that its specific provisions “which constitute a direct or indirect application of the principle of good faith and fair dealing”[65] can be adopted ex ante by the parties as the model contract clauses rather than be chosen either ex ante or ex post as the applicable contract law. The very limited usefulness of the PICC necessitates recourse to the CISG, which Singapore and other major economies in Asia as well as in Europe have ratified into their respective national law. In contrast to the PICC 2016, the CISG’s position on good faith could perhaps be truly helpful in reconciling the differences in this respect. As discussed below, this is (somewhat surprisingly) because the CISG’s express reference in Article 7 to “good faith” is not binding to contractual parties—at least not directly thereto. Nor can a general principle of good faith be inferred from the Article 7 case law. The CISG Article 7(1) provides:
In this provision, “the bearers of this duty [of good faith] can only be courts and arbitrators”.[67] This is because the requirement of good faith is applicable not to the interpretation of contracts by courts and tribunals, but to the interpretation of the CISG. Therefore, “the need to promote … the observance of good faith” in the CISG Article 7(1) is not even a principle for interpreting the contract in question, and certainly not a substantive principle which imposes upon the contractual parties an obligation of good faith as the PICC Article 1.7 does. At most, purely by logic and assumption, “the observance of good faith” might refer implicitly to observance by contractual parties. This is seemingly unquestionable; nevertheless the legislative history of the CISG Article 7(1) does not support such an assumption. The CISG Article 7(1) is the result of the compromise between common law and civil law in its legislative history.[68] The compromise was perceived as “actually burying the principle of good faith [in its civil law tradition]”[69] by the CISG. Therefore, unlike civilian contract law, the CISG Article 7(1) imposes no duty of good faith directly upon contracting parties. Legal cases which were understood to have invoked the CISG Article 7(1) reference to good faith might be more dubious than they otherwise appear. Indeed, “there is little to remark on the judicial treatment of good faith in Article 7(1).”[70] As regards Article 7 cases in Asia, one that has been cited in influential sources as vindicating a CISG requirement of good faith for contractual parties is the Chinese case Comac SpA Ltd v Shanghai Swift Mechanical & Electronic Equipment Co Ltd, [71] decided by the Shanghai People’s High Court, the highest appellate court in Shanghai. Although this is not the place to mine the case for details, here it suffices to point out that both the trial and the appellate courts’ references to “the observance of good faith in international trade” in the CISG Article 7(1) were out of context. Both courts gave weight only to the wording “the observance of good faith”, taking it for granted that it was a requirement for contractual parties. However, they failed to appreciate that Article 7(1) stressed, for interpreters of the CISG, “the need to promote … the observance of good faith” in parallel to “the need to promote uniformity in its application”, and they also failed to appreciate the afore-mentioned compromise[72] in the legislative history of the CISG Article 7(1). This case also exemplifies the judicial potential to find, by returning to Article 7(1) via Article 7(2),[73] a general principle of good faith. “The question is whether this formula [in Article 7(2)] opens the door to those who see good faith as an existing, universal norm.” [74] Case law on Article 7(2) shows that unresolved matters cannot be settled by invoking good faith:
Whilst the CISG Article 7(1) does not incline toward a broad general civilian-style duty of good faith, it could still be practically problematic for contractual parties of common law background. This is not least because the CISG applies only to international sale of goods, but more importantly due to the following reasons. First, the interpretive principle of good faith in the CISG Article 7(1) is for interpreting the CISG, not for interpreting contracts. Second, even if the interpretive principle of good faith were applicable to contracts, it does not fit the established English-Singaporean approach to interpretation of contracts, an approach which is supposed to follow only those principles classically summarized in Investors Compensation Scheme Ltd v West Bromwich Building Society,[76] which however do not include or recognize a priori an interpretative principle of good faith. As the effort to seek reconciliation through international instruments such as the PICC and the CISG proves futile, it is necessary to consider departing somewhat from the conventional approaches to good faith in commercial contracts. The Supreme Court of Canada (SCC) in Bhasin v Hrynew[77] has so departed at least more in form that in substance. For our reconciliatory purpose, we might as well also consider making a departure which is similar but not identical. Such considerations require thinking big over the judicial approach to good faith in commercial contracts. IV. Thinking Big in Singapore over the Requirement of Good FaithThe SGCA has noted Bhasin v Hrynew in obiter, but clearly with much cautiousness, albeit being open to consider it in a definite fashion at the next possible judicial opportunity.[78] Before a judicial opportunity would arise again in Singapore, academic discussions shall proceed well ahead of it. This is particularly so when it is arguably necessary for the Singapore judiciary to think big over good faith in commercial contracts. It is necessary because, as has been argued above, the conventional wisdom in terms of the current common law of good faith in commercial contracts and of the international commercial contract law optional instruments is actually not really useful for reconciling the differences in this regard between contractual parties respectively of the English common law tradition and of European-Asian civil law tradition. Given that, one needs to think beyond the conventional wisdom and instead think big. Clearly to a large extent, this has emerged in the SCC decision in Bhasin v Hrynew. What is arguably “revolutionary”[79] in Bhasin v Hrynew is that the SCC "cut the Gordion knot in a novel manner: by grounding the solution in an “organising principle of good faith,”[80] rather than in the conventional wisdom of implying terms of good faith into contract. Instead the SCC found “an organising principle of good faith” and a specific duty of honesty thereunder. Whether the SCC’s both findings are desirable has been widely debated in common law jurisdictions; however, its methodological departure from conventional wisdom is particularly worthy of judicial attention. Perhaps when, and if, a judicial opportunity for considering good faith in contract arises in Singapore, judges could also try to depart from the conventional technique of implied term and instead make concrete enquiries about good faith. After all, “[i]n practice, we must…concretize the idea of a good faith regime, then the rules so determined should govern”.[81] A. Concretising the Idea of Good Faith: Reasonable Expectations, Honesty, and Fair DealingTwo sets of enquiries, one normative and the other descriptive, can be made for the purpose of concretising the idea of good faith. The normative one essentially is: “Should the party (defendant) act in good faith?”; and the descriptive one essentially is: “Has the party (defendant) breached [a duty of] good faith?” However, both sets of enquiries on good faith shall be concretised into more specific enquiries on reasonable expectations of the contractual parties, honesty, and fair dealing or fairness in the dealing process. Although contracting parties do not owe each other sympathy, empathy, or charity, they are expected to refrain from sharp practices and opportunistic breach that negates the purpose and objective of the contract. In other words, contracting parties enter into the arrangement with certain reasonable expectations regarding performance and administration of the contract. This kinship between good faith and reasonable expectations provides a means of revising the good faith doctrine by reference to reasonable expectations. Dishonest or unduly opportunistic behaviour in dealing is an unfair surprise that improperly deprives a party of the benefit of the bargain. Applying this approach creates the following normative enquiries for scrutinising contract performance: (1) Should the conduct at issue help to honour the reasonable expectations of the contractual parties? (2) Should the allegedly culpable party be honest in the conduct at issue? (3) Should the conduct at issue be a “fair dealing”? It is unimaginable and unlikely that contract law would allow negative answers to any of the three normative enquiries. This effectively means that the requirement of good faith can be concretised normatively into the principle of honouring reasonable expectations, the duty of honesty, and the duty of fair dealing. Correspondingly, the descriptive enquiries in a dispute over good faith in contract are: (1) Does the conduct at issue help to honour the reasonable expectations of the contractual parties? If yes, there is probably no breach of good faith; if no, probably there is a breach. Both answers however are tentative presumptions, and further enquiries are needed. (2) Is the allegedly culpable party honest in the conduct at issue? If not, there is a breach of good faith—full stop. If yes, a further enquiry is necessary. (3) Is the conduct a “fair dealing”? If yes, there is no breach of good faith; if no, there is a breach. Only when one of the contractual parties in dispute has raised issues of good faith, is it necessary for judges and/or arbitrators to make all these enquiries, whether normative or descriptive. Both the normative enquiries and the descriptive enquiries are useful where there is neither statutory nor contractual term of good faith but it is raised as an issue by one of the parties. The descriptive enquiries are also useful where there is an express general term of good faith in contract or a statutory general requirement of good faith applicable thereto. In the context of Singapore contract law, the two sets of enquiries are proper. The normative and descriptive enquiries on reasonable expectations are aligned with the extra-judicial proposition of Arden LJ, (as she was then), who stated in a public speech to the legal profession in Singapore, that she “would apply the principle of giving effect to the reasonable expectations of the parties to the debate on good faith”.[82] It is also consistent with the Singaporean academic view that a model of good faith based on reasonable expectations exists and it should prevail over the morality-based model.[83] In a real sense, the principle of honouring reasonable expectations, from and as the basis of good faith, organises the variety of embodiments of good faith. It is also proper for Singaporean courts to make the normative and the descriptive sets of enquiries on honesty and fair dealing, which is the core meaning of good faith as is recognised by the SGCA:
This core meaning of good faith is also consistent with that in Anglo-American contract law. On the meaning of good faith, Bingham LJ has observed that good faith “is in essence a principle of fair and open dealing.”[85] Extra-judicially, Lord Steyn has stated:
Lord Hobhouse described good faith as “a principle of fair dealing”.[87] What good faith requires “includes the core value of honesty”,[88] and could be described as "good faith and “fair dealing”.[89] In American contract law, the “obligation of good faith in performance and enforcement”[90] of contracts which are subject to the Uniform Commercial Code “means honesty in fact and the observance of reasonable commercial standards of fair dealing.”[91] B. An Organizing Principle of Reasonable Expectations1. An organizing principle: A better alternativeOne of the two major judicial innovations in the Bhasin v Hrynew approach to the requirement of good faith in contract law is that, rather than finding it through the conventional implication of terms into contract, the SCC recognised good faith an “organizing principle”. The SCC has pointed out that “an organizing principle states in general terms a requirement of justice from which more specific legal doctrines may be derived…[It] therefore is not a free-standing rule, but rather a standard that underpins and is manifested in more specific legal doctrines.”[92] An “organizing principle of good faith” is a standard rather than a rule and arguably it is “not a substantive principle”[93] Yet, so long as courts may actually give it weight to develop the law, the ever-lasting concerns over uncertainty in the conception of good faith will loom persistently.[94] This is perhaps partly why the new general organizing principle of good faith has been prone to criticisms, such as that it “has the potential to generate an unforeseen host of discrete obligations”.[95] Hence, an organizing principle better than that of good faith might be needed. The better alternative is an organizing principle of reasonable expectations. As noted above, this follows Arden LJ’s comments in Singapore[96] and also the local academic view in this regard.[97] For three reasons, an organizing principle of reasonable expectations is better than that of good faith. First, while the Bhasin approach was perhaps innovative, it addressed the issue of good faith by starting essentially from “an organizing principle of good faith” per se. At least to some extent, this was repeating the issue itself. Methodologically this is undesirable. Instead, we need to think beyond good faith and to understand it in terms of something else—such as reasonable expectations in the least—that is closely connected to good faith. Second, actually there is recognised close connection between keeping good faith and fulfilling reasonable expectations: as is to be discussed below, the former is a means and the latter is an end. It is more sensible to recourse to a well-recognised end than to the controversial means. Third, recognised in contract law of both legal traditions, the principle of honouring reasonable expectations is less controversial and more acceptable to both parties of either legal tradition than the organizing principle of good faith. 2. Good Faith as Means to Reasonable Expectations as EndIn English law, the principle of (honouring) reasonable expectations is actually more closely connected with the requirement of good faith than is realised. To Lord Steyn, “there is another theme of good faith and fair dealing: the reasonable expectations of honest men must be protected.”[98] A less direct but still close relation between them is mediated through implied term. Lord Steyn stated: “The implication of terms fulfils an important function in promoting the reasonable expectations of parties.”[99] Particularly noteworthy is Arden LJ’s extra-judicial statement in Singapore in relation to express terms of good faith in contract:
It can be seen from the foregoing judicial and extra-judicial observations that the requirement of good faith is a means of ensuring that reasonable expectations can be honoured, which is the end. That is perhaps why to Lord Steyn "there is not a world of difference between the objective requirement of good faith and the reasonable expectations of the parties."[101]As long as the end can be achieved, the arguably controversial means could be left in the shadow of the end. That is perhaps also why Lord Steyn considered that the respect for the reasonable expectations of the parties made it unnecessary to adopt any general concept of good faith in English contract law.[102] Similarly, in the view of American contract law:
It is noteworthy that in recent years English contract law already started to use the conception of reasonable or justified expectations to explain the content of (utmost) good faith, which is “to adhere to the spirit of the contract… and to observe reasonable commercial standards of fair dealing, and to be faithful to the agreed common purpose, and to act consistently with the justified expectations of the parties.”[104] This followed from the Restatement (Second) of Contracts that “Good faith performance or enforcement of a contract emphasises faithfulness to an agreed common purpose and consistency with the justified expectations of the other party”.[105] More recently in 2017, explaining the content of a duty of good faith, Leggatt J (as he was before becoming Leggatt LJ later that year) reiterated:
In Canadian contract law, "it may be more realistic to suggest that the implied limitation on the exercise of the discretion is intended to give effect to the “reasonable expectations of the parties.”[107] Anglo-Canadian law “does not need to legislate a standard of good faith because it has evolved sufficiently towards the protection of justified expectations”[108] and that “reference to justified [or reasonable] expectations … is much more satisfactory than good faith as a guide to the resolution of practical problems.”[109] The requirement of good faith is not only a moral demand,[110] but also—and more importantly—serves a utilitarian purpose of ensuring that contractual parties" reasonable expectations can be honoured in contract law. This is arguably so for the requirement of good faith in Section 205 of the Restatement and other sections which are consistent with it.[111] The means-and-end relationship between good faith and reasonable expectations also exist in European civilian contact law. It is recognized in the Draft Common Frame of Reference (“DCFR”), where it is stated that the principle of protection of reasonable reliance and expectations “could be arrived at by applying the general principles of good faith and fair dealing.”[112] 3. Honouring Reasonable Expectations: The Underpinnings of Contract LawWhilst for too long the role of expectations in contract (law) has been subsumed into that of intentions, expectations have a substantive role in the formation of contract,[113] and the performance of contract obligations are founded upon reasonable expectations induced by a promise.[114] This is the first premise of the recognised importance of contractual parties’ reasonable expectations in contract law. The second premise is the validity of the qualifier “reasonable”. One should not ignore “the legal implication in contracts of what is reasonable, which runs throughout the whole of modern English law in relation to business contracts.”[115] In the common law tradition, the “reasonableness” qualifier is “an objective norm of behaviour”.[116] In European civilian contract law, “reasonableness” is “to be objectively ascertained, having regard to the nature and purpose of what is being done, to the circumstances of the case and to any relevant usages and practice.”[117] Therefore, although expectations might seem subjective, reasonable expectations are more objective than subjective. Hence it is not surprising that prominent judges have called for protection of reasonable expectations over at least the last two decades. Most notable among them was Lord Steyn, who for example opined in First Energy (UK) Ltd v Hungarian International Bank Ltd:[118]
In Darlington BC v Wiltshier Northern Ltd,[119] Lord Steyn again stated that “[t]he law of contract should give effect to the reasonable expectations of contracting parties”, and repeated this sentiment in Society of Lloyd’s v Robinson,[120] where he noted that “[t]he implication of a term to control contractual discretion ‘is essential to give effect to the reasonable expectations of the parties’”.[121] Writing extra-judicially Lord Steyn also stated that “in the event of doubt, the working assumption [for interpretation of commercial contract] will be that a fair construction best matches the reasonable expectations of the parties.”[122] Lord Steyn was not alone in this regard. He has since been echoed with by the observation of Sir Robin Cooke that “giving effect to reasonable expectations … is a prime object of the law in almost all fields.”[123] Dyson LJ also implied a term of good faith into a loan agreement to “give effect to the reasonable expectations of the parties”.[124] Recently, Lord Hoffmann asserted “[t]he purpose of the law of contract is to fulfil reasonable expectations and such expectations should therefore be self-fulfilling.”[125] Arden LJ has observed extra-judicially in Singapore:
“Reasonable expectations resonate throughout the spectrum of contract doctrines, from formation to consideration and through to performance.”[127] No less often, the reasonable expectations approach operates inconspicuously in the name of other concepts and doctrines in contract law. One example is that damages for breach of contract will only compensate losses that were reasonably contemplated or expected by the parties when they made the contract. The other example is estoppel—where one party has induced the other party to have reasonably expected benefits or interests which will accrue under the contract in question and to act to its own detriment, the inducing party cannot renege to frustrate the other party’s reasonable expectations. In continental European civil law, reasonable expectations are more expressly relevant in the DCFR. In the notes to DCFR, it is stated that there are four underlying principles, namely freedom, security, justice and security. Regarding security, it is noted:
Although the examples in the full paragraph above are concerned more with protection of reliance than of expectations in contract law, a number of other DCFR provisions expressly prescribe that one party can reasonably expect that the other party has certain obligations. For more examples, the DCFR provides that the business party “has a duty to disclose to the other person such information…to be supplied as the other person can reasonably expect”.[129] Failing that, the business party “has such obligations under the contract as the other party has reasonably expected”.[130] Where the quality of the subject matter of a contract cannot be determined, “the quality required is the quality which the recipient could reasonably expect in the circumstances.”[131] Goods must inter alia “be supplied along with such accessories, installation instructions or other instructions as the buyer may reasonably expect to receive; and possess such qualities and performance capabilities as the buyer may reasonably expect.”[132] Other examples of express provisions for contractual parties’ reasonable expectations concern coverage in consumer goods guarantee,[133] conformity of goods under lease,[134] pre-contractual duties to warn of risks in the context of contract of services,[135] conformity in the context of contract of storage,[136] conformity of goods for donation,[137] and measure of damages in the context of contract of donation.[138] The provisions for reasonable expectations are not limited to the law of contract, and they extend to the law of property/ownership, [139] of restitution, [140] and even of tort.[141] Apart from the DCFR, in the national positive laws of Germany, France and the Netherlands, interpretations of contract law rules and decisions are to the effect of honoring reasonable expectations are readily detectable. [142] 4. HonestyThe requirement of acting honestly could be legitimately thought to be universal for contract-based transactions in both common law and civil law. It is not surprising that Justice Cromwell held in Bhasin v Hrynew:
A duty of honesty “interferes very little with freedom of contract, since parties will rarely expect that their contracts permit dishonest performance of their obligations.” [144] It “poses no risk to commercial certainty. . . . A reasonable commercial person would expect, at least, that the other party to a contract would not be dishonest about his or her performance. The duty is also clear and easy to apply.”[145] Those who fear the assumed interference and uncertainty “may take comfort from experience of the civil law of Quebec and the common and statute law of many jurisdictions in the United States.”[146] Just as the test of dishonesty of an accessory to a trust relationship, which also demands good faith, has been found by the Privy Council to be objective, the test of honesty should be objective too. Although honesty certainly does have a strong subjective element, the subjective characteristics of honesty do not mean that individuals are free to set their own standards of honesty in particular circumstances. The standard of what constitutes honest conduct is not subjective. Honesty is not an optional scale, with higher or lower values according to the moral standards of each individual.[147] 5. Fair DealingFair dealing has been well accepted in the common law of contract as the objective sense of good faith. So the natural and further enquiry of whether the conduct in question is a fair dealing is, in principle, unlikely to be problematic under English-Singaporean contract law—and similarly so under civilian contract law too. In Europe, the DCFR also recognises “good faith and fair dealing”, i.e. good faith in the sense of fair dealing, as an objective “a standard of conduct” which is "characterised by honesty, openness and consideration for the interests of the other party ".[148] In Asian civil law jurisdictions, as for example, the Chinese General Provisions of Civil Law and the Chinese Contract Act, the principle of fairness[149] is parallel to the principle of good faith[150] as the fundamental principles of private law (including contract law). The Japanese Civil Code section 1(2) provides for the principle of good faith since 1896, and the additional section 1(3) for the principle against abuse of rights since 1947. The latter followed the European (mainly French) civil law tradition,[151] in whose contemporary fashion “the general principle of the prohibition of abuse of rights … constitutes one of the applications of the general duty of good faith and fair dealing in its limitative function.”[152] The prohibition of abuse of rights “is founded on the restrictive function of reasonableness and fairness”[153] and is consistent with “the reasonableness and fairness-based Civil Law tradition.”[154] What, then, is the meaning of fair dealing? Actually the more practically useful question is: how are courts to find whether the dealing in question is “fair”? In English contract law, for the requirement of good faith, “fair dealing is defined by the contract and by those standards of conduct to which, objectively, the parties must reasonably have assumed compliance without the need to state them. The advantage of including reference to fair dealing is that it draws attention to the fact that the standard is objective.”[155] In substance, this approach to defining or finding “fair dealing” is consistent with the European civil law standards for fair dealing, namely “honesty, openness and consideration for the interests of the other party to the transaction or relationship in question”[156] as prescribed in the DCFR. Given that in both legal traditions fair dealing has been recognised as the objective sense of good faith, and also the standards for finding fair dealing are essentially homogeneous, it is natural that “in this sense [i.e. fair dealing as objective good faith], judges in the greater part of the industrialised world usually have no great difficulty in identifying a case of bad faith.”[157] The recourse to fair dealing is very likely to be challenged for being a recipe for uncertainty. To some extent, such challenges are legitimate. Meanwhile, for concerns over uncertainties in commercial (contract) law, what has been noted by the SGCA is particularly noteworthy:
Therefore, as long as the judicial approach to finding what is or is not fair dealing does not lead unnecessarily to more uncertainties, the uncertainty underlying conceptions as “fair” and “reasonable” is what the world of law has been able to cope with. These conceptions are prima facie riddled with uncertainty and abstractness when they are detached from specific factual matrix. In reality, however, they exist not in vacuum but in specific case scenarios. Once fairness is contextualised in a specific case, the contextual approach can concretise what is fairness in that scenario. In this way, the contextual approach to finding fair dealing alleviates rather than adds to its abstract uncertainty. 6. The Myth of Presumed Intentions for Implied TermsRegarding implied terms as a source of good faith, they are critiqued in Bhasin v Hrynew:[159] “The categories of terms implied…sometimes are blurred or even ignored, resulting in uncertainty and a lack of coherence at the level of principle.” Although this is not the occasion to discuss in depth the problems with the common law mode of implying terms into contract, for the purpose here it helps to note Lord Steyn’s extra-judicial view that it is a “myth”[160] to regard an implied term as based on the contractual parties’ inferred actual intentions (i.e. presumed intentions), although it has been the conventional wisdom to so regard since The Moorcock. [161] “The reasonable expectations of the parties in an objective sense are controlling [in implying a term into contract]: they sometimes demand that such terms be imputed to the parties.”[162] Imputed intentions are those which, albeit do not exist or cannot be deduced, are attributed to the parties; whereas inferred or presumed intentions are those which are objectively deduced to be the subjective actual intention of the parties.[163] Arguably, “it may be realistic to assume that implied duties of good faith are likely, on occasion at least, to slide into the category of legal incidents rather than mere presumed intentions.”[164] V. ConclusionIn view of the everlasting importance of international trade to Singapore’s status as a hub of international commerce, and Singapore’s rising status as “as a leading forum for legal services and commercial dispute resolution”,[165] it is in Singapore’s interest to try to reconcile the differences between English-Singaporean (and Commonwealth) contract law and European-Asian civilian contract law in respect of good faith in commercial contracts. For express terms of good faith, Singapore’s Asian perspective taken in HSBC Institutional Trust Services (Singapore) Ltd v Toshin Development Singapore Pte Ltd[166] is useful where there is an Asian party to a contract in question. Other than that, common law’s conventional wisdom about good faith is inadequate for the reconciliatory purpose. Hence, Singaporean contract lawyers might as well think beyond the conventional wisdom and think big well ahead of the next potential judicial opportunity. For this purpose, the innovative approach in Bhasin v Hrynew is enlightening to some extent, particularly its “organizing principle” approach; but Bhasin v Hrynew cannot be taken fully as a model or example. Along this line, a framework partly illustrated by Bhasin v Hrynew can be set up for thinking big over good faith in commercial contracts. This framework consists of an organising principle of honouring reasonable expectations, a duty of honesty, and a duty of fair dealing. The framework realistically concretises good faith into the three components, all of which are essentially objective and ascertainable in specific factual matrix and are well-recognised in both common law and civil law. Hence this framework is likely to be far less controversial than the conventional wisdom on good faith, and also less so than the organising principle of good faith in Bhasin v Hrynew. Admittedly, for the enterprise of thinking big over good faith, a framework is not all that is needed, and more building blocks for the framework must be expected. Nevertheless, this arguably less controversial framework is a meaningful start for contract lawyers’ joint enterprise of thinking big, in Singapore and even beyond, over good faith in international commercial contracts.
What is meant by the principle of good faith and fairness?The Duty of Good Faith and Fair Dealing
This duty requires that neither party will do anything that will destroy or injure the right of the other party to receive the benefits of the contract. There is no specific definition, however, of this duty and courts have discretion to determine its scope.
What is the definition of good faith negotiations?Definition of good faith negotiating (final version): Parties negotiate in good faith if they use reasonable negotiating strategies implemented sincerely with the mutual intention to negotiate an agreement, if that agreement is possible.”
Why is good faith important in negotiation?the obligation to negotiate in good faith is part of a contractually binding agreement; the obligation to negotiate in good faith is an express obligation; and. the matter to be negotiated is capable of objective assessment by a third party.
What is the meaning of compliance in good faith?Compliance in good faith was defined by the ICJ (in case Gabvikovo-Nagymaros Project (Hungary/Slovakia) (1997)) as including a duty to give effect to the judgment with a view to avoiding its superficial implementation or otherwise circumventing it.
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