Strengths and weaknesses of the english and german approach to good faith

The study of theoretical and practical issues in applying the principle of good faith will provide an overview of the reasonableness and unreasonableness of legal provisions related to t

TABLE OF CONTENTS INTRODUCTION

A Purpose and objectives of the essay

B Background and definition of the principle of good faith in contract law

C Research subject of the essay

CHAPTER I: THE PRINCIPLE OF GOOD FAITH

A The legal framework for good faith in each jurisdiction

1 The legal framework for good faith in English jurisdiction

2 The legal framework for good faith in German jurisdiction

B A Comparative Analysis of the Principle of Good Faith in English and German

Contract Law

1 Similarities Between the Two Jurisdictions

2 Differences Between the Two Jurisdictions CHAPTER II: Critical Evaluation of Good Faith Approaches and Cross-Border

Implications

A Strengths and Weaknesses of the English and German Approach to Good Faith

1 Strengths and Weaknesses of the English approach to good faith

2 Strengths and Weaknesses of the German approach to good faith

B Practical Implications of Cross-Border Contracts

CHAPTER III: CONCLUSION AND RECOMMENDATIONS

A Conclusion

B Recommendations for Effective Contract Negotiation and Drafting

REFERENCES

INTRODUCTION

A Purpose and objectives of the essay

The purpose of the essay is to systematically study the theoretical issues of the principle of

good faith, study the provisions of the German civil code and some relevant legal documents

of England as well as relevant judgments to provide a theoretical basis to complete the legal

provisions to propose a coherent definition and approach to understand and interpret the

concept of the principle of good faith The study of theoretical and practical issues in

applying the principle of good faith will provide an overview of the reasonableness and

unreasonableness of legal provisions related to the principle of good faith in the German Civil Code and some related legal documents of the UK to propose solutions to improve these

provisions and enhance the effectiveness of the principle of good faith in regulating

contractual relations, specifically cross-border contracts and contract negotiation and

drafting, thereby protecting the rights and legitimate interests of the parties in a balanced

manner, contributing to promoting socio-economic development and international economic integration

To achieve the above purpose, the essay sets out the following objectives:

Clarify the theoretical basis related to the principle of good faith in contract law such as the

concept, characteristics, and significance of the principle of good faith in contract law

Study the current legal framework and practical application of the principle of good faith in

contract law of two typical countries, Germany and the UK

Based on the comparative analysis of the current situation in two legal systems, the essay

makes comments on the reasonableness and unreasonableness of the regulations related to the principle of good faith of the two countries and uses that as a basis for proposals to improve

contract law related to the principle of good faith

B Background and definition of the principle of good faith in contract law

The concept of good faith emanates from Roman law, whereby the judge was allowed to go

beyond the strict rules and make decisions based on fairness and honesty in the contract Two basic principles of Roman law, "freedom of contract" and "pacta sunt servanda" (that is,

agreements must be kept), require that contracts be entered into freely and performed as

agreed The doctrine of good faith, nonetheless has various exceptions to when the parties

should not carry out a contract as agreed in specific situations that will make performance of

such a contract unfair

Nowadays, the notion of good faith is reflected in many legal systems, such as "bonne foi" in

French, "treu und glauben" in German, and "good faith" in English However, scholars could

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when it comes to contract law: subjective and objective

From the subjective perspective, it pertains to the morals and inner belief of a person and is

used to judge behavior based on a person's mental state or trust in a legal event It is honesty, integrity, and legitimate trust A person acts in good faith when they are ignorant or could not have known about a legal issue and act based on that In contract law, it protects parties who reasonably rely on others' false information

From the objective perspective, good faith is a broader concept relating to social ethical

values: it 1s associated with loyalty, honesty, and fairness It involves a legal standard to

measure parties' conduct in relation to contracts, characterized by honesty, absence of bad

intent, fulfillment of obligations, considering another party's interests Here, it is based upon the established practices or social norms of ethics

C Research subject of the essay

This essay discusses the principle of good faith in German and English contract law and

assesses the consequences that the differences between the two legal systems have for the

way contracts are drafted and enforced

The reason for undertaking the study of the principle of good faith in German contract law,

representing the civil law tradition, is based on the following: (1) the wide influence the

German Civil Code, BGB, has had on many modern civil codes throughout the world, for

example, Switzerland, Italy, Greece, Egypt, Portugal, the Netherlands, and Quebec; (2)

because good faith is a basic principle clearly enunciated in the BGB, and it governs not only the drafting of contracts but also their performance and dispute resolution

The reason for choosing the research of the principle of good faith in English contract law, as the representative of common law, is because: (1) English contract law has widely influenced the common law systems such as the US, Canada, Australia, New Zealand, and Singapore;

(2) the principle of good faith is applied only in quite limited areas in English law, such as

insurance contracts and employment contracts, which means it is in contrast compared to

Germany

Therefore, the essay will be mainly based on the provisions of the principle of good faith in

the German Civil Code-BGB and English contract law

CHAPTER I: THE PRINCIPLE OF GOOD FAITH

A The legal framework for good faith in each jurisdiction

1 The Legal Framework for Good Faith in English Jurisdiction

The duty of good faith in English law is very different from that in most civil law systems,

where it is a principle in the law of contract The common law tradition in English law does

not impose a general requirement for good faith It rather respects the freedom of parties to

make whatever contractual arrangements they wish, which in turn favours consistency in

legal outcomes over an all-embracing ethical obligation Parties, in general, are at liberty to

act in their self-interest, so long as they avoid misrepresentation and fraud.This preference for certainty is all the more important in commercial and financial transactions, where clarity and predictability are paramount

While there is no common obligation to act in good faith in English law, particular

obligations do arise in defined situations The principle of good faith, for instance, underpins insurance contracts through the doctrine of “utmost good faith" enshrined in Section 17 of the Marine Insurance Act 1906, whereby full disclosure of all facts relevant to the contract must

be made Again, the legislation on consumer protection, of which Consumer Rights Act 2015

is exemplary, enunciates good faith in the provisions dealing with unfair contract terms that

create a substantial imbalance, to the disadvantage of consumers

The courts have also grappled with this concept in cases such as Interfoto Picture Library Ltd

v Stiletto Visual Programmes Ltd (1989), where Lord Justice Bingham referred to good faith

as "fair and open dealing." In Director General of Fair Trading v First National Bank ple

(2001), the courts looked at the principle of good faith in relation to the Unfair Terms in

Consumer Contracts Regulations 1994

English courts have been relentless in rejecting an all-encompassing, mandatory standard of good faith that would apply to every contractual agreement In Walford v Miles (1992), the

House of Lords held that promises to negotiate in good faith are unenforceable, arguing that such obligations would seriously undermine the freedom of parties to pursue their interests

This unwillingness suggests a trend toward a contextual approach—avoiding subjective

interpretations that will get in the way of business

But the role of good faith in English law is an increasingly expanding one There have been

many suggestions from scholars and legislators that wider principles can be used to make

good faith fair in contractual dealings However, English law is always a bit cautious about

keeping it selective and context-driven This reflects the considered balance in promoting

fairness while preserving the commercial pragmatism that has been at the heart of English

contract law

2 The Legal Framework for Good Faith in German Jurisdiction

The good faith principle is a key and strong one in German contract law It is contained in

Articles 157 and 242 of the Biirgerliches Gesetzbuch (BGB), Germany's Civil Code Sections nourish the idea that contracts are to be interpreted and performed in a good faith and

customary usage manner, thus embedding fairness and justice into contractual relationships

Basic approaches of good faith in German law therefore lie in three functions, which are

shaping contract performance, limiting the exercise of legal rights, and an auxiliary corrective mechanism to bridge imbalance or injustices

First, good faith provides secondary obligations in contracts: to supply information, to co-

operate, and to protect the interests of one's partner Breach of those duties gives rise to

various types of liability and enables the integrity of the contractual process to be maintained Secondly, good faith limits the abuse of rights through excluding actions taken dishonestly,

or which are contradictory or disproportionate In such a way, the doctrine "abuse of nght"

means that the legal nght should be executed in an equitable manner For example, a party's

right may be rendered unenforceable if its enforcement would result in an unfair result

The third function of good faith is corrective, in that it enables the courts to step in and

modify contracts to prevent grave injustices or respond to significant changes in

circumstances This principle was very much appreciated at the time of Germany's

hyperinflation during the 1920s; wherein, even modifications to contracts were worked out to alleviate the economic burdens suffered due to wild fluctuations in the monetary

environment This is the gist of the doctrine of clausula rebus sic stantibus, under which

contracts can thus be adjusted in the event that the basic conditions change dramatically

The good faith extends further to the pre-contractual negotiations under the doctrine of culpa

in contrahendo: this latter doctrine imposes liability on the parties for pre-contractual reliance damages or for fraudulent behavior in the pre-contractual phase of negotiations, and thus the

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equity of dealing starts right from the beginning In contrast, no general duty to negotiate in

good faith exists under English law

Overall, good faith in German contract law is not an ideal but a flexible overarching principle permeating contract formation, performance, and enforcement, its broad application ensuring fairness, justice, and balance, reflecting the underlying moral and legal order of the German

legal system

B A Comparative Analysis of the Principle of Good Faith in English and German

Contract Law

1 Similarities Between the Two Jurisdictions

While English and German laws approach good faith in remarkably different ways, both

show a remarkable convergence of concepts in how they pursue principles of fairness and

guard against unjust outcomes in relationships underpinning contracts

One important similarity is the treatment given by both around unfair contract terms Under

English law, the Unfair Terms in Consumer Contracts Regulations 1994 permit the courts to hold a term unfair because it fails to meet the standard of good faith, creating an imbalance in the rights and obligations of the fare parties A clear example is found in the Director General

of Fair Trading v First National Bank ple case (2001) in which an interest term in a

consumer loan agreement was ruled to be unfair Notably, good faith is thereby mandatory

under Section 242 of the BGB, which though German law propounds courts the right to

invalidate dispositions or conduct at variance with such precept

The similar reflections are the disclosure obligatory in that contact For instance, in the

English case, Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd (1989), it

adjudicated itself pertinent that "it should be made clear that important clauses are to be

clearly worded" This means that a hidden term that inflicts unnecessary charges cannot be

valid This is reflected in German law, whereby under Section 157 of the BGB, contracts

must be interpreted in light of good faith to ensure openness and honesty in contractual

matters

Both jurisdictions also prevent abuse of rights In German law, under good faith, abuse of

rights (Missbrauch der Rechte) is prohibited by, for instance, BGH, Judgment of 20 July

2006 - VIII ZR 522/05, which laid down that undisclosed terms may lead to liability On the contrary, in English law, the term "abuse of nghts" does not exist, but the concept has been

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embedded through the course of cases like Walford v Miles (1992), which emphasizes

avoiding undue harm to other people in exercise of one's right

2 Differences Between the Two Jurisdictions

Specific statutory provisions and case law further elaborate the main distinctions between

English and German law concerning the understanding of good faith and its application In

English law, good faith 1s not a general, overriding duty, but applies in certain particular

cases or relationships within a contract On the other hand, good faith 1s generally considered

by the German law as principle in respect of pre-and post-contract stages of contract

execution

One of the most significant cases illustrating this point of absence of a general duty of good

faith in English law is Browne v Dunn 1893, in which the court declared that, even if good

faith is central to negotiations, the practice of good faith as a general duty does not exist in

the whole negotiation or formation of a contract process English law restricts good faith, and

it does not have the general duty of honesty or fair dealing unless provided by the nature of

the contract itself, like insurance contracts (uberrimae fidei), or where the regulatory bodies

have imposed fairness, as in the case of the Director General of Fair Trading v First National

Bank ple 2001, upon Unfair Terms in Consumer Contracts Regulations Here, the Court of

Appeal held that a term in a consumer contract was unfair, since it did not satisfy the

requirement of good faith This again shows that good faith applies in particular areas, such

as consumer protection, but it is not a general principle of English contract law

On the other hand, Section 242 of Biirgerliches Gesetzbuch (BGB) (German Civil Code)

provides for a clear duty of good faith on the parties to a contract In German law, this

principle is applied in a broader perspective This can be well evidenced from the case of

BGH Judgment 9 November 1995, where the German Federal Court decided that good faith

mandated disclosure of all the material information by the party during the course of

negotiations It was, therefore, clear that good faith pre-contractual negotiation obligations

extend to areas beyond performance, which are not so stringently implemented in English

law

Apart from this, German law also greatly relies on "Rechtmissbrauch" or abuse of rights to

make sure the exercise of legal rights will not lead to results that are unfair For example, in

the BGH Judgment 20 February 2003, it was held that a party's right to terminate the contract may be restricted under good faith in cases where such termination would result in an abuse

of such a right In contrast, English law tends to avoid such wide-ranging interpretations of

rights, focusing usually on the intention of the parties as expressed in the contract

CHAPTER II: Critical Evaluation of Good Faith Approaches and Cross-Border

Implications

A Strengths and Weaknesses of the English and German Approach to Good Faith

1 Strengths and Weaknesses of the English Approach to Good Faith

Its power partly lies in the emphasis it lays on legal certainty and predictability In not

imposing a general duty of good faith, English law leaves the parties free to negotiate and

contract within a framework that prizes their expressed intentions This clarity is welcome,

above all, in commercial contexts, where predictability is the sine qua non for planning and

risk management Cases like Walford v Miles (1992) highlight the foregoing principle,

whereby the House of Lords refused to recognize any good faith duty to negotiate as being

enforceable, saying that such duties are "inherently repugnant" to the adversarial nature of

contract law This approach reduces judicial interference, allowing autonomy and limiting the chances of litigation

However, this staunch adherence to autonomy reveals one key weakness: the ability of

unfaimess and exploitation to creep in The absence of any general good faith duty permits

the stronger party to exploit a bargaining imbalance or ambiguities in the terms, at least in

consumer contracts While the Unfair Terms in Consumer Contracts Regulations 1994, as

applied in Director General of Fair Trading v First National Bank ple 2001, tried to fill these gaps, such remedies would not suffice to safeguard against unfair open conduct per se

Yet another limitation 1s its resistance to evolving norms of fairness The good faith provision under Section 242 BGB is such that it has a very liberal application in terms of the contract

being adjusted whenever unexpected events occur The English law, however, is not that

willing to adopt the same kind of principles, thereby rendering it less equipped to deal with

dynamic or equitable adjustments

2 Strengths and Weaknesses of the German Approach to Good Faith

A strong point of the German approach 1s the far-reaching and binding application of good

faith in all phases of the contract In this regard, Section 157 BGB requires good faith and

customary usage in interpreting contracts while Section 242 BGB prescribes a duty on the

debtor to perform obligations fairly The strength of the clausula rebus sic stantibus doctrine,

rooted in Section 242, is that it allows contracts to be varied or cancelled upon occurrence of

any event that fundamentally alters the basis upon which a contract was made During the

hyperinflation crisis of 1920, German courts applied clauses to these parties to prevent severe injustice resulting from drastic changes in the economy

In addition, good faith provides a basis for ancillary obligations, such as obligations of co-

operation, information, and protection The Federal Court of Justice declared that withholding significant risks during preliminary negotiations constitutes a violation of the principle of

good faith under the doctrine of culpa in contrahendo and, thus, gives rise to liability for

damages (BGHZ 67, 356) Good faith has thus been implicated in promoting transparency

and accountability in the affairs of contract

This wide-ranging application creates scope for uncertainty and discretion, however The

more open-ended Section 242 BGB can lend itself to divergence at the hands of the courts

For instance, in RGZ 103, 328 (Ltith Case), the Reichsgericht made special note of the

weighing between fairness and freedom of contract-in that sense, a conflict of equity and

predictability According to critics, such extensive judicial discretion could endanger the

dividing line between the interpretation by judges and legislative competencies

B Practical Implications of Cross-Border Contracts

Advent differences between English and German approaches to bona fides result in

considerable differences in the obligations that they confer on the parties and those

concerning enforcement of agreements within cross-border contracts Whereas English law

does not impose a general requirement of good faith, the parties have considerable freedom in negotiating and executing agreements with regard to the subject matter Such freedom is

likely to benefit business, especially those lines requiring an element of predictability

Nevertheless, such freedom makes it difficult to ensure that weaker parties are not exposed to unfair play unless the contrary is explicitly provided for in the contract The impugned

judgment of the House of Lords in Walford v Miles (1992) stated that there exists no duty to negotiate in good faith thereby further extending personal freedom in negotiation of

contracts

In contrast, German law requires adherence to good faith under Sections 157 and 242 of the

Biirgerliches Gesetzbuch (BGB) This principle requires that parties behave fairly and co-

operatively, even at the stage of negotiations, and communicate information when material

The doctrine of culpa in contrahendo holds that parties are liable for omitting to disclose

relevant information during negotiations Thus, the broad general principle of good faith

provides far greater security against exploitation but also gives rise to more uncertainty

because of the decisive role played by judicial interpretation of fairness

This difference is very material for those businesses entering into cross-border contracts A

contract regulated by English law allows more flexibility while leaving less protection against unfair practice; a contract under German law provides fairness but may require more detailed negotiations in respect to the risks Thereby, careful drafting and clear terms are fundamental

in order to align parties' expectations and avoid further conflicts

CHAPTER ITI: CONCLUSION AND RECOMMENDATIONS

A, Conclusion

The essay pays attention to the principle of good faith typing the effect it has in the contract

law in the English and German jurisdictions Good faith is known to originate from Roman

law which regulates justice in contracts and relies on ill-defined terms (honesty and trust) and broader based definitions (being social)

It is widely agreed that Courts want freedom of contract, will encourage predictability and

minimize judicial interference usually, which helps with commerce but allows for abuse and

limits room for professional change For example, in the UK, good faith is not considered to

be an overarching responsibility in the contract as it applies in select areas such as in the case

of insurance and administrative law

In contrast to the English law, good faith is mentioned in the German law in sections 157 and

242 of the BGB as a guiding principle of all laws and applies to all stages of a contract, such

as while executing it, nght excesses or some benevolent measures that could protect people in times of hyperinflation However, judicial discretion may undermine predictability of the law wherein the legislation relies on strict rule making

Both are similar in that they address unjust terms and the abuse of rights, but their differences influence cross-border contracts: while English law prioritizes flexibility with predictability, German law focuses on fairness and cooperation, though with higher interpretive insecurity

This brings up again how important clear terms of a contract would be to set expectations and reduce potential conflicts

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