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Good Faith in Contract Particularly in the Contracts of Arbitration and Chartering By: Prof. William Tetley, Q.C. McGill University Email: william.tetley@mcgill.ca Web: http://tetley.law.mcgill.ca/comparative/goodfaith.pdf (published in (2004) 35 JMLC 561-616)

I. II. III. IV.

Introduction Good Faith is Essential to Contract The Purpose of this Paper Good Faith is Necessary to All Society Definitions 1) Good faith 2) Bad faith

V.

The Application of Good Faith 1) The formation and performance of the contract 2) Non-contractual good faith 3) Where no contract is ever formulated

VI.

Is There a General Duty of Good Faith in Law? 1) Roman law, Lord Mansfield, the reaction, the revival 2) The civil law and good faith 3) The common law and good faith in the 19th and 20th centuries

VII.

Good Faith in the Common Law (Piecemeal Solutions) 1) 2) 3) 4) 5) Equity Misrepresentation Collateral promises, collateral warranties, collateral contracts Mistake Undue influence

Professor of Law, McGill University; Distinguished Visiting Professor of Maritime and Commercial Law, Tulane University; counsel to Langlois Kronstrm Desjardins (Langlois Gaudreau OConnor) of Montreal. The author is indebted to Vanessa Rochester, a third-year student at the Faculty of Law of McGill University and to Robert C. Wilkins, B.A., B.C.L., for their assistance with the preparation and correction of the text.

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6) 7) 8) 9) 10) 11) 12) 13) Duress Warranties, conditions and innominate terms Fundamental breach Waiver and estoppel Fiduciary obligations Unjust enrichment and restitution Other rules Legislation a) Statute law b) Regulations

VIII.

Good Faith and the Common Law Today 1) 2) 3) 4) The United Kingdom The United States Canada Australia and New Zealand

IX.

Good Faith in International Law (International conventions, instruments and the lex mercatoria,)

1) The U.N. Convention on Contracts for the International Sale of Goods, 1980 (Vienna Sales Convention, 1980) 2) The International Institute for the Unification of Private Law, 1994 (UNIDROIT Principles, 1994) 3) The Vienna Convention on the Law of Treaties, 1969 4) The lex mercatoria X. The Contracts of Arbitration and their Advantages and Disadvantages 1) 2) 3) 4) 5) XI. The arbitration contracts The arbitration process a definition A United Kingdom definition Advantages of arbitration Disadvantages of arbitration

Ad Hoc Arbitration vs. Institutional Arbitration 1) Ad hoc arbitration 2) Institutional arbitration 3) The ICC: International Court of Arbitration 4) The lex mercatoria, arbitration and good faith

XII.

The Law of Arbitral Proceedings

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1. The UNICITRAL Model Law on International Commercial Arbitration, 1985 2. The U.N. Convention on the Recognition & Enforcement of Foreign Arbitral Awards, 1958 a) The United States b) Canada c) The United Kingdom 3. Inter-American Convention on International Commercial Arbitration, 1975 (Panama Convention, 1975) 4. Inter-American Convention on the Extraterritorial Validity of Foreign Judgments and Arbitral Awards, 1979 (Montevideo Convention, 1979) XIII. XIV. Arbitration and Good Faith Appeals from Arbitral Awards 1) Is it proper to appeal the findings of an award? 2) The United Kingdom 3) The United States XV. The Distinctive Nature of Charterparties 1) Parochial jurisprudence 2) No binding international law on chartering terms 3) Charterers, however, want the benefit of international law 4) No strictly drafted uniform forms 5) Tanker charters 6) How many owners and charterers can dance on the point of a needle XVI. Good Faith and Charterparties 1) Lack of good faith in chartering 2) The historical basis for lack of good faith in chartering 3) Slow advance of good faith in the common law 4) Good faith in chartering through the back door

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XVII. Arbitration and Chartering 1) Arbitration in London and New York 2) International enforcement 3) Arbitration and reasons XVIII. Is a Statute (Convention) for Charterparties Unthinkable? XIX. Conclusion Good Faith is Essential to Arbitration and to Chartering

WT/Good Faith in Contract, January 26, 2004

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I. Introduction Good Faith Is Essential to Contract Arbitration and chartering are both contracts, which must be negotiated, agreed upon and performed. It is the thesis of this paper that all contracts, including arbitration and chartering, should be entered into and performed in good faith. Viable arbitration requires that each party be in good faith; otherwise multiple proceedings, the questioning of every point of law, unnecessary procedures and appeals, inordinate delays and the resulting high costs only result in failure to arrive at a just solution in a reasonable time. Judges, on the other hand, as opposed to arbitrators, have more authority to deal with recalcitrant parties or their attorneys who may intentionally or unintentionally put a spoke in the wheel of expeditious and fair proceedings. In consequence, the practice of good faith by the parties, their attorneys and the arbitral tribunal is very important, if arbitration is to be more efficient and more effective than proceedings before the courts. Similarly chartering, which has its roots in the common law, which latter has never had a general doctrine of good faith, nevertheless would be better off with good faith as a basic principle in its negotiation and performance. Otherwise uncertainty in the performance of the charterparty is likely. And the present-day practice of solving chartering disputes principally by arbitration only exacerbates the problem exponentially.

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II. The Purpose of this Paper The purpose of this paper is to define good faith and then to illustrate that the entering into, and the performance of a contract, including the contracts of arbitration and ship chartering, require good faith as a fundamental element of contract law.1 Three questions will be asked. Firstly, does an obligation to act in good faith actually exist in the civil and the common law of contract? Secondly, is good faith essential to efficient and effective arbitration? Thirdly, is good faith an implied term in ship chartering or should it be? In effect, the paper is three opening salvos on three closely-related subjects: 1) good faith in general in the civil and the common laws, 2) good faith in arbitration, and 3) good faith in chartering. By reflecting on all of them at the same time, the paper is of relevance to the shipping man, the commercial man, the arbitrator, the lawyer and the professor.

III.

Good Faith is Necessary to All Society Good faith, of course, extends far beyond contracts and arbitration and

chartering to all of society itself. Aristotle set out the broad parameters that "[i]f good

Arbitration, it must be also understood, is much more than a separate contract. Such separation has been referred to as the autonomy of the arbitration clause whereby an arbitration agreement is considered to be separated from the contract in which it is embedded. Redfern and Hunter explain the legal analysis of this separation as follows: The arbitration clause in a contract is considered to be separate from the main contract of which it forms part and, as such, survives the termination of that contract Another method of analyzing this position is that there are in fact two separate contracts. The primary or main contract concerns the commercial obligations of the parties; the secondary or collateral contract contains the obligation to resolve any disputes arising from the commercial relationship by arbitration., A. Redfern and M. Hunter , Law and Practice of International Commercial Arbitration, 3 Ed. (London: Sweet & Maxwell, 1999) para. 331 at 154. See also P. Sanders, Quo Vadis Arbitration?: Sixty Years Of Arbitration Practice: A Comparative Study (The Hague: Kluwer Law International, 1999) at 171-176. See also the Qubec Civil Code 1994 (enacted by S.Q. 1991, c. 64), art. 2642 c.c.q., which similarly provides that an arbitration agreement contained in a contract is considered to be an agreement separate from the other clauses of the contract, and that the ascertainment by the arbitrators that the contract is null does not entail the nullity of the arbitration agreement.

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faith has been taken away, all intercourse among men ceases to exist."2 Thus, all social intercourse requires good faith.

IV. 1)

Definitions Good faith Defining good faith is a formidable task. Juenger noted that the term lacks a

fixed meaning because [it ] is loose and amorphous.3 Powers described it as an elusive term best left to lawyers and judges to define over a period of time as circumstances require.4 Yet, Powers went on to define it as an expectation of each party to a contract that the other will honestly and fairly perform his duties under the contract in a manner that is acceptable in the trade community.5 He went on to give it international authority as an international doctrine that requires parties to an international transaction to act reasonably, as they would expect the other party to act.6 Another definition of good faith emphasizes the use of the principle by courts to constrain the discretion that the parties may have over a decision affecting the parties rights and duties. In this way courts hold that good faith requires the discretionexercising party to act fairly, in order to protect justifiable expectations arising from their agreement.7

Cited by Hugo Grotius in De Jure Belli ac Pacis, Libri Tres (1625), and cited by J.F. O'Connor in Good Faith in International Law (Brookfield USA: Dartmouth Publishing Company Limited, 1991) at 56. 3 F.K Juenger, Listening To Law Professors Talk About Good Faith: Some Afterthoughts (1995) 69 Tul. L. Rev. 1253 at 1254. 4 P. J Powers, Defining the Indefinable: Good Faith and the United Nations Convention on the Contracts for the International Sale of Goods (1999) 18 J.L. & Com. 333 at 333. 5 Ibid. at 352. See also E.A. Farnsworth, Precontractual Liability and Preliminary Agreements: Fair Dealing and Failed Negotiations (1987) 87 Columbia L. Rev. 217, who intertwines the notions of fair dealing and good faith. 6 Powers, supra note 4, at 352. 7 S.J. Burton, Principles of Contract Law, 2nd ed. (St. Paul, Minn.: West Group, 2001) at 444-445.

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Good faith has also been associated with the legal rules related to honesty, fairness and reasonableness. Hence, OConnor describes good faith as: a fundamental principle derived from the rule pacta sunt servanda, and other legal rules, distinctively and directly related to honesty, fairness and reasonableness, the application of which is determined at a particular time by the standards of honesty, fairness and reasonableness prevailing in the community which are considered appropriate for formulation in new or revised legal rules.8 I, therefore, define good faith in contract as just and honest conduct, which should be expected of both parties in their dealings, one with another and even with third parties, who may be implicated or subsequently involved. Good faith requires that each party be fair and honest in negotiations and, once the agreement has been reached, that the parties also perform their respective obligations and enforce their rights honestly and fairly. 2) Bad faith Bad faith is perhaps easier to define.9 It has been said that: Bad faith performance occurs precisely when discretion is used to recapture opportunities foregone upon contracting when the discretion-exercising party refuses to pay the expected cost of performance. Good faith performance, in turn, occurs when a partys discretion is exercised for any purpose within the reasonable contemplation of the parties at the time of formation to capture opportunities that were preserved upon entering the contract, interpreted objectively. The good faith performance doctrine therefore directs attention to the opportunities foregone by a discretionexercising party at formation, and to that partys reasons for exercising discretion during performance.10

J.F. OConnor, Good Faith In English Law (Brookfield USA: Dartmouth Publishing Company, 1990) at 102. 9 Resorting to the examples of bad faith, in Summers view, forms the best way to understand the doctrine of good faith, because good faith has no general meaning but serves to exclude a wide range of heterogeneous forms of bad faith. See R.S. Summers, Good Faith in General Contract Law and the Sales Provisions of the Uniform Commercial Code (1968) 54 Va. L. Rev. 195 at 201; also R.S. Summers, The General Duty of Good Faith: Its Recognition and Conceptualization (1982) 67 Corn. L. Rev. 810-840. 10 S.J. Burton, Breach of Contract and The Common Law Duty to Perform in Good Faith (1980) 94 Harv. L. Rev. 369 at 373.

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Similarly in Gateway Realty Ltd. v. Arton Holdings Ltd. and LaHave Developments Ltd. (No. 3)11 Kelly J. held that: In most cases, bad faith can be said to occur when one party, without reasonable justification, acts in relation to the contracts in a manner where the result would be to substantially nullify the bargained objective or benefit contracted for by the other, or to cause significant harm to the other, contrary to the original purpose and expectation of the parties. In Crawford v. Agricultural Development Board (NB),12 the New Brunswick Court of Appeal (Bastarache J.A.) held: I would agree with Belobaba,13 that community standards are imprecise and will vary from trade to trade. Bad faith is nevertheless identifiable, as stated by the trial Judge, because it requires dishonesty, ill will, improper motive or other intentional conduct equivalent to fraud. V. 1) The Application of Good Faith The formation and performance of the contract The principle of good faith should apply not only at the formation of a contract, i.e. during negotiations, but during the performance. Good faith is also necessary during enforcement of a contract, if proceedings are necessary to enforce it. 2) Non-contractual good faith Pre-contractual good faith and non-contractual good faith tend to become indistinguishable in the common law. Juenger points out that the concept of good faith in law tends to blur the distinction between contractual and noncontractual obligations14and that [t]he idea of a precontractual duty to bargain in good faith

(1991) 106 N.S.R. (2d) 180 (N.S. S.C.T.D.); (1992) 112 N.S.R. (2d) 180 (N.S. C.A.). (1997) 192 N.B.R. (2nd) 68 at 78; 489 A.P.R. 68 at 78 (N.B. C.A.). 13 E.P. Belobaba, Good Faith in Canadian Contract Law, Special Lectures of the Law Society of Upper Canada (Don Mills, Ontario: De Boo, 1985) 73 at 78-80. 14 Juenger, supra note 3 at 1254.
12

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. obliterates a dividing line long thought to be axiomatic in Anglo-American jurisprudence.15 3) Where no contract is ever formulated Where the question of a pre-contractual obligation of good faith arises, however, a distinction must be made between where there is an enforceable contract or agreement and where there is no enforceable contract or agreement. In the absence of an enforceable contract or agreement, bad faith may actually give rise to remedies in delict or tort, but not in contract, because the liability arises from an extra-contractual obligation. In a recent comparative study between American and French law concerning precontractual good faith, N.E. Nedzel opined that [w]hen there is no contract or preliminary agreement, both French and American law agree that contract law is inapplicable. Thus, precontractual misbehavior must be sanctioned under tort or equity theories.16 VI. 1) Is There a General Duty of Good Faith in Law? Roman law, Lord Mansfield, the reaction, the revival The concept of good faith (also called bona fides or bonne foi) has existed at least since the development of Roman law,17 and is believed by some to have even preceded natural law.18 Bona fides contracts were originally distinguished from stricti iuris (formal) contracts, which were enforceable only by satisfying certain legal

Ibid. N.E. Nedzel, A Comparative Study of Good Faith, Fair Dealing, And Precontractual Liability (1997) 12 Tul. Eur. & Civ. L.F. 97 at 155. 17 N.W. Palmieri, Good Faith Disclosures Required During Precontractual Negotiations (1993) 24 Seton Hall L. Rev. at 70, 80. See also J.A.C. Thomas, Textbook of Roman Law (Amsterdam: North-Holland Publishing Company, 1976) at 228; W.W. Buckland, A Text-book of Roman Law from Augustus to Justinian, 3rd ed. Rev. by P. Stein (London Cambridge University Press, 1963) at 416 sq., 679 sqq; M.J. Scermaier, Bona fides in Roman contract law in Good Faith in European Contract Law , Ed by R. and S. Whittaker (Cambridge: Cambridge University Press, 2000), 63. 18 W.T. Tte, Tort Roots and Ramifications of the Obligations Revision (1986) 32 Loy. L. Rev. 47 at 58.
16

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requirements.19 In line with the commercial development and with the advent of consensual notion of contracts, bona fides was conceived as a source from which new rules could be derived.20 It was not a yardstick merely for interpretation, but rather it operated as a standard to create an obligation binding the parties and giving the Roman judge ample discretion to deal with informal contracts.21 And good faith has been given an even more fundamental basis in natural law, which enlarged the narrow, pragmatic rule, otherwise known as pacta sunt servanda, 22 that promises and agreements must be kept. Cicero, in his treatise On Duties, attributed to promises such force that he called good faith the foundation of justice.23 Bona fides /good faith in Roman law was based on an ethical concept [that] was applied in the form of specific rules, the most important of which were formulated in relation to the basic rule pacta sunt servanda.24 In Roman society, good faith was always associated with

trustworthiness, conscientiousness and honourable conduct.25 The development of good faith into a more sophisticated principle, in the common and civil law from the

W. W. Buckland, supra note 17 at 413. In contrast to parties to a stricti iuris contract whose obligations were confined to what they had expressed, the parties to a bona fides contract were bound beyond their expression by equity; See also W.L. Burdick, The Principles of Roman Law and Their Relation to Modern Law (Rochester, N.Y.: The Lawyers Cooperative Publishing Co., 1938; reprinted 1989) 657-658; T. Glyn Watkin, An Historical Introduction to Modern Civil Law (Aldershot, England: Dartmouth Publishing Company Limited, 1999) at 309. In bona fides contracts, remedy was denied by the praetor where the party seeking it was not in good faith, ibid. In such contracts, as opposed to stricti iuris contracts, there was a certain discretion to determine how much was due to the plaintiff after considering how much each party owed to the other in light of their mutual obligation of good faith. 20 S. Litvinoff, Good Faith (1997) 71 Tul. L. Rev. 1645 at 1651-53. 21 Ibid. 22 H.A. Rommen, The Natural Law, a study in legal and social history and philosophy (Thomas R. Hanley, trans.), St. Louis: B. Herder Book Co., 1947) at 4. 23 OConnor, supra note 2, at 22. 24 Ibid. at 117. 25 Ibid.

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Roman times, began as an obligation of contracts, promises and agreements and then became more sophisticated.26 After the fall of Rome, the concept of good faith as an implied principle in the performance of contracts appeared again in mercantile practice during the eleventh and twelfth centuries and was adopted generally throughout civil law regimes27 The common law, too, was not immune from the concept which grew slowly with time. Thus, by the 18th century, the high watermark of good faith in the common law was reached, so that in 1766 Lord Mansfield (1705-1793), who served as Chief Justice of Kings Bench from 1756 to 1788, could refer to good faith as the governing principle...applicable to all contracts and dealings.28 2) The civil law and good faith In Interfoto Picture Library Ltd. v. Stiletto Visual Programmes Ltd., Bingham, L.J. commented:29 In many civil law systems, and perhaps in most legal systems outside the common law world, the law of obligations recognises and enforces an overriding principle that in making and carrying out contracts parties should act in good faith. This does not simply mean that they should not deceive each other, a principle which any legal system must recognise; its effect is perhaps most aptly conveyed by such metaphorical colloquialisms as playing fair, coming clean or putting ones cards face upwards on the table. It is in essence a principle of fair and open dealing. Civil law regimes take an expansive approach to the obligation of good faith, applying it to both the formation of a contract and its performance, whereas the common law enunciates the narrower view that good faith is at best only applicable to the performance of the contract and is most often only recognized by statute. The civil law
26

Ibid, at 118. See also G. Schwarzenberger and E.D Brown, A Manual of International Law, 6 Ed., (Milton: Professional Books Ltd., 1976) at 23, 36 and 118-119, on good faith as one of the seven fundamental principles of customary international law. 27 J.P. Anderson, Lender Liability for Breach of the Obligation of Good Faith Performance (1987) 36 Emory L.J. 917 at 919-920. 28 Carter v. Boehm (1766) 3 Burr. 1905; 97 E.R. 1162. 29 [1988] 1 All E.R. 348 at 352 (C.A.)

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principle of good faith is based on the concept that contracts are a relationship between two parties; therefore the obligation of good faith exists during negotiations and even before a contractual relationship may exist,30 (rather than at the commencement of a contract in the common law, which requires an offer, acceptance and a consideration).31 Bad faith bargaining may result in extra-contractual responsibility in the civil law, for example, where a party feigns negotiating, without having any genuine intention of concluding a contract at the end of the day, but purely in order to obtain information which he may use for his own benefit or to harm a competitor or opponent, and then breaks off the bargaining abruptly. Such responsibility is easier to establish where the negotiations have reached a relatively advanced stage at the time they are broken off.32 The French Civil Code, 1804, the mother of most modern civil codes, includes the principle of good faith in particular situations,33 for example contracts at 1134 c.c. and prescription, at arts. 2265, 2268, 2269. The new Civil Code of Qubec (ccq) in force as of 199434 is an excellent example of a modern civil code going much further, declaring good faith to be a basic principle of general application.35 Thus art. 6 ccq reads: Every person is bound to exercise his civil rights in good faith and art. 7 ccq declares: No right may be exercised with the intent of

J. Ghestin, Trait de droit civil. La formation du contrat (Paris: L.G.D.J., 1993), para. 329 at 294; J.-L. Baudouin & P.-G. Jobin, Les Obligations, 5 Ed., (Montreal: Les ditions Yvon Blais, 1998) paras. 93-95 at 113-115, who, in addition to discussing Qubec civil law, also summarize French, Belgian and Dutch law on the obligation of good faith in pre-contractual bargaining. 31 Carter v. Boehm, supra, note 28. 32 See Baudouin & Jobin, supra, note 30, who also note (see para. 94 at 114) that in France, where the parties have made an agreement in principle whereby they expressly undertake to pursue negotiations, bad faith conduct of such negotiations may also entail contractual responsibility.. 33 J. Schmidt, La sanction de la faute prcontractuelle (1974) R.T.D.C. 46 at 50-51; P. Jourdain, Rapport franais in La bonne foi. Travaux de lAssociation Henri Capitant, Journes louisianaises 1992 (Paris: Litec, 1994). 34 S.Q. 1991, c. 64, in force January 1, 1994. See also Jean Pineau, Thorie des obligations in La Rforme du Code civil (Quebec: Les Presses de lUniversit Laval, 1993), para. 10 at 28-29. 35 Baudouin & Jobin, Les Obligations, supra, note 30, para. 90 at their note 22, state that good faith is a fundamental pillar, not only of Qubec civil law of obligations, but of the whole of private law generally.

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injuring another or in an excessive and unreasonable manner which is contrary to the requirements of good faith. In respect of contracts, good faith is required in both the negotiation and the performance of agreements. Art. 1375 ccq reads: The parties shall conduct themselves in good faith both at the time the obligation is created and at the time it is performed or extinguished. Other modern codes are to the same effect. Art. 1759 of the Louisiana Civil Code36 declares that: Good faith shall govern the conduct of the obligor and the obligee in whatever pertains to the obligation.37 The German Civil Code, at art. 242, also specifies that: The obligor must perform in a manner consistent with good faith taking into account accepted practice, as does the Italian Civil Code, which states at art. 1337, "[t]he parties, in the conduct of negotiations and the formation of the contract, shall conduct themselves according to good faith...." Effectively, in civil law regimes, a contracting party owes a pre-contractual duty of good faith to negotiate fairly and honestly.38 The good faith obligation then extends to performance of the contract, requiring that the parties act reasonably. In other words, one should not breach the relationship of trust with persons, with whom one negotiates and then contracts.39 3) The common law and good faith in the 19th and 20th centuries Despite the influence of Lord Mansfield40 (who, in any event, was a Scot with a sound knowledge of civilian principles41), the 19th and early 20th centuries, witnessed a

The Louisiana Civil Code of 1870 (itself the successor to earlier codifications in 1808 and 1825) has been virtually recodified piecemeal since 1987. 37 Louisiana Civil Code, 2001 Edition, A.N. Yiannopoulos, ed. (St. Paul, Minn.: West Group, 2001). 38 J. Klein & C. Bachechi, Precontractual Liability and the Duty of Good Faith Negotiation in International Transactions (1994) 17 Hous J. Int'l L. 1, at 16-17. 39 Ibid. 40 Carter v. Boehm, supra note 28.

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uniform reaction in the common law against Lord Mansfields position on good faith with the rise of legal positivism and the pursuit of legal certainty, attendant on the growth of laissez-faire liberalism.42 This resulted in the English concept of absolute freedom to contract. Nevertheless, by the end of the 19th century, there was another swing of the pendulum when preventative legislation was adopted to avoid abuse of power by the rich and powerful. In maritime law, this evolution can be seen in the U.S. Harter Act of 1893,43 on carriage of goods by sea, one of the earliest consumer protection acts, (albeit a maritime one) where the carrier could not contract out of many of its responsibilities.44 In the twentieth century, good faith slowly gained some prominence in the common law, with the result that it is to be found in most national common law systems, although to a limited extent, and usually only in respect of the performance of the

See E. Heward, Lord Mansfield (Barry Rose (Publishers) Ltd., Little London, Chichester, West Sussex, 1979) at 10-13, who points out that, even as a young lawyer, Lord Mansfield had a good knowledge of Latin and of Roman Law, which he likely acquired at Oxford before reading for the bar in London. He also studied Scots law, in order to be able to assist his sponsor at Lincolns Inn, William Hamilton, who, as both a Scottish advocate and an English barrister, was involved in pleading appeals from the Scottish Court of Session to the House of Lords. Lord Mansfield also spoke and read French and was familiar with French commercial law. 42 This has been commented on by P.S. Atiyah, The Rise and Fall of Freedom of Contract (Oxford: Clarendon Press, 1979) at 168: We should begin by noting that in the latter half of the eighteenth century there were signs of an emerging principle of good faith in contract law. The idea of good faith would, of course, have been completely congruent with the traditional morality, though it needed someone like Lord Mansfield to enunciate and apply the principle in a wide variety of cases. Mansfield began this task, but it was never completed, for the economic liberalism which he also favoured and helped to develop, ultimately proved fatal to anything as paternalistic as a general principle of good faith. 43 Act of February 13, 1893, chap. 105, 27 Stat. 445-446, 46 U.S.C. Appx. 190-196. 44 Legislation modeled on the Harter Act was subsequently introduced in Australia with the Carriage of Goods Act 1904; in New Zealand with the Shipping and Seamen Act 1903, 1908, 1911, 1912 and in Canada with the Water-Carriage of Goods Act 1910. Under this pressure from the U.S. and major member States of the British Empire, the United Kingdom itself eventually came to accept the need for a cargo liability regime more protective of weaker bargaining parties and supported the adoption of the Brussels Convention on the Unification of Certain Rules of Law relating to Bills of Lading, adopted at Brussels, August 25, 1924, and in force June 2, 1931, better known in English as the Hague Rules. In fact the U.K. adopted the Rules in its Carriage of Goods by Sea Act, 1924 before they were formally adopted by the diplomatic conference in Brussels.

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contract. It is very often by statute as well.45 Nevertheless, there is still considerable opposition to the doctrine of good faith46 in common law jurisdictions. The opposition among common lawyers to a general good faith duty is generally rooted in the persistent anxiety that importing such an overriding principle into the common law, particularly as applied to pre-contractual bargaining (as opposed to postcontractual performance), would result in cases being decided on subjective standards of morality and fairness, thus giving rise to uncertainty, the bane of commercial law. The House of Lords, in Walford v. Miles, rejected the notion of a pre-contractual duty to negotiate in good faith, stating: the concept of a duty to carry on negotiations in good faith is inherently repugnant to the adversarial position of the parties when involved in negotiationsA duty to negotiate in good faith is as unworkable in practice as it is inherently inconsistent with the position of a negotiating party.47 The House of Lords, in The Star Sea, a marine insurance decision, did illuminate the issue when it held that there was a post-contractual duty to exercise good faith.48 It is important to note, however, that the Court added the following limits: 1) that good faith varies according to the point or stage at which it arises; 2) the duty in respect of claims is to only certain types of claims and before legal proceedings have commenced.49 Thus, good faith has often had to enter the common law in some disguised form, and this is precisely what it has done.

R.A. Newman,"The General Principles of Equity," in R.A. Newman ed. Equity in the World's Legal Systems (Brussels, Belgium: tablissements mile Bruylant, 1973) 589 at 590-598 . 46 Sir R.Goode, Commercial Law in the Next Millennium (London: Sweet & Maxwell, 1998) at 19. See D. Clark, Some Recent Developments in the Canadian Law of Contracts, (1993) 14 Advocates Q. 435. 47 Walford v. Miles [1992] 2 W.L.R. 174, at 181 (H.L.). For criticism of the decision see Lord Steyn Contract Law: Fulfilling the Reasonable Expectations of Honest Men (1997) 113 Law Quarterly Rev. 433 at 439, who argues that the notion of good faith is practical and workable, although unnecessary. 48 The Star Sea [2001] 1 Lloyds Rep. 389 (H.L.). 49 Ibid. See also Bari Soyer, The Star Sea a lone star?, [2001] Lloyds M.C.L.Q. 428.

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VII. Good Faith in the Common Law (Piecemeal Solutions) Historically, the common law of England did not recognize good faith. Thus John H. Baker, in his celebrated text An Introduction to English Legal History,50 makes no reference to good faith in his history of the common law. Sir Roy Goode, in his equally celebrated text Commercial Law, confirms, there is, surprisingly, no general principle of English law that requires legal remedies to be exercised in good faith.51 Comparing the attitude of the civil law with the common law of England on the question of a general principle of good faith, Bingham L.J., in Interfoto Picture Library Ltd. v. Stiletto Visual Programmes Ltd., observed:52 English law has, characteristically, committed itself to no such overriding principle but has developed piecemeal solutions in response to demonstrated problems of unfairness. Many examples could be given. Thus equity has intervened to strike down unconscionable bargains. Parliament has stepped in to regulate the imposition of exemption clauses and the form of certain hirepurchase agreements. The common law also has made its contribution by holding that certain classes of contract require the utmost good faith, by treating as irrecoverable what purport to be agreed estimates of damage but are in truth a disguised penalty for breach, and in many other ways. Among the many other piecemeal solutions which English courts have used to police the fairness of contracts and their performance, in the absence of a general good faith doctrine, are the common law rules on mistake and misrepresentation, duress (including economic duress) and undue influence, the objective interpretation of contracts, the concept of unconscionability, implied terms, waiver and estoppel.53 A few of these concepts will be reviewed here. 1)
50 51

Equity

J.H. Baker, An Introduction to English Legal History, 4th ed. (London: Butterworths, 2002). R. Goode, Commercial Law, 2nd ed. (Harmondsworth: Penguin Books, 1995) at 117. 52 [1988] 1 All E.R. 348 at 353 (C.A.). 53 R. Bradgate, Commercial Law, 3 Ed. (London: Butterworths, 2000) at 27 [Bradgate, Commercial Law, 3 Ed., 2000] mentions several of these common law principles and concepts.

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Equity has played a major role as a stand-in for good faith in English commercial law. As Bradgate explains:54 In the law of contract, since equity guards against unconscionable conduct, many of the piecemeal solutions by which the law seeks to promote good faith are equitable. They include the right to rescind for misrepresentation, the concept of undue influence and, of course, promissory estoppel, which tempers the rigour of the doctrine of consideration and, by preventing the revocation of a promise once relied on, prevents unconscionable behaviour. Perhaps the clearest example of the role played by equity in introducing a good faith element into English law is the prohibition on unconscionable bargains. Early on, catching bargains entered into in order to take advantage of the weakness or inexperience of expectant heirs were struck down as inequitable and therefore unenforceable because they were found to be either actually or presumptively fraudulent.55 This concept was eventually extended to include the protection of poor and ignorant persons generally against exploitation by stronger parties through patently unfair contract terms.56 2) Misrepresentation Misrepresentation of facts made by one party in order to induce another party to enter into a contract, and on which the representee relies in doing so, is sanctioned by rescission of the contract and/or by damages at common law and under the Misrepresentation Act 1967.57 The law on misrepresentation also includes various features reflecting an unacknowledged, but implicit, concern for good faith. For example,
Ibid. at 31. See, for example, Earl of Chesterfield v. Janssen (1751) 2 Ves. Sen. 125 at 157, 28 E.R. 82 at 101. 56 See, for example, Cresswell v. Potter [1978] 1 W.L.R. 255, where it was suggested that the modern equivalent of poor and ignorant persons was members of lower income groups. On unconscionable bargains generally, see Halsburys Laws of England, vol. 31, 4 Ed., Reissue (London: Butterworths, 1998) at paras. 854-855. 57 U.K. 1967, c. 7. The specific remedies available for misrepresentation depend on whether the misrepresentation was fraudulent, negligent or innocent. Where the misrepresentation is other than fraudulent, courts and arbitrators are granted discretion to impose damages in lieu of rescission of the contract, having regard to certain equitable considerations specified at sect. 2(2) of the Misrepresentation Act, 1967.
55 54

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although the common law lacks any extensive requirement of full disclosure in precontractual bargaining, there is some authority to the effect that misrepresentation may occur where a contract comes into existence because one party, before the contract is concluded, makes a statement relied upon by the other, which, although true as far as it goes, is incomplete or misleading,58 or where he makes a statement which, although true when made, later becomes false due to changed circumstances and the statement goes uncorrected.59 One may also cite misrepresentations as to future intentions or opinions. While the common law is normally concerned only with representations as to facts, statements as to the future intentions or opinions of one party to a contract may also engender liability for misrepresentation in some situations. For example, where a party has special knowledge or expertise, so that his opinion on a particular matter is one upon which the other party can be expected to rely, liability for misrepresentation may ensue if the party did not in fact hold the opinion that he expressed and the other party relied on the opinion to his detriment.60 The quite obvious intent of these rules is to restrict certain forms of dishonest or bad-faith conduct by contracting parties, even in the pre-contractual context. 3) Collateral promises, collateral warranties, collateral contracts Pre-contractual representations that become terms of a contract may found an action for breach of contract, where those representations are subsequently found to be untrue. But even where they are not incorporated expressly into the agreement, they may nevertheless constitute collateral promises which courts will enforce. In English maritime law of chartering, for example, purely oral misrepresentations as to the vessels

58

See, for example, Dimmock v. Hallett (1866) 2 Ch. App. 21. With v. OFlanagan [1936] Ch. 575, [1936} 1 All E.R. 727 (C.A.). 60 See Smith v. Land and House Property Corporation (1884) 28 Ch. D. 7 (C.A.).
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cargo capacity, draught and intended route, although not embodied in the text of the charterparty, if breached, have been sanctioned by awards of damages.61 The same concept of collateral contracts or collateral warranties has also been invoked, as well as the doctrine of fraudulent misrepresentation, to by-pass the parol evidence rule and overcome superseding clauses in bills of lading.62 In this way, courts have been able to consider and analyze evidence other than the bill of lading per se (e.g. the booking note, the carriers advertisement and freight tariff, and oral and written communications between shipper and carrier) in ascertaining the full terms and conditions of a contract of carriage of goods by sea.63 Here again, courts in England have intervened to protect the legitimate expectations of shippers, by relieving them of the burden of a clause imposed by the superior bargaining power of contracting carriers, thus demonstrating an implicit judicial preoccupation with good faith and fair dealing in carriage by sea law. 4) Mistake At common law, mistakes by contracting parties, in many cases, give rise to no cause of action, because of the venerable principle of caveat emptor. Each party is expected to take care of his own interests in contracting, and each is entitled to rely on the apparent agreement of the other. In consequence, errors as to the terms of a contract often have no effect on the enforceability of the agreement. Nevertheless, if one party agrees to terms of a contract to which he never intended to agree, and the other
61

See S.C. Boyd, A.S. Burrows & D. Foxton, eds., Scrutton on Charterparties and Bills of Lading, 20 Ed. (London: Sweet & Maxwell, 1996) [hereafter cited as Scrutton on Charterparties and Bills of Lading, 20 Ed., 1996], art. 56 at 109-110 and authorities cited there. 62 A superseding clause in a bill of lading (referred to in the United States as a supersession clause) provides that all agreements or freight engagements for the shipment of the goods are superseded by the bill of lading itself, which contains the entire contract between the parties. The parol evidence rule precludes testimony and other extrinsic evidence from being used to contradict or vary or add to, a written instrument. 63 See Esso Petroleum Co. v. Mardon [1976] 1 Q.B. 801 at 817, [1976] 2 All E.R. 5 at 13 (C.A.); J. Evans & Sons v. Andrea Merzario [1976] 1 W.L.R. 1078, [1976] 2 All E.R. 930 (C.A.); Tetley, Marine Cargo Claims, 3 Ed. (Montreal: Les ditions Yvon Blais, 1988) at 91-94.

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party knew or ought to have known of his co-contractors error, the contract may be held void, as enforcing such a contract would seem unreasonable.64 The partial and unspoken recognition of good faith as a control mechanism for contractual relationships is evident in rulings of this sort. 5) Undue influence Undue influence may vitiate a contract where the agreement has resulted form one partys having exercised a dominant influence over the other and having abused that power so as to obtain an unfair advantage for himself, to the detriment of the party influenced. Undue influence is presumed in certain relationships (e.g. between a solicitor and a client, a trustee and a beneficiary, or an agent and a principal). In other cases, a similar presumption may arise on the facts of the case, particularly where one contracting party sought the advice of another on a particular matter within the latters realm of expertise.65 In many cases, it is possible to prove actual, as opposed to presumed, undue influence.66 The obvious thrust of these principles is to prevent exploitation of the weak and gullible by more knowledgeable and crafty parties who deal with them in bad faith.67 6) Duress Duress (defined as a coercion of the will which vitiates consent68), has long been recognized as making a contract voidable, where threats to persons or property have been used to extract consent to the agreement. More recently, economic duress (e.g. threats by one party to cease performing a contract unless the other party agrees to
See Hartog v. Colin and Shields [1939] 3 All E.R. 566 (K.B.); Bradgate, Commercial Law, 3 Ed., 2000, supra note 53 at 53. 65 See Lloyds Bank Ltd. v. Bundy [1975] Q.B. 326, [1974] 3 All E.R. 757 (C.A.); National Westminster Bank plc v. Morgan [1985] A.C. 686, [1985] 1 All E.R. 821 (H.L.). 66 Many of the undue influence cases involve legal or common-law spouses or parents guaranteeing loans to their partners or children. 67 The House of Lords has held that it should not be necessary to prove that the transaction was manifestly disadvantageous in order to establish undue influence. See Royal Bank of Scotland v. Etridge (No. 2) [2002] 2 A.C. 773 (H.L.). 68 See Pao On v. Lau Yiu Long [1980] A.C. 614 at 653, [1979] 3 All E.R. 65 at 78 (P.C.).
64

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a variation in its terms69) has emerged as another equitable device to sanction bad-faith conduct in commercial agreements.70 Thus contracts of affreightment may be voidable for duress if concluded as a result of illegitimate threats by one party (e.g. threats of blacking of a ship by a seamens trade union).71 Mere economic pressure or the use of superior bargaining position will not ordinarily constitute economic duress, however.72 7) Warranties, conditions and innominate terms The distinction between warranties, conditions and innominate terms is another way in which good faith is enforced in the common law of contract, by ensuring that relatively minor contractual breaches (breaches of warranties, sounding only in damages) do not permit the injured party to be released from his contractual obligations, as if they were breaches of conditions. Many terms, particularly in ship chartering, are considered innominate (or intermediate), in that they are not clearly either conditions or warranties, but rather must be judicially construed, in the light of the contract as a whole and the surrounding circumstances, in order to determine whether their violation goes to the root of the contract, thus opening the door to repudiation of the contract by

See North Ocean Shiping Co. Ltd. v. Hyundai Construction Co. (The Atlantic Baron) [1979] Q.B. 705 at 719, [1978] 3 All E.R. 1170 at 1182 (Q.B.); Atlas Express Ltd. v. Kafco (Importers and Distributors) Ltd. [1989] Q.B. 833, [1989] 1 All E.R. 641 (Q.B.); Pao On v. Lau Yiu Long, ibid. 70 Bradgate, Commercial Law, 3 Ed., 2000, supra note 53 at 60. 71 See Universe Tankships Inc. of Monrovia v. International Transport Workers Federation (The Universe Sentinel) [1983] 1 A.C. 366, [1982] 1 Lloyds Rep. 537 (H.L.); Dimskal Shipping Co. S.A.. v. International Transport Workers Federation (The Evia Luck (No. 2)) [1992] 2 A.C. 152, [1992] 1 Lloyds Rep. 115 (H.L.). 72 See, for example, Occidental Worldwide Investment Corp. v. Skibs A/S Avanti (The Siboen and The Sibotre) [1976] 1 Lloyds Rep. 293 at 336 (a chartering case, where the shipowners agreement to a reduction in time charter hire was found to have resulted from commercial pressure falling short of economic duress). Lord Dennings view in Lloyds Bank Ltd. v. Bundy [1975] Q.B. 326, [1974] 3 All E.R. 757 (C.A.) that the courts had a general power of intervention wherever there was inequality of bargaining power was rejected as too uncertain by the House of Lords in National Westminster Bank plc v. Morgan [1985] A.C. 686 at 708, [1985] 1 All E.R. 821 at 830 (H.L.).

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the innocent party, or whether they are breaches of a less significant kind, giving rise only to a damage award.73 8) Fundamental breach Another such device was the fundamental breach doctrine, developed in the first half of the twentieth century, in an era before consumer protection legislation. The doctrine sanctioned intentional contractual breaches which went to the root of the contract, thereby depriving the innocent party of substantially the whole benefit which it reasonably expected to derive from the agreement.74 In maritime law, the traditional admiralty rule, dating from at least the eighteenth century, whereby a deliberate and unjustified geographic deviation by the carrier of goods by sea from the customary route for the voyage caused him to lose the benefit of the contract and all its exemption and limitation clauses and to be saddled with the sweeping liability of an insurer of the goods, was eventually subsumed into this more general fundamental breach doctrine. Carriage of goods on deck unknown to the shipper or contrary to the shippers express instructions was also seen as a fundamental breach of the contract of carriage, as was intentional misrepresentation by the shipper of the nature or value of the goods.75 Fundamental breach thus sanctioned what in effect was bad faith conduct.

See Hong Kong Fir Shipping Co. Ltd. v. Kawasaki Kisen Kaisha Ltd. [1962] 2 Q.B. 26 (C.A.). Among examples of innominate terms in chartering are statements as to the ships tonnage or the speed capacity of the vessel; the implied warranty of seaworthiness; and the implied undertaking as to reasonable dispatch in loading or sailing. See Scrutton on Charterparties and Bills of Lading, 20 Ed., 1996, supra, note 61, arts. 44-53 at 89-107. 74 See Hain S.S.Co. v. Tate & Lyle Ltd. (1936) 55 Ll. L. Rep. 159 (C.A.). 75 In maritime law, the fundamental breach doctrine, particularly as applied to unjustified geographic deviation and unauthorized deck carriage by the carrier, has been modified in its scope and conditions, by the Hague Rules (the Convention for the Unification of Certain Rules of Law relating to Bills of Lading, adopted at Brussels, August 25, 1924, and in force June 2, 1931) and by the Hague/Visby Rules (being the same Convention, as amended by the Protocol adopted at Brussels on February 23, 1968, in force June 23, 1977 and the Protocol adopted at Brussels on December 21,1979, in force February 14, 1984). Fundamental breach as applied to deviation and deck carriage is also under increasing attack in maritime law decisions rendered by U.K. courts. See generally Tetley, Marine Cargo Claims, 3 Ed. (Montreal: Les ditions Yvon Blais, 1988), chap. 5, and the preliminary version of the same chapter in the forthcoming fourth edition, on-line at http://tetley.law.mcgill.ca/maritime/ch5.pdf.

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The House of Lords, however, rejected the substantive fundamental breach notion in the 1960s in Suisse Atlantique Socit dArmement Maritime S.A. v. N.V. Rotterdamsche Kolen Centrale.76 Then, after the U.K. Parliament had enacted consumer protection legislation in the Unfair Contract Terms 1977,77 the House of Lords decision in Photo Production v. Securicor Transport78 in effect turned fundamental breach into purely a matter of construction of the contract. In consequence, the violation of an agreement, however deliberate and egregious and however subversive of the essential purpose for which the parties contracted, no longer automatically deprives the defaulting party of the benefit of contractual exemption and limitation clauses. Rather, such clauses must now be construed by the court, and will ordinarily be upheld, unless found to be unreasonable or unconscionable.79 Unreasonableness and unconscionability may play a similar role to good faith in policing liability exclusions and limitations in the contemporary common law of contract, but the civil law is much clearer, in sanctioning such clauses with nullity where their effect would be to excuse or restrict legal responsibility for acts or omissions tantamount to faute lourde, defined as gross fault opposed to good faith.80

[1967] 1 A.C. 361 (H.L.). U.K. 1977, c. 50. 78 [1980] A.C. 827 (H.L.). 79 In the U.K., courts, pursuant to the Unfair Contract Terms Act 1977, U.K. 1977, c. 50, apply a statutory reasonableness test to decide whether or not an exemption or limitation clause is enforceable. Canadian courts, however, lacking an equivalent statutory test, have yet to decide whether the proper test of such clauses in Canadian common law is reasonableness or unconscionability. See Hunter Engineering Co. Inc. v. Syncrude Canada Ltd. [1989] 1 S.C.R. 426, (1989) 57 D.L.R. (4th) 321, where Dickson C.J.C. opted for an unconscionability test, while Wilson J. preferred a test of reasonableness. 80 See, for example, art. 1474 of the Qubec Civil Code 1994, prohibiting the exclusion or limitation of a partys liability for material injury caused to another through an intentional or gross fault; a gross fault is a fault which shows gross recklessness, gross carelessness or gross negligence. Gross fault, in the French text of art. 1474 c.c.q., is faute lourde. Faute lourde was defined in the nineteenth century by Pothier, as a failure to devote to the affairs of others the level of care which even the least careful and most stupid of people would not fail to devote to their own business, such a fault being opposed to good faith [Emphasis added]. See M. Bugnet, uvres de Pothier, tome 2 (Paris : Plon, 1861) at 32. Such virtual bad faith conduct continues to
77

76

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9) Waiver and estoppel The doctrines of waiver and estoppel have also developed in English law to safeguard the reasonable expectations of contracting parties. At common law, a party can waive its right to strict performance of the contract.81 Equity has also created the similar doctrine of promissory estoppel, whereby after a party has expressly or impliedly promised (by an unambiguous representation) that he will not insist on his contractual rights, he may not retract that promise once it has been relied upon by the other party, if such retraction would be inequitable.82 These mechanisms, in effect, provide some limited reinforcement of good faith by giving legal effect to the legitimate expectations of the contracting parties,83 although a broader principle of fair dealing has been rejected expressly.84 10) Fiduciary obligations English law has also developed a strong equitable notion of fiduciary obligations, which is especially relevant in matters of agency and trust. The fiduciary relationship is rooted in a concept of loyalty of which good faith is a key ingredient. As Millett L.J. stated in Bristol and West Building Society v. Mothew:85 A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his
constitute rupture of the contract in civilian jurisdictions, and results in the party at fault losing the protection of the contract terms. 81 See, for example, Charles Rickards Ltd. v. Oppenhaim [1950] 1 K.B. 616, [1950] 1 All E.R. 520 (C.A.). 82 See, for example, Panchaud Frres S.A. v. Etablissements General Grain Co. [1970] 1 Lloyds Rep. 53 (C.A.); The Post Chaser [1981] 2 Lloyds Rep. 695. 83 Bradgate, Commercial Law, 3 Ed., 2000, supra note 53 at 105. 84 See Glencoe Grain Rotterdam BV v. Lebanese Organisation for International Commerce [1997] 4 All E.R. 514 (C.A.). 85 1998 Ch. 1 at 18 (C.A. per Millett L.J.). Cited with approval by the Privy Council in Arklow Investments Ltd. v. Maclean [2000] 1 W.L.R. 594 at 599 (P.C.).

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own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations. They are the defining characteristics of the fiduciary. The duty of loyalty of the fiduciary, related to protecting legitimate expectations of the principal, bears a striking resemblance to a general principle of good faith. In fact sometimes, fiduciaries must go even further than good faith would require, to the point of preferring the interests of others to their own.86 11) Unjust enrichment and restitution The recent development of the common law in respect of restitution also indirectly acknowledges the demands of fair dealing in commercial relations, and thus reinforces good faith under the name of unjust enrichment. Frequently, the law of restitution compels the repayment of what has been unjustly received as a result of mistake, duress or illegality.87 12) Other rules A New Zealand court, in refusing to exclude from the common law of that country a general obligation for contracting parties to act in good faith in both the making and the carrying out of contracts, has held that although Lord Mansfield is long dead and buried, his spirit, promoting good faith as a basic principle, survives in many rules and principles of the common law. Included in the examples listed following that comment are: the rules
86

Bradgate, Commercial Law, 3 Ed., 2000, supra note 53 at 32 observes: It has been said that fiduciary obligations are imposed to protect legitimate expectations. On their face they look very like duties of good faith. In fact they go further. Whereas good faith requires a contractor to have regard to the interests and expectations of the other contracting party as well as his own, in a spirit of co-operation, fiduciary obligations require the fiduciary to prefer the interests of his principal to his own. If good faith is inconsistent with the adversarial self interest of commerce, fiduciary obligations may be thought to be even more so. The key is to bear in mind the flexibility of equity. Fiduciary obligations will not be imposed where they would be inappropriate in a commercial context. This same distinction between a duty of good faith and a fiduciary obligation has been reiterated judicially. See, for example, Shelanu Inc. v. Print Three Franchising Corp. (2003) 64 O.R. (3d) 533 at 555-556 (Ont. C.A.), citing P. Finn, The Fiduciary Principle in T.G. Youdan, ed., Equity, Fiduciaries and Trusts (Agincourt, Ont.: Carswell, 1989) 1 at 4. 87 In Australia and New Zealand Banking Group Ltd. v. Westpac Banking Corporation (1988) 164 C.L.R. 662 at 673, it was observed that contemporary legal principles of restitution or unjust enrichment can be equated with seminal equitable notions of good conscience.

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invalidating penalty provisions, the law providing relief against forfeiture, rules providing for the importation of implied terms and the severance of ineffective terms and rules of construction such as contra proferentem.88 One might also add the general implied duty for parties to a contract to do everything they can to ensure that the object of the contract is attained.89 13) Legislation

a)

Statute law

Because the concept of good faith is not fixed firmly in the common law, statute law is the usual means for imposing good faith in common law jurisdictions. The most famous such statute invoking good faith is the United Kingdoms Marine Insurance Act, 1906,90 which at sect. 17 reads: A contract of marine insurance is a contract based upon the utmost good faith and, if the utmost good faith be not observed by either party, the contract may be avoided by the other party. Sections 18, 19 and 20 of the Marine Insurance Act, 1906 complete the obligation, but the provisions have been interpreted very restrictively so that the obligation of good faith has been held only at the formation of the contract and not when

Livingstone v. Roskilly [1992] 3 N.Z.L.R. 230 at 237-238 (N.Z. High C.). For example, the vendor in a sale of land may often be required to use best endeavours to obtain subdivision approval and a merchant in a commercial transaction may also be required to do his best to secure export permits or financing. See, for example, Little v. Courage Ltd. (1994) 70 P. & C.R. 469 at 476 (C.A.). 90 U.K., 6 Edw. 7, c. 41. For the text of the Marine Insurance Act 1906, see http://www.jus.uio.no/lm/private.international.commercial.law/insurance.html#MIA. The mother of most insurance statutes in English-speaking nations, the Marine Insurance Act 1906 is even heavily relied on in the United States, where there is no federal marine insurance act. See W. Tetley, International Maritime & Admiralty Law, (Montreal: Les ditions Yvon Blais, 2002) at 595598. See also the corresponding provisions of Canadas Marine Insurance Act, S.C. 1993, c. 22, which are modeled on those of the 1906 British statute. For the text, see http://laws.justice.gc.ca/en/M-0.6/index.html.
89

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the contract is in force.91 Other statutes in particular in respect of consumers, also invoke good faith to shore up the limits of the principle in the common law. The uberrimae fidei (utmost good faith) principle requires the fullest good faith in pre-contractual disclosures of material facts relating to the risk to be insured. To this extent, the good faith requirement goes beyond the normal requirement of honesty and fair dealing in common law. Partnership legislation also requires full disclosure of material facts prior to contracting. The Partnership Act, 1890,92 of the United Kingdom, at sect. 28, obliges partners to render true accounts and full information of all things affecting the partnership to any partner or his legal representative. Thus, a partner negotiating for the purchase of a share of another partner has been held to be under a duty to disclose full information as to the partnership assets and their value.93. The Unfair Contract Terms Act 197794 has proven to be particularly important in protecting U.K. consumers from abusive terms in various types of consumer contracts, and more particularly in subjecting contractual clauses which exempt or limit the liability of merchants for negligence to a test of reasonableness.95 In general, this test has been applied having regard to such factors96 as the relative bargaining strength of the

See H. N. Bennett, Mapping the Doctrine of Utmost Good Faith in Insurance Contract Law [1999] Lloyds M.C.L.Q. 165; M. Clarke, Good Faith and Good Seamanship [1998] Lloyds M.C.L.Q. 465. Tetley, International Maritime & Admiralty Law, supra note 90 at pp. 597-598. 92 U.K., 53 & 54 Vict., c. 39. 93 Law v. Law [1905] 1 Ch. 140 (C.A.). 94 U.K. 1977, c. 50. 95 See the Unfair Contracts Terms Act 1977 at sect. 2(2). See, for example, Stewart Gill Ltd. v. Horatio Myer Ltd. [1992] Q.B. 600, [1992] 2 All E.R. 257 (C.A.); George Mitchell (Chesterhall) Ltd. v. Finney Lock Seeds Ltd. [1983] 2 A.C. 803, [1983] 2 All E.R. 737 (H.L.). Sect. 2(1) prohibits clauses in consumer contracts which exclude or limitat liability for death or personal injury caused by negligence. 96 Although technically, many of the guidelines as to reasonableness listed in Schedule 2 to the Unfair Contract Terms Act 1977 apply only in assessing reasonableness under sect. 6 and 7, in respect of clauses excluding liability for breach of implied terms of supply contracts, these guidelines are often considered by judges in deciding other cases arising under the statute as well. See The Flamar Pride [1990] 1 Lloyds Rep. 434; R. Bradgate, Commercial Law, 3 Ed., 2000, supra note 53 at 86.

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parties, whether the consumer received any inducement to agree to the impugned term, whether the consumer knew or ought reasonably to have known of the existence and extent of the term,97 and the availability of insurance to the party seeking to rely on the term in respect of a particular risk. Considerations akin to good faith often arise in applying the reasonableness test.98 b) Regulations

In the United Kingdom, good faith now figures expressly in certain directives of the European Union which have been implemented by U.K. regulations. For example, the E.C. Directive on Commercial Agency,99 the E.C. Directive on Unfair Terms in Consumer Contracts100 and the E.C. Directive on Distance Contracts,101 all include explicit provisions on good faith which now form part of English regulatory law. The Commercial Agents (Council Directive) Regulations 1993, for example,102 giving effect to the E.C. Directive on Commercial Agency, oblige the principal, in his dealings with the agent, to act dutifully and in good faith (Regulation 4). This
97 98

See especially sect. 11(1) of the Unfair Contract Terms Act 1977. See, for example, Finney Lock Seeds, supra, note 95, where the House of Lords struck down a clause in a contract limiting the liability of the seller of defective seeds to their contract price, because: a) the sellers had breached the sales contract by negligence; b) it was possible for the seed suppliers to insure against such claims; and c) similar claims which had arisen previously had been settled without relying on the limitation clause. 99 Council Directive 86/653/EEC of 18 December 1986 on the coordination of the laws of the Member State relating to self-employed commercial agents (O.J.E.C. L 382, 31/12/86 at 17), implemented in the U.K. by the Commercial Agents (Council Directive) Regulations 1993, S.I. 1993/3053, in force January 1, 1994. 100 Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts (O.J.E.C. L 95, 21/04/93 at 29), implemented by the Unfair Terms in Consumer Contracts Regulations 1999, S.I. 1999/2083, as amended by the Unfair Terms in Consumer Contracts (Amendment) Regulations 2001, S.I. 2001/1186. These Regulations partly overlap the Unfair Contract Terms Act 1977, U.K. 1977, c. 50, which has resulted in the U.K. Law Commissions project to replace both the 1977 statute and the 1999 Regulations with a new enactment, written in plain language. See the 37th Annual Report of the Law Commission 2002/03, Report No. 280, Cmnd. 5937, published August 22, 2003; paras. 4.4-4.5; available on-line at http://www.lawcom.gov.uk/files/lc280.pdf. 101 Council Directive 97/7/EC of the European Parliament and of the Council of 20 May 1997 on the protection of consumers in respect of distance contracts (O.J.E.C. L 144, 04/06/97 at 19), implemented in the U.K. by the consumer protection (Distance Selling) Regulations 2000, S.I. 2000/2334. 102 S.I. 1993/3053.

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requirement includes the duty for the principal to provide the agent with the necessary documentation relating to the goods concerned and to obtain for him the information necessary for the performance of the agency contract (Regulation 4(2)).103 The parties may not derogate from the good faith obligation. (Regulation 5). The Unfair Terms in Consumer Contracts Regulations 1999,104 implementing the E.C. Directive on Unfair Terms in Consumer Contracts, at Regulation 5, define unfair terms as follows: (1) A contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties rights and obligations arising under the contract, to the detriment of the consumer. In assessing good faith, the Directive requires regard to be had to the strength of the bargaining position of the parties, whether the consumer had an inducement to agree to the term and whether the goods or services were sold or supplied to the special order of the consumer. The seller or supplier can satisfy the requirement of good faith by dealing fairly and equitably with the other party, whose legitimate interests he takes into account. This has been held to require the terms to be fair in themselves, reasonably transparent and not to operate so as to defeat the reasonable expectations of the consumer.105 The Consumer Protection (Distance Selling) Regulations 2000,106 implementing the EC Directive on Distance Contracts, regulate contracts concerning goods or services
103

The principal must, for example, ,notify the agent within a reasonable time if he anticipates that the volume of transactions will be significantly lower than the agent could normally have expected (Regulation 4(2)) and notify the agent within a reasonable time of his acceptance, refusal or nonperformance of any transaction introduced by the agent. (Regulation 4(3)). 104 S.I. 1999/2083, in force October 1, 1999, replacing the Unfair Terms in Consumer Contracts Regulations 1994, adopted by S.I. 1994/3159 which came into force on July 1, 1995. 105 Director General of Fair Trading v. First National Bank plc [2002] 1 A.C. 481, [2001] 1 All E.R. 97 (H.L.), where it was held that good faith was not an artificial or technical concept but connoted fair and open dealing, which required terms to be expressed fully and clearly, without hidden pitfalls and with appropriate prominence being given to matters which might operate disadvantageously to the customer, and required the supplier not to take advantage, deliberately or unconsciously, of factors indicative of the consumer's weaker bargaining position. 106 S.I. 2000/2334.

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concluded between a supplier and a consumer under an organized distance sales or service provision scheme run by the supplier who, for the purposes of the contract, makes exclusive use of one or more means of distance communication up to and including the moment at which the contract is concluded. (Regulation 3(1)). The Regulations require the consumers in such a case to be provided with information, including all the main terms of the contract, prior to entering into it, the information to be confirmed in some durable medium after the contract is made (Regulation 8). The information must be provided with due regard to the principles of good faith in commercial transactions (Regulation 7(2).

VIII. 1)

Good Faith and the Common Law Today The United Kingdom All of the above legal mechanisms emanating from English commercial law are

really substitutes for good faith, or piecemeal solutions that indirectly and partially approximate those that could be had if good faith were accepted officially as a principle of general application in the common law. But at present, the concept is not so recognized in the United Kingdom, except in a limited number of statutes and regulations, and is imported under other guises, as it were, through the back door. Although the notion of good faith and morality has been the subject of academic debate for some time now,107 English lawyers must still resort to the general common law to find a workable substitute for the good faith notion, as it is specifically not recognized,
As exemplified by the debate between Professor Hart and Lord Devlin in the 1960s, concerning the role of morality and religion in law. Lord Devlin, in The Enforcement of Morals (London: Oxford University Press, 1965) at 43-44 describes the opposing positions: The moralist cannot say much more about contract than that the good man should keep faith and deal fairly. The pragmatist, if I may affix that label for want of a better to those who are concerned only to see that the law regulates the activities of those members of society where they impinge on one another, would say that there is no need to talk in moral terms about keeping faith; whether keeping faith is good or bad for the soul is something that each man can decide for himself. All that society need say about it is that as a matter of convenience a man must stick to his bargain, for otherwise social relations would not be possible.
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although in many cases application of particular rules would achieve the same result.108 Recently, interest has been shown, in the duty of good faith in contractual performance.109 There is some recognition, even in judicial circles, that a general good faith principle is, after all, not totally alien or anathema to English law. Lord Steyn voiced this idea eloquently, even while contending that no general duty of good faith was needed at common law. He wrote:110 As long as our courts always respect the reasonable expectations of parties our contract law can be left to develop in accordance with its own pragmatic traditions. And where in specific contexts duties of good faith are imposed on parties our legal system can readily accommodate such a well tried notion. After all, there is not a world of difference between the objective requirement of good faith and the reasonable expectations of parties. [Emphasis added] The reasonable expectations of honest people is perhaps the closest substitute the common law has yet found for the civilian notion of good faith in contract. It is a value through which good faith concerns, underlying the specific rules reviewed above, have been introduced into the common law, piecemeal and through the back door. Whether or not English jurists consider a general good faith duty necessary or desirable, however, English law, to borrow Lord Steyns words, is slowly being forced to accommodate the good faith concept per se, because of the implementation in the U.K. of certain European Union directives which require that well tried notion to be applied openly and expressly by British judges.111 In consequence, good faith, as a discrete and

Hiscock, Mary E., The keeper of the flame: good faith and fair dealing in international trade, 29 Loyola of Los Angeles Law Review 1059 at 1070 (1996). 109 Among major works on good faith published in recent years, see J. Beatson & D. Friedman, eds., Good Faith and Fault in Contract Law (New York: Oxford University Press, 1995); R. Harrison, Good Faith in Sales (London: Sweet & Maxwell, 1997); R. Brownsword, N.J. Hird and G. Howells, eds., Good Faith in Contract: Concept and Context (Aldershot: Ashgate/Dartmouth, 1999); and M.P. Furmston, ed., Butterworths Law of Contract (London: Butterworths, 1999), paras. 1.77-1.101. 110 See Lord Steyn, supra, note 47 at 439. 111 See sect. VII (13), supra.

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recognized principle, is now beginning to squeeze into the commercial law of the United Kingdom, albeit through a crack, in the front door. The time may well have come to consider introducing a general good faith duty into English common law of contract, if only to ensure greater unity and consistency in the law, greater international legal harmony and to better protect the interests of contracting parties by a general principle which, over time, would no doubt be developed by the common law and absorb some of the piecemeal solutions that have hitherto held sway. In this regard, it is interesting that the U.K. Law Commission indicated in 1999 that it was considering a commercial code for England and Wales.112 It would appear that this code would not contain detailed rules, but rather broad underlying principles, similar to those found in the UNIDROIT Principles of International Commercial Contracts113 and the Principles of European Contract Law.114 The proposed enactment, if actually adopted, would compel English lawyers and judges to think about general legal principles, one of which would very likely be good faith.115 Whether or not such a code is ever enacted, however, it is clear that statues and regulations increasingly require English lawyers to come to grips with good faith as a discrete legal concept and English judges to render decisions giving that general principle concrete meaning in the commercial context.116 2)
112

The United States

Law Commission Report No. 259, The Law Commission Seventh Programme of Law Reform, published June 16, 1999, at paras. 1.12-1.16. See text on-line at: http://www.lawcom.gov.uk/files/lc259.pdf. Such a code would be intended to provide a guide for lawyers, business people, the courts and commercial arbitrators and would not necessarily be in statutory form (ibid. at para. 1.14). 113 Infra, note 151. 114 Infra, note 154. 115 R. Bradgate, Commercial Law, 3 Ed., 2000, supra note 53 at 33-34. 116 Ibid., referring to the regulations as a significant step in the Europeanisation of English contract law, in that they have forced English lawyers to confront and think about the concept of good faith.

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Until recently, good faith was not part of American common law and, for example, Oliver Wendell Holmes, in his celebrated commentary The Common Law (1881),117 makes no mention whatsoever of good faith. In the United States today, the concept of good faith is rather found in statute, for example sect. 1-203 of the Uniform Commercial Code (UCC),118 which states, [e]very contract or duty within this Act imposes an obligation of good faith in its performance or enforcement .119 In the same way, the 2nd Restatement of Contracts (1981)120 at sect. 205 stipulates that, [e]very contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.
121

Good faith is defined in comment (a) to sect. 205, as faithfulness to an agreed common purpose and consistency with the justified expectations of the other party.122 Sect. 205 goes on to state that good faith and fair dealing in the performance of a contract requires more than mere honesty. Similarly, in the case of Hooters of America, Inc. v. Phillips, it was held that Hooters materially breached the arbitration agreement by promulgating rules so egregiously unfair as to constitute a

O.W. Holmes, The Common Law (Boston: Little, Brown and Company, 1881). The Uniform Commercial Code (UCC) is prepared by the National Conference of Commissioners on Uniform State Laws, in collaboration with the American Law Institute. On good faith under the UCC, see generally E.A. Farnsworth, Good Faith Performance and Commercial Reasonableness Under the Uniform Commercial Code, (1963) 30 U. Chi. L. Rev. 666. UCC at sect. 1-201(19) defines good faith to mean honesty in fact in the conduct or transaction concerned, while UCC sect. 1-203 defines good faith for a merchant in the context of transactions in goods as honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade. 119 The American Law Institute and the National Conference of Commissioners on Uniform State Laws, Uniform Commercial Code. Online: Cornell University at: http://www.law.cornell.edu/ucc/1/overview.html. 120 American Law Institute, Restatement of the Law Second, Contracts 2d, adopted at Washington, D.C. on May 17, 1979 (St. Paul, Minn.: American Law Institute Publishers, 1981). 121 Sect. 205 of the Restatement Second of Contracts. Note, both the UCC and Restatement only seek to aid and assist with the law on contracts, they are not binding. 122 Restatement Second, Contracts 2d, sect. 205, comment (a).
118

117

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complete default of its contractual obligation to draft arbitration rules and to do so in good faith.123 3) Canada The requirement to act in good faith when performing duties owed under a contract is stronger in common law Canada,124 than in the U.K. and it has been described as a vital norm in contract law.125 Moreover, two Ontario Law Reform

Commission reports have recommended the adoption of a doctrine of good faith very similar to that set forth in the U.S. 2nd Restatement of Contracts.126 If, however, one is to look only at the common law, rather than at statutes and regulations, we see that courts are often reluctant to impose a duty of good faith on parties and may prefer to rely on the common law concept of unconscionability or on one of the many other devices which the common law has traditionally employed to try to ensure that basic fairness is observed in contractual relationships. As Bastarache J.A. said in Crawford v. Agricultural Development Board (NB):127 Cases relative to the performance of contracts deal with the interpretation of the provisions of the contract, fundamental breach, unconscionability, implied terms, the tort of misrepresentation, promissory estoppel and unjust enrichment. Some authors have argued that all of this is good faith by any other name.

123 124

173 F.3d 933 at 938 (4 Cir. 1999). See McKennas Express Ltd. v. Air Canada (1992), 102 Nfld. & P.E.I.R. 185 (P.E.I. S.C. T.D.); Greenberg v. Meffert et al. (1985), 50 O.R. (2d) 755 (Ont. C.A.), leave to appeal to the Supreme Court of Canada was dismissed (1985) 56 O.R. (2d) 320; Brule Construction Ltd. v. Ottawa (City) (1991), 51 O.A.C. 260 (Ont. C.A.); and the Supreme Court of Canada in Lac Minerals Ltd. v. International Corona Resources Ltd.[1989] 2 S.C.R. 574. See also E.A. Farnsworth, Duties of Good Faith and Fair Dealing Under the UNIDROIT Principles, Relevant International Conventions, and National Laws (1995) 3 Tul. J. Int'l & Comp. L. 47 at 54. 125 B.J. Reiter, Good Faith in Contracts, (1983) 17 Val U.L. Rev. 705 at 707. 126 Ontario Law Reform Commission, (1979) 1 Report on Sale of Goods at pp. 103-61; Ontario Law Reform Commission, Report on Amendment of the Law of Contract at 165-176 (1987); see also E.A. Farnsworth, Good Faith in Contract Performance, in J. Beatson & D. Friedman (eds)., Good Faith and Fault in Contract Law, supra, note 109 at 158. 127 Crawford, supra note 12 at 75.

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As elsewhere in the common law world, however, Canadian courts have been wary of embracing the concept of a general duty of good faith in respect of precontractual dealings. In Martel Building Ltd. v. Canada,128 the Supreme Court of Canada decided that the tort of negligence did not extend to impose liability for pure economic loss resulting from the conduct of pre-contractual negotiations. In particular, the Court held that: It would defeat the essence of negotiation and hobble the marketplace to extend a duty of care to the conduct of negotiations, and to label a partys failure to disclose its bottom line, its motives or its final position as negligent. Such a conclusion would of necessity force the disclosure of privately acquired information and the dissipation of any competitive advantage derived from it, all of which is incompatible with the activity of negotiating and bargaining. The Court nevertheless noted that remedies for many forms of conduct in the negotiation of commercial contracts already exist in Canadian common law, through such doctrines as undue influence, economic duress, unconscionability, negligent misrepresentation, fraud and the tort of deceit.129 In an important dictum, the Court, moreover, left open the door to the introduction of a duty to bargain in good faith (a question which had been raised only in first instance and not in appeal in the case at bar). While stressing that no such duty had been recognized thus far in Canadian law, the Court pointedly added that Whether or not negotiations are to be governed by a duty of good faith is a question for another time.130 [Emphasis added].

[2000] 2 S.C.R. 860 at 886. Ibid. at 886-887. 130 Ibid. at 887. Note that some Canadian common law courts have recognized an implied duty to negotiate in good faith based upon specific wording in a contract. See, for example, Empress Towers Ltd. v. Bank of Nova Scotia (1990) 50 B.C.L.R. (2d) 126 (B.C. C.A.). An express contractual term requiring parties to negotiate in good faith was also recognized in Northland Fleet Services v. Quintette Operating Co. (2001) 16 B.L.R. (2d) 58 (B.C. S.C.).
129

128

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Indeed, a duty of good faith, at least in the performance, if not in the negotiation, of contracts, has been found to exist (although sparingly) in decisions such as McKinlay Motors v. Honda, where the Newfoundland Supreme Court Trial Division held that it [was] obviously an implied term of any such agreement that the parties act toward each other in their business dealings, in good faith.131 In Dynamic Transport. v. O.K.

Detailing,132 the Supreme Court of Canada held that there was a general obligation of
good faith performance. And in Jirna v. Mister Donut,133 the Ontario Court of Appeal held that in a franchise relationship there were general fiduciary obligations of good faith. Peel Condominium Corp. No. 505 v. Cam-Valley Homes Ltd. illustrates the tangential use of good faith in respect of sale. Finlayson J.A., speaking for the Ontario Court of Appeal, decided: The developers good faith obligation, or duty, is to carry out the terms of the agreement and deliver whatever title the contract between the parties calls for. This obligation or duty is circumscribed by the documentation required by the Condominium Act. The purchaser, for his or her part, has an equitable interest in the unit by virtue of the agreement that is signed; an equitable interest that equity will enforce by specific performance. However, there is no overarching fiduciary duty arising out of the relationship of a vendor and purchaser as such. 134 And Weiler J.A., concurring in the result held that the immediate case was "concerned with good faith in the execution of a contract and not simply good faith in pre-contractual negotiations leading to a tort action."
135

Thus the policy reasons

expressed by the Supreme Court of Canada in Martel Building Ltd.: v. Canada,136 where the Court stated that an overarching duty to bargain in good faith at common law has not
131

McKinlay Motors Ltd v Honda Canada Inc (1989) 80 Nfld & P.E.I. R 200 at 211; 249 APR 200 at 211 (Nfld. S.C. T.D.). 132 Dynamic Transport Ltd. v. O.K. Detailing Ltd. [1978] 2 S.C.R. 1072. 133 Jirna Ltd. v. Mister Donut of Canada Ltd. (1971) 22 D.L.R. (3d) 639 (Ont. C.A.), aff'd [1975] 1 S.C.R. 2. 134 53 O.R. (3d) 1 at 16 (Ont. C.A., per Finlayson J. A.). 135 Ibid. per Weiler J.A at 31. See Martel Building Ltd. v. Canada [2000] 2 S.C.R. 860. 136 [2000] 2 S.C.R. 860.

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yet been recognized by Canadian courts, had no application to this case. The Supreme Court left open the question of the existence of an implied duty of good faith at common law in the performance of existing contracts. Equity may also be the foundation for an independent doctrine of good faith in the performance of a contract in Canadian common law. The policy of the Court ought to be in favour of the enforcement of honest bargains.137 An example of the application of the doctrine of good faith in disguised form is the decision of Grange J. in Stepps Investments Ltd. v. Security Capital Corp. Ltd138 where he stated: It is not unreasonable, in my view, in modern commercial relations, to require the parties, where an important amendment is being made, to ensure that knowledge of such amendment comes to the other side. I do not mean that a party must overcome obtuseness in his opposite number but he must at least give him a real opportunity to appreciate the change. And if the circumstances are such that the amendment might readily be missed he should be particularly reluctant to assume such knowledge.139 It is also noteworthy that Gonthier, J. of the Canadian Supreme Court ,in an article entitled Liberty, Equality, Fraternity: The Forgotten Leg of the Trilogy, or Fraternity: The Unspoken Third Pillar of Democracy,140 alludes strongly to good faith. His observations are an example of the development of an independent doctrine of good faith in contract law, at least in the performance of contracts.141

Hurley v. Roy (1921), 50 O.L.R. 281 at 285 (Ont. S.C. App. Div.), as noted by Grange J.A. in LeMesurier et al. v. Andrus (1986), 54 O.R. (2d) 1 at 7; 25 D.L.R. (4th) 424 (Ont. C.A.). 138 (1976), 14 O.R. (2d) 259 (Ont. High C.J.). 139 Ibid. at 272. 140 (2000) 45 McGill L.J. 567 at 583-84, subtitled Good Faith in Contracts. 141 Belobaba, supra, note 13 at 83 et seq. Canadian courts have also begun to recognize a duty of good faith in contract performance in cases of inequality of bargaining power, particularly in contracts of adhesion such as employment contracts and franchising agreements. See, for example, Wallace v. United Grain Growers Ltd. (c.o.b. Public Press) [1997] 3 S.C.R. 701 (employment); Shelanu Inc. v. Print Three Franchising Corporation (2003) 64 O.R. (3d) 533 at 554-555 (Ont. C.A.) (franchising agreements). The breach of good faith in the performance of an insurance contract was also accepted as giving rise to significant punitive damages in Whiten v. Pilot Insurance Co. [2002] 1 S.C.R. 595.

137

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4) Australia and New Zealand Australia and New Zealand courts, although sharing the English common law heritage, appear more open to recognizing a discrete good faith principle in contract, similar to that prevailing in Europe and the United States. 142 Some decisions even go as far as to accept that a promise to negotiate in good faith may be enforceable in some situations.143

IX.

Good Faith in International Law (International conventions, instruments and the lex mercatoria)

1)

The U.N. Convention on Contracts for the International Sale of Goods, 1980 (Vienna Sales Convention, 1980) Article 7(1) of United Nations Convention On Contracts For The International

Sale Of Goods, 1980 (the Vienna Sales Convention, 1980) stipulates that the doctrine of good faith is to be used for interpretation.144 Specifically, Article 7(1) states: In the interpretation of this Convention, regard is to be had to its international character and to the need to promote uniformity in its application and the observance of good faith in international trade.145 A narrow interpretation of art. 7(1) would mean that it does not impose an obligation of good faith on the conduct of contracting parties, but rather that art. 7(1)
See generally A.F. Mason, Contract, Good Faith and Equitable Standards in Fair Dealing (2000) 116 L.Q.R. 66. See also Renard Construction (ME) Pty. Ltd. v. Minister for Public Works (1992) 26 N.S.W.L.R. 234 at 263-269 (N.S.W. C.A.); Hughes Aircraft Systems International v. Airservices Australia (1993) 31 N.S.W.L.R. 91 (N.S.W. C.A.); Alcatel Australia Ltd. v. Scarcella (1998) 44 N.S.W.L.R. 349 (N.S.W. C.A.). 143 See Livingstone v. Roskilly [1992] 3 N.Z.L.R. 230 at 237 (N.Z. High C.); Coal Cliff Colleries Pty. Ltd. v. Sijeham Pty Ltd. (1991) 24 N.S.W.L.R. 1 (N.S.W. C.A.); Mason, supra. 144 United Nations Convention On Contracts For The International Sale Of Goods, adopted at Vienna, April 11, 1980 and in force January 1, 1988. Online: Pace University School of Law: Institute of International Commercial Law homepage at: http://www.cisg.law.pace.edu/cisg/text/treaty.html. [hereinafter CISG]. As at September 29, 2004, 63 States were party to the Vienna Sales Convention 1980. See the United Nations website "List of Multilateral Treaties deposited with the Secretary General" at http://untreaty.un.org/ENGLISH/bible/englishinternetbible/partI/chapterX/treaty20.asp. 145 Article 7(1) Vienna Sales Convention.
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simply requires that Convention provisions be read in good faith. If this were the case, then parties would be allowed to act in bad faith and escape liability, which would undermine the good faith principle found in art. 7(1). Clearly, art. 7(1) must be read broadly as imposing an obligation of good faith conduct in international trade. Generally there is support for the broad reading of art. 7(1). Phanesh Koneru cautions that, good faith cannot exist in a vacuum and does not remain in practice as a rule unless the actors are required to participate.146 Nives Povrzenic, for his part, argues that good faith is a principle that cannot be ignored: The need to promote...the observance of good faith in international trade should be given a broad interpretation in the sense that it is addressed to the parties to each individual contract of sale as well as to the Convention itself.147 Additionally, it has been held that the Vienna Sales Convention is effectively the product of compromise amongst common law, civil law and socialist law148 regimes and embraces the concept of a universal lex mercatoria.149

P. Koneru, The International Interpretation of the UN Convention on Contracts for the International Sale of Goods: an Approach Based on General Principles. Online: Pace University School of Law homepage (last accessed 24 July 2002) at: http://www.cisg.law.pace.edu/cisg/biblio/koneru.html. 147 N. Povrzenic, Interpretation And Gap-Filling Under The United Nations Convention On Contracts For The International Sale Of Goods. Online: Pace University School of Law: Institute of International Commercial Law homepage at: http://www.cisg.law.pace.edu/cisg/biblio/gapfill.html. 148 For the legislative history of the Vienna Sales Convention, see "United Nations Conference on Contracts for the International Sale of Goods," (Vienna: 10 March - 11 April 1980), Official Records, UN Document No. A/CONF. 97/19 (U.N. Publications No. E.81.IV.3). See also J.O. Honnold, Documentary History of the Uniform Law for International Sales (Deventer, The Netherlands: Kluwer Law and Taxation Publishers, 1989). 149 Thus, it possesses a universal appeal that many arbitrators will find appealing in their search for a lex mercatoria-type of justification for their awards., L.A. DiMatteo, Resolving International Contract Disputes (1998) 53-Nov Disp. Resol. J. 75 at 75. See also W. Tetley, International Conflict of Laws: Common, Civil and Maritime (Montreal: Les ditions Yvon Blais, 1994) at 419 [Tetley, International Conflict of Laws]. One should, however, be careful in accepting such a lex mercatoria as it could displace entire bodies of national commercial law.

146

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2) The International Institute for the Unification of Private Law, 1994 (UNIDROIT Principles, 1994) UNIDROIT is the independent intergovernmental organization whose purpose is to harmonize and coordinate the private law of States and to prepare gradually for the adoption by States of uniform rules of private law.150 Perhaps its greatest achievement is the UNIDROIT Principles of International Commercial Contracts 1994151, which Principles can be used to interpret the Vienna Sales Convention152 because the latter was actually modeled on the UNIDROIT Principles.153 Thus article 1.7 of the UNIDROIT Principles, in discussing good faith and fair dealing, supports the positive obligation of good faith on parties. Article 1.7(1) states, each party must act in accordance with good faith and fair dealing in international trade [and art. 1.7(2) states] the parties may not exclude or limit this duty.154 In effect, the UNIDROIT Principles add support to a positive duty of good faith that can be seen in the Vienna Sales Convention. It seems clearly evident that good faith under the UNIDROIT Principles goes well beyond the Vienna Sales Convention, to expressly impose an obligation

http://www.unidroit.org/english/presentation/main.htm J. M. Perillo., UNIDROIT Principles of International Commercial Contracts (1994): The black letter text and a review (1994) 63 Fordham Law Review 281 at 282. The UNIDROIT Principles 1994 and commentaries on them are also available on-line at: http://www.unidroit.org/english/principles/pr-main.htm. See Tetley, International Maritime and Admiralty Law, supra, note 90 at 268, footnote 19. 152 CISG, supra, note 144. 153 U. Magnus, Remarks on good faith: The United Nations Convention on Contracts for the International Sale of Goods and the UNIDROIT Principles of the International Commercial Contracts, Pace University School of Law, on-line at: http://cisgw3.law.pace.edu/cisg/principles/uni7.html#um. 154 See also E.A. Farnsworth, supra, note 124 at 49, noting various other provisions of the UNIDROIT Principles which refer to either good or bad faith and/or fair dealing. See also the very similar Principles of European Contract Law, revised 1998/1999, which provide at art. 1.102(1): Parties are free to enter into a contract and to determine its contents, subject to the requirements of good faith and fair dealing, and the mandatory rules established by these Principles. The Principles of European Contract Law, prepared by the Commission on European Trade Law and revised in 1998/1999, are available on line at: http://www.ufsia.ac.be/~estorme/PECL2en.html.
151

150

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of good faith on contracting parties.155 Hence, the UNIDROIT Principles

demonstrate that the doctrine of good faith is a shared value that is generally common among States. In essence it recognizes Lord Mansfields view that good faith is a

governing principleapplicable to all contracts and dealings"156, thus reinforcing the view that good faith, as it exists in national laws, also exists in international law. 3) The Vienna Convention on the Law of Treaties, 1969 Art. 31(1) of the Vienna Convention on the Law of Treaties (Vienna Treaty Convention) reads: A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.157 This rule of treaty interpretation imposes a test based on both good faith and reasonableness, establishing objective points of reference which one can apply to applicable international legislation. 4) The lex mercatoria The law merchant is that omnipresent but enigmatic source of law, which fills in the cracks between statutes and which can be described as the unwritten traditions and standards of commercial men since the days of ancient Rhodes in 800 B.C.158 The lex

T. Keily, Good Faith and the Vienna Convention on Contracts for the International Sale of Goods (1999) 3 Vindobona J. Intl Comm. L. & Arb. 15-40. 156 Carter v. Boehm, supra, note 28. 157 Vienna Convention on the Law of Treaties, adopted at Vienna, May 23, 1969, and in force January 27, 1980, 1155 U.N.T.S. 331. On-line at: http://www.un.org/law/ilc/texts/treaties.htm. As at September 29, 2004, 98 States were party to the Vienna Convention 1969. See the United Nations website "List of Multilateral Treaties deposited with the Secretary General" at http://untreaty.un.org/ENGLISH/bible/englishinternetbible/partI/chapterXXIII/treaty1.asp. 158 The historic lex mercatoria (more usually known in England as the Law Merchant) was a body of oral, transnational, customary law common to merchants in medieval Europe, who frequently travelled with their goods, by land and sea, from place to place and kingdom to kingdom. One major branch of this customary mercantile law was the lex maritima, which arguably dates back to the unwritten sea law of ancient Rhodes, but which developed significantly in the Middle Ages under the influence of three documents: 1) the Rles of Olron, a compilation of maritime law decisions and principles appearing in written form by the end of the twelfth century, which were accepted in northern and western Europe from the Atlantic coast of Spain to Scandinavia; 2) the Consolato del Mare, which governed maritime affairs on the Mediterranean from about the late 1300s; and 3) the Laws of Wisbuy (based on the Rles of Olron), which controlled trade in the Baltic. On the historic lex mercatoria, see generally Sir. T. Scrutton,

155

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mercatoria, which has been revived (or at least rediscovered) in recent decades, particularly by arbitrators in deciding international commercial disputes, has the tradition of fair dealing and good faith between the parties. 159

X. 1)

The Contracts of Arbitration and their Advantages and Disadvantages The arbitration contracts Arbitration is a contract, or rather a contract and a subsequent contract or

undertaking. The first contract is the agreement by the two parties to subject disputes to an arbitration panel under specific rules and in a particular place. The second contract is the undertaking by the panel to abide by the rules chosen and to render a binding award. At the first meeting at which both the parties and the panel attend, the parties expressly or impliedly confirm their acceptance of the panel and their role and in effect confirm the second undertaking. 2) The arbitration process a definition The arbitration process can be defined as an agreement to settle differences between parties, who choose not to litigate before the courts, but ratherto submit to the opinion of experts of their choice, whose decision will be final. The experts agree to the mandate and then perform their duties.

General Survey of the History of the Law Merchant in Select Essays in Anglo-American Legal History, vol. 3, Little, Brown & Co., Boston, 1909 at 7-15; L. Trakman, The Law Merchant: The Evolution of Commercial Law, F. B. Rothman, Littleton, Colorado, 1983 at 1-21; H. J. Berman, Law and Revolution: The Formation of the Western Legal Tradition, Harvard University Press, Cambridge, Mass., 1983 at 333-356; Tetley, International Conflict of Laws, supra, note 149 at 181-182; F.K. Juenger, The Lex Mercatoria and Private International Law (2000) 60 Louisiana L. Rev. 1133 at 1134-1136. On the historic lex maritima, see generally Tetley, The General Maritime Law The Lex Maritima (1996) 20 Syracuse J. Intl & Comm. L. 105-145 and on-line at http://tetley.law.mcgill.ca/maritime/genmarlaw.pdf; Tetley, Maritime Liens & Claims, 2 Ed., (Montreal: Les ditions Yvon Blais) 1998 at 12-13 and 22-23; Tetley, International Maritime & Admiralty Law, supra, note 90 at 9-13 and 15-19. 159 See infra at sect. XI(4).

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Ideally, the place of the arbitration, the formalities and the rules of procedure are negotiated fairly and appropriately prior to the dispute in the first arbitration agreement, including to be bound by the arbitrators decision.160 3) A United Kingdom definition In the United Kingdom arbitration has on occasion been defined quite differently: The law of private arbitration is concerned with the relationship between the courts and the relationship between the courts and the arbitral process. 161 The above definition, with its reference to the courts, implicitly recognizes appeals of arbitration awards on points of law and/or fact and not merely in cases of fraud or improprieties of the arbitrators or the parties. To add to the lack of finality is the absence of good faith as a strong principle of English law in respect of the negotiation and performance of contract. 4) Advantages of arbitration It can be claimed that the advantages of arbitration include: (a) impartiality of the decision maker; (b) arbitration awards are final and appeals are not permitted except in cases of fraud; (c) confidentiality can be obtained if desired; (d) the arbitrators have an expertise in the particular subject under dispute; (e) the parties are also able to limit discovery and other procedures if they so desire, making the process less onerous; (f) the process is quicker; (g) arbitration is less adversarial and thus enhances

negotiation and future business relations; and (h) finally, the overall costs of settlement are reduced.162 5) Disadvantages of arbitration

Tetley, International Conflict of Laws, supra note 149 at 390. M.J. Mustill & S.C. Boyd, The Law and Practice of Commercial Arbitration in England, 2nd ed., (London: Butterworths, 1989) at 3. See, however, other U.K. definitions at Tetley, ibid. 162 See the International Trade Administration: United States Department of Commerce web page at: http://www.osec.doc.gov/ogc/occic/arb-98.html.
161

160

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Arbitration for its part requires the following basic principles in the bargaining process: impartiality, neutrality, fairness, justice, competence, informed consent, confidentiality and full disclosure.163 If any of these principles is breached, the

advantage of arbitration cannot be achieved. Moreover, where issues are complex or where the parties are continuously seeking intervention of a court on procedural or evidentiary matters, arbitration is often more expensive and time-consuming than actual litigation. The requirement, therefore, that parties approach arbitration in good faith is also essential.

XI. 1)

Ad Hoc Arbitration vs. Institutional Arbitration Ad hoc arbitration Parties using arbitration must choose between proceeding within an institutional

framework, such as the International Chamber of Commerce (ICC), and proceeding ad hoc. Ad hoc arbitration means that there is no formal administration by an established arbitral organization; rather, the parties create their own rules and procedures. To follow this method of arbitration the parties may either (i) draft a set of ad hoc procedures in contract; (ii) refer to a generally accepted system of ad hoc arbitration rules, such as the Panama Convention164, UNCITRAL Arbitration Rules165 or the CPR Institute for Dispute

S. C. Grebe, K. Irvin & M. Lang, "A Model for Ethical Decision Making in Arbitration" (1989) 7 Arbitration Q. 133 at 134. The authors also include confidentiality, although in my view it is not essential. 164 Tetley, International Conflict of Laws, supra note 149 at 405. 165 Adopted by the United Nations Commission on International Trade Law on April 29, 1976, and approved by Resolution 31/98 of the United Nations General Assembly on December 15, 1976. For the text on line, see: http://www.uncitral.org/english/texts/arbitration/arb-rules.htm. See also Tetley, ibid. at 404.

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Resolution Rules for Non-Administered Arbitration,166 or (iii) after a problem has developed allow an arbitration tribunal to create some of its own rules and procedures. At times ad hoc arbitration is less expensive than institutional arbitration. The burden ad hoc arbitration places on parties to organize and administer the arbitration, however, can be excessive and disproportionate. And if problems arise, such as intentional delays, by the parties or arbitrators, then the assistance of a court or of an independent appointing authority will not be available. The highest standard of good faith is thus required in ad hoc arbitration. 2) Institutional arbitration Institutional arbitration means that the proceedings are administered or supervised by an organization in accordance with its own rules of arbitration. By choosing institutional arbitration, the parties can rely on expertise and resources of the institution for selecting arbitrators and for administering the arbitration. There is a price for institutional arbitration- a fee must be paid to the administering body, unlike ad hoc arbitration. The functions of the institution may be vital, however, to ensure that the arbitration advances without undue hindrance. 3) The ICC: International Court of Arbitration The good services an institution may offer are perhaps best exemplified by the International Chamber of Commerce, Court of Arbitration (ICC Court), which provides a thoroughly supervised form of administered arbitration. It particularly has the advantage of being able to punish or discipline parties, and even arbitrators, who are not acting properly. The ICC Court applies the Rules of Arbitration of the International Chamber of Commerce.167 ICC officers, however, do not decide the matters submitted to ICC
Revised and effective, September 15, 2000. The Rules are on line at: http://www.cpradr.org/arb-rules.htm. N.B.: The CPR Institute for Dispute Resolution was formerly called the Center for Public Resources.
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arbitration; rather, this role is for the arbitrators appointed under the Rules. The Courts role is rather to oversee the process of the arbitration and may: (i) determine whether there is a prima facie agreement to arbitrate; (ii) decide on the number of arbitrators; (iii) appoint arbitrators; (iv) decide challenges against arbitrators; (v) ensure that arbitrators are conducting the arbitration in accordance with the ICC Rules and replace them if necessary; (vi) agree to the place of arbitration; (vii) fix and extend time-limits; (viii) determine the fees and expenses of the arbitrators; and (ix) scrutinize arbitral awards [which would not otherwise be available since arbitration decisions are generally not subject to appeal].168 4) The lex mercatoria, arbitration and good faith Although the matter continues to be controversial among jurists, there is a growing body of legal opinion today supporting the existence of a modern lex mercatoria, which, like the historic Law Merchant of the Middle Ages,169 can provide viable solutions to trade disputes involving parties from different jurisdictions, by applying fundamental principles of justice and equity recognized by merchants everywhere. This modern lex mercatoria is increasingly invoked by both ad hoc and institutional arbitrators in rendering awards in international commercial disputes.170 Good faith as between

The current ICC Arbitration Rules came into force on January 1, 1998. For the text on-line, see: http://www.iccwbo.org/court/english/rules/rules.asp. 168 See in general International Chamber of Commerce: International Dispute Resolution: on-line at: http://www.iccwbo.org/court/english/arbitration/introduction.asp. 169 See supra, Section IX(4). 170 On the modern lex mercatoria in international commercial arbitration, see O. Lando, The Lex Mercatoria in International Commercial Arbitration (1985) 34 I.C.L.Q. 747; B. Goldman, La Lex Mercatoria dans les contrats et larbitrage internationaux: ralit et perpective in The Influence of the European Communities upon Private International Law of the Member States, F. Rigaux, Ed., Larcier, Brussels, 1981; J.D.M. Lew, Applicable Law in International Commercial Arbitration, Oceana, Dobbs Ferry, N.Y. 1978, No. 343 at 436-437; A.F. Lowenfeld, Lex Mercatoria: An Arbitrators View (1990) 6(2) Arb. Int. 133; Philippe Kahn, La Lex Mercatoria: point de vue franais aprs quarante ans de controverses (1992) 37 McGill L.J. 413; T.E. Carbonneau, ed, Lex Mercatoria and Arbitration: A discussion of the new law merchant, Juris Publishing, Yonkers, N.Y. and Kluwer Law International, 1998. See also Tetley, International Conflict of Laws, supra, note 149 at 417-419 and examples cited there of specific arbitral awards applying the modern lex mercatoria.

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contracting parties is frequently reiterated in such awards as a guiding rule of the contemporary law merchant.171 XII. 1) The Law of Arbitral Proceedings UNICITRAL Model Law on International Commercial Arbitration, 1985 The UNCITRAL Model Law172 allows the parties to fix the [arbitration] rules of procedure, and in the absence of choice, the tribunal may apply its own rules.173 Perhaps most important is that the UNCITRAL arbitration rules provide vast flexibility for the arbitrators to conduct each case. The rules may thus be used in all legal systems (whether common law or civil law), in various circumstances and in different cultures. Nevertheless, such flexibility may leave parties and their lawyers uncertain concerning the specific procedures that a tribunal may choose to follow. This problem is heightened in international arbitration, as there are likely to be three members on the arbitration tribunal, each from a different country. The lawyers and parties themselves may even come from different countries with different legal and cultural backgrounds.

See, for example, the International Chamber of Commerce Award No. 3131 of October 26, 1979, reported in Revue de larbitrage 1983, 525 at 531, where it was held: Conformment au principe de bonne foi qui inspire la lex mercatoria internationale, le tribunal a recherch si, dans la prsente espce, la rupture du mandat tait imputable au comportement de lune des parties et si elle avait caus lautre un prjudice qui serait ainsi injustifi, et dont lquit imposerait alors quil soit rpar. 172 Adopted at Geneva. June 21, 1985; online: http://www.uncitral.org/english/texts/arbitration/mlarb.htm. See also the European Convention on International Commercial Arbitration (adopted at Geneva, April 26, 1961 and in force in part January 7, 1964 and in part October 18, 1965; 484 U.N.T.S. 349), which is very similar to the UNCITRAL Model Law on International Commercial Arbitration. As at April 16, 2004, legislation based on the UNCITRAL Model Law on International Commercial Arbitration had been enacted in Australia, Azerbaijan, Bahrain, Bangladesh, Belarus, Bermuda, Bulgaria, Canada, Croatia, Cyprus, Egypt, Germany, Greece, Guatemala, Hong Kong Special Administrative Region of China, Hungary, India, Iran (Islamic Republic of), Ireland, Japan, Jordan, Kenya, Lithuania, Macau Special Administrative Region of China, Madagascar, Malta, Mexico, New Zealand, Nigeria, Oman, Paraguay, Peru, Republic of Korea, Russian Federation, Singapore, Spain, Sri Lanka, Thailand, Tunisia, Ukraine, within the United Kingdom of Great Britain and Northern Ireland: Scotland; within the United States of America: California, Connecticut, Illinois, Oregon and Texas; Zambia, and Zimbabwe. See http://www.uncitral.org/english/status/index.htm. 173 Tetley, International Conflict of Laws, supra note 149 at 404.

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Consequently, the parties entering into arbitration may have varying expectations of rules of procedure and how the tribunal will adhere to these rules.174 2) The U.N. Convention on the Recognition & Enforcement of Foreign Arbitral Awards, 1958 The United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (The New York Convention)175 is the most important convention for enforcement of arbitration awards. It facilitates enforcement of awards in all contracting states as each country must recognize [arbitral] awards as binding and enforce them in accordance with the rules of procedure of the territory where the award is relied on.176 This means that a party need only supply the local court with an

authenticated original or duly certified copy of the award and the original or a certified copy of the arbitration agreement in order to apply for enforcement. Nevertheless, article V(1)(d) stipulates, that such [arbitral] recognition and enforcement may be

refused where the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, or, failing such agreement with the law of the country where the arbitration took place.177 There is, however, no explicit good faith provision in the Convention. a) United States

The United States in acceding to the New York Convention in 1970, incorporated two reservations: U.S. Courts will only enforce arbitration awards where (1) the subject
Howard M. Holtzmann, Recent Work on Dispute Resolution by the United Nations Commission on International Trade Law 5 ILSA J. Intl & Comp. L. 425 (1999), International Law Weekend Proceeding Recent Work on Dispute Resolution by the United Nations Commission on International Trade Law. 175 Adopted at New York, June 10, 1958 and in force, June 7, 1959; 330 U.N.T.S. 3. On-line at: http://www.uncitral.org/english/texts/arbitration/NY-conv.htm. As at September 29, 2004, there were 134 States party to the New York Convention. A list of parties can be found on-line at: http://untreaty.un.org/English/bible/englishinternetbible/partI/chapterXXII/treaty1.asp. 176 Article III, United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 10 June 1958). 177 Tetley, International Conflict of Laws, supra note 149 at 405.
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matter of the award is considered to be commercial in nature under U.S. law; and, (2) the award was rendered in a country that is also a party to the New York Convention.178 b) Canada

Canada adopted two federal statutes to give effect to the New York Convention 1958179 and the UNCITRAL Model law on International Commercial Arbitration 1985.180 The federal legislation, surprisingly, has been effectively implemented in every province.181 The Canadian framework also permits regulations for conducting arbitration while giving the parties latitude to design rules that suit themselves but leaving courts less discretion to intervene in the conduct or arbitral decision. c) The United Kingdom

Unfortunately, the United Kingdom (with the exception of Scotland182) did not adopt the UNCITRAL Model Law. Rather it has kept its own statute, which results in considerable appeals and the constant threat of appeal. 3) Inter-American Convention on International Commercial Arbitration, 1975

(Panama Convention, 1975) The Inter-American Convention on International Commercial Arbitration, 1975 (Panama Convention)183 is an agreement among most members of the Organization of

The New York Convention, supra note 175. Note most of the New York Convention signatories, including Canada and UK, have also reserved the right to only apply the Convention on the basis of reciprocity, to the recognition and enforcement of only those awards made in the territory of another Contracting State. 179 The United Nations Foreign Arbitral Awards Convention Act, S.C. 1986, c. 21; R.S.C. 1985, c. 16 (2nd Supp.). On-line at: http://laws.justice.gc.ca/en/U-2.4/index.html. 180 The Commercial Arbitration Act, S.C. 1986, c. 22; R.S.C. 1985, c. 17 (2nd Supp.) adopting, in a Schedule, the Commercial Arbitration Code, based on the UNCITRAL Model Law 1985. On-line at: http://laws.justice.gc.ca/en/C-34.6/index.html. 181 See Tetley, International Conflict of Laws, supra note 149, at pp. 397-400. 182 Scotland is governed by the UNCITRAL Model Law, with a few modifications, pursuant to the Law Reform Miscellaneous Provisions (Scotland) Act 1990, U.K. 1990 c. 40, sect. 66 and Schedule 7. See http://www.legislation.hmso.gov.uk/acts/acts1990/Ukpga_19900040_en_1.htm. 183 Adopted at Panama City, January 30, 1975, and in force June 16, 1976. See Tetley, International Conflict of Laws, supra note 149 at 405. For full text of Convention, see International Legal Materials at (1975) 14 I.L.M. 336 or on-line at: http://www.oas.org/juridico/english/treaties/b35.htm.

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American States (OAS) and provides for the reciprocal recognition and enforcement of international commercial arbitration agreements and awards. Article 3 of the Panama Convention stipulates that in the absence of an express agreement between the parties, the arbitration shall be conducted in accordance with the Rules of Procedure of the Convention, which closely resemble the UNCITRAL Arbitration Rules.184 But, here again, there is no explicit good faith provision. 4) Inter-American Convention on the Extraterritorial Validity of Foreign Judgments

and Arbitral Awards, 1979 (Montevideo Convention, 1979) The Inter-American Convention on the Extraterritorial Validity of Foreign Judgments and Arbitral Awards, 1979 (Montevideo Convention)185 establishes rules with regard to recognition and enforcement of foreign judgments. Article 6 requires that the law of the State where such execution is sought govern the procedures for ensuring the validity of the awards and judgments, as well as the jurisdiction of the arbitrators and judges who rendered them.186 In addition, the Montevideo Convention only applies when there is an existing judgment or arbitral award rendered in civil, commercial or labor proceedings in one of the signatory countries.187 In such cases, the Convention sets forth the requirements that must be met in order to establish the extraterritorial

Of particular interest is that the United States signed the Panama Convention 1975 in 1978 and deposited its instrument of ratification in 1990. Canada, however, has not signed the Convention. As at September 29, 2004, the following countries were party to the Panama Convention 1975: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, the United States of America, Uruguay and Venezuela. 185 Adopted at Montevideo, May 8, 1979 and in force June 14, 1980. For the text, see International Legal Materials at (1979) 18 I.L.M. 1224 or on-line at: http://www.oas.org/juridico/english/treaties/b-41.htm. 186 Tetley, International Conflict of Laws, supra note 149 at 406. 187 As at September 29, 2004, the Montevideo Convention, 1979 is in force in the following countries: Argentina, Bolivia, Brazil, Colombia, Ecuador, Mexico, Paraguay, Peru, Uruguay and Venezuela.

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validity188 and procedures to recognize and enforce of arbitration decisions.189 There is no explicit good faith provision in the Convention, however.

XIII.

Arbitration and Good Faith In light of international conventions and instruments, such as the Vienna Sales

Convention, the UNIDROIT Principles, the Vienna Treaty Convention, and national legislation that require good faith, all parties to arbitration, including lawyers190, the arbitrators, the arbitration institution (if chosen) and the actual disputing parties themselves must enter into the arbitration with a mutual obligation to act in good faith. Carrothers goes one step further and states that good faith obligations and duties should always rise to the standard of utmost good faith and full disclosure where arbitration takes place.191 All parties should intend from the beginning to arrive fully prepared to discuss their respective interests. They should do so in a timely and

effective manner192 and must make themselves, reasonably available and demonstrate a proactive desire to settle the dispute. Hill & DeLacenserie add that good faith means that one must not suffocate:

Montevideo Convention, 1979, Art. 2. Ibid, Art. 3. 190 The Boston Bar Association, for example, states in its Civility Standards for Civil Litigation, at art. 11(b): A lawyer should not falsely hold out the possibility of settlement as a means for adjourning discovery or delaying trial. See also art. 11(a): A lawyer should raise and explore with his or her client the issue of settlement in every case as soon as enough is known about the case to make that discussion meaningful. See Boston Bar Association, Civility Standards For Civil Litigation, March 7, 1997; on-line at: http://www.bostonbar.org/civility.htm. 191 A.W.R. Carrothers. The Cuckoo's Egg in the Mare's Nest--Arbitration of Interest Disputes in Public-Service Collective Bargaining: Problems of Principle, Policy, and Process, in Arbitration 1977, Proceedings of The 30th Annual Meeting, National Academy of Arbitrators 15, 23 (Barbara D. Dennis et al. eds., 1977) at 27. 192 Where a party opts for litigation instead of relying on his right to arbitrate under a charterparty, and then suddenly invokes the arbitration clause after engaging in prolonged pre-trial discovery over many months, he will often be held to have waived the right to arbitrate, particularly where permitting the tardy recourse to arbitration would unfairly prejudice the other party. Denying the right to arbitrate in such cases, in effect, forestalls bad-faith conduct. See, for example, Expofruit S.A. v. M/V Aconcagua 280 F.Supp.2d 374, 2003 AMC 2308 (E.D. Pa. 2003).
189

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the arbitration process with lengthy "legalisms", procedural niceties, and endless arrays of data that result in hearings with no focus. Parties are advised to resist the urge to advance every conceivable argument and sub-issue. 193 Hill & DeLacenserie argue, that more and more .. a legalistic, technical, highly adversarial process is misplaced in interest arbitration.194 In consequence, arbitrators must rely on considerations of good faith, as can be found in international and customary law, to resolve disputes even where national laws may not imply such a standard.195 Good faith in particular for arbitrators means not accepting to act as an arbitrator when ones immediate calendar is full, and to fully disclose any prior dealings or relationships that might give rise to even an appearance of conflict of interest. Lord Hewart, C.J. in R v. Sussex Justices stated that it was of fundamental importance that justice should not only be done, but should manifestly and undoubtedly be seen to be done.196 Arbitrators before and during an arbitration, must therefore carry out an introspective consideration, as best they can, of their own prejudices and pet likes, dislikes and hobby horses, so that they do not render a biased award.

M.F. Hill, Jr. & E. DeLacenserie, Interest Criteria In Fact-Finding And Arbitration: Evidentiary And Substantive Considerations (1991) 74 Marquette Law Review 399 at 444. 194 Ibid. 195 See ICC Partial Award Made (June 14, 1979) in Case No. 3267, 7 Y.B. Commercial Arb. 96 at 100 (1982) ("the abruptness of this deduction without advance warning other than a notice sent simultaneously with the making of such deduction does not appear in keeping with the good faith spirit which should have prevailed in the performance of the Contract") (arbitrators authorized to act as "amiables compositeurs"); Arbitral Tribunal of Hamburg, Friendly Arbitration Award of January 15, 1976, 3 Y.B. Commercial Arb. 212 at 213 (1978) ("the forementioned principles are not based on German rules of law, but are rather a consequence of the principle of good faith in trade. These principles have because of their character a supra-national validity"); ICC Award Made in Case No. 1784 in 1975, 2 Y.B. Commercial Arb. 150 at 150 (1977) ("requirement of good faith which should govern the determination of the parties' obligations and their fulfillment, particularly when the agreement involved is an international contract"). (this footnote is cited in footnote 225 in C. R. Drahozal, Commercial Norms, Commercial Codes, And International Commercial Arbitration (2000) 33 Vanderbilt Journal of Transnational Law 79 at 127-128.) 196 R. v. Sussex Justices, Ex p. McCarthy [1924] 1 K.B. 256 at 259.

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Without good faith, the claimed advantages of effective arbitration are lost. If handled properly, good faith arbitration can provide relatively quick dispute resolution at a low cost. Added to this is the advantage of experienced adjudicators acting outside the adversarial process. Currently, however, many litigants justifiably complain that the benefits of arbitration are lost because of vigorous adversarial arbitration by the parties and their lawyers. Delays are also criticized and appeals are taken that are quite outside the spirit and agreement to arbitrate. Ultimately, the challenge is for parties, counsel and the arbitrators to find ways to present and resolve the dispute directly and effectively. Without good faith as a binding principle, injustices will surely continue.

XIV. 1)

Appeals From Arbitral Awards Is it proper to appeal the findings of an award? In my view, there should be no setting aside of arbitral awards on questions of

fact or law adjudged in the award. To have agreed to arbitrate is to accept as final the decision of the arbitrators. To then proceed before the courts and to question the findings of the arbitrators is not good faith.197 Applications to set aside an award should be permitted and are permitted in cases of incapacity of the parties to arbitrate, lack of notice and the other cases set out in article 33 of the UNCITRAL Model Law on International Commercial Arbitration adopted on June 21, 1985. 2) The United Kingdom The UNCITRAL Model Law has been adopted in many states, but it was rejected in England on the basis that in English law there is a well developed arbitral

197

A recent example of a quite unnecessary, if not improper, appeal can be seen in Gannet Shipping Ltd. v. Eastrade Commodities Inc. [2002] 1 Lloyds Rep. 713.

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process.198 This has led to a right to appeal, which is broader in England than it is in internationally recognized instruments such as the UNCITRAL Model Law. Under the former U.K. Arbitration Act 1979, there was a right to appeal on any question of law that arose out of the arbitral award. There has been slight change in legislative policy since the 1979 Act, and the Arbitration Act 1996 has restricted the availability of appeals.199 The more restrictive approach has been viewed as in line with the perceived Parliamentary aim of speedy finality in arbitration.200 Regardless of a more restrictive approach to appeals, under the Arbitration Act 1996, appeals over questions of fact or law are still permitted201 and if not prevalent, are a constant threat to the finality of every award. The right to appeal can thus incline the successful party to settle on less favourable terms than the award granted him and at very least can delay the finality of the award and closure of the dispute. On the other hand, it can be argued that the right to appeal is a stimulus to the arbitrators to do their work carefully and properly. 3)
198

The United States

D.C. Jackson, Enforcement of Maritime Claims, 3rd ed., (London: LLP, 2000), at 324, referencing the reasoning in the Report of the Department Advisory Committee on Arbitration Law, June 1989, which was chaired by Lord Mustill. Jackson does note, however, that the Model Law did have a large influence on the Arbitration Act 1996, ensuring that the approach in England is not too far from internationally recognized principles. 199 The Arbitration Act 1979, U.K. 1979, c. 42, was repealed and replaced by the Arbitration Act 1996. Wilford, Coghlin, and Kimball, Time Charters, 5h ed.,(London: LLP, 2003), paras. 29.5329.56 at 494-495, indicate certain requirements that must be met, before the award may be appealed on a question of law. In particular, it must be shown that the determination of the question which is requested of the court would substantially affect the rights of one or more of the parties, and that the tribunals decision is obviously wrong or, if the question is one of general importance, the decision is open to serious doubt before the award may be appealed (ibid., para. 29.54 at 494). See also The Northern Pioneer [2003] 1 Lloyds Rep. 212 (C.A.). 200 Jackson, supra note 198 at 337. 201 See the Arbitration Act 1996, U.K. 1996, c. 23 at sects. 67 (challenging arbitral awards on grounds relating to the arbitral tribunals substantive jurisdiction); 68 (challenging arbitral awards for serious irregularity) and 69 (appeals of arbitral awards on questions of law). See the text of the statute at http://www.legislation.hmso.gov.uk/acts/acts1996/1996023.htm. Jackson, supra note 198 at 336, has argued that appeals are quite limited because of the fact that, aside from appeals on a point of law, the process of appeal is contained in mandatory provisions, the procedure for which is found in the Civil Procedure Rules 1998, S.I. 1998/3132, in force April 26, 1999, as amended in 2002, Part 62 (Arbitration) and Practice Direction 62 - Arbitration.

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Fortunately, in the United States, the right to appeal is less broad than in England. The rule concerning appeals from arbitral awards can be found in the Federal Arbitration Act: The power to vacate an arbitration award is limited to the subsequent grounds[;] (1) the award was procured by corruption, fraud, or undue means; (2) there was evident partiality or corruption in the arbitrators[;] (3) the arbitrators were guilty of misconduct in refusing to postpone the hearing or hear evidence or any other misbehavior; and (4) the arbitrators exceeded their powers, or imperfectly executed them so that a final and definite award was not made.202 Under the Federal Arbitration Act, only a final award properly can be the subject of a motion to vacate under Section 10203 and under section 12 the motion to vacate must be served within 3 months of the date on which the arbitral award was filed or delivered.204 It has been noted that there is a federal policy which strongly favors arbitration, and it is for this reason that Congress has limited the opportunities for successful attacks on awards emerging from that process.205 It has been held that the grounds for vacation of an arbitral award enunciated in section 10, are the only grounds on which an arbitration award may be vacated,206 subject to one exception, public policy. The Supreme Court of the United States in Wilko v. Swan207 held that a court may vacate an arbitration award where the arbitrator displayed manifest disregard of the law. In other words, an award may be set aside if it compels the

202

The Federal Arbitration Act, 9 U.S. Code 10. See also http://www4.law.cornell.edu/uscode/9/. The right to appeal from orders compelling arbitration are also limited, indicating a strong public policy in favour of arbitration (Wilford, Coghlin, and Kimball, supra note 199, para. 29.97 at 502. Section 16 does not allow appeals from interlocutory orders compelling arbitration, although appeals from final orders compelling arbitration are permitted. Orders denying arbitration are appealable, whether interlocutory or final. (Ibid). 203 Wilford, Coghlin, and Kimball, supra note 199, para. 29.167 at 515. 204 Ibid, para. 29.172 at 515. 205 Ibid, para. 29.174 at 516. 206 Ibid, citing Bell Aerospace Co. Division of Textron Inc. v. Local 516, 500 F.2d 921 (2d Cir. 1974). 207 346 U.S. 427 at 436 (1953).

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violation of law or is contrary to well accepted and deep-rooted public policy.208 In Re Sea Dragon Inc.,209 the court vacated an arbitral award against a charterer on the basis that it was against American public policy and comity because the award compelled a violation of a sequestration order rendered by a Dutch and thus compelled a violation of Dutch law. The arbitration panel was aware that its order would violate a Dutch court decree, and thus the court held that the arbitration award will not be confirmed since it compels the violation of law and is contrary to accepted public policy.210

XV. 1)

The Distinctive Nature of Charterparties Parochial jurisprudence Charterparties are remarkable contracts because of their number, their broad

international scope and their importance in facilitating world trade. Yet the jurisprudence that chartering has produced is parochial and has not brought forth the great national and international decisions found in other branches of maritime law, which decisions have influenced commercial and general law far beyond the boundaries of the sea. Carriage of goods, for example, is responsible for important judgments on fundamental breach211, the Himalaya clause (third party benefits)212 and measure of damages213; ship

Re Red Sea Dragon Inc. 574 F. Supp. 367 at 372; 1984 AMC 699 at 705 (S.D. N.Y. 1983), relying on Diapulse Corp of America v. Carba, Ltd. 626 F.2d 1108 at 1110 (2 Cir. 1980). 209 574 F. Supp. 367; 1984 AMC 699 (S.D. N.Y. 1983). 210 Ibid., F. Supp. at 373; AMC at 706. For criticism and commentary on the use of the doctrine of manifest disregard of the law see R.G. Bauer, Upsetting a Charter Party Arbitration Award: Are the Courts Lowering the Bar on Judicial Review? (2001) 25 Tulane Maritime Law Journal 419. 211 See Z.I. Pompey Industrie v. ECU Line NV, [2003] 1 S.C.R. 450, 2003 AMC 1280; 224 D.L.R. (4th) 577 (S.C.C.) 212 See Homburg Houtimport B.V. v. Agrosin Private Ltd. and others (The Starsin) [2003] 1 Lloyds Rep. 571; 2003 AMC 913; [2003] 2 All ER 785 (H.L.). 213 See The Heron II (Koufos v. Czarnikow) [1969] 1 A.C. 350 (H.L.), as well as ETS Gustave Brunet, S.A. v. M.V. Nedlloyd Rosario 929 F. Supp. 694 at 710; 1997 AMC 803 at 828 (S.D. N.Y. 1996).

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collision has its leading cases on tort and economic loss214; yet great international decisions, even on the interpretation of contracts, rarely refer to precedents concerning charterparties, despite their multiplicity, because charterparties are so vague and changing in their final terms and details, and the decisions usually decide particular disputes, rather than general matters.215 The absence of good faith as an underlying principle of chartering contributes to this deficiency, particularly the paucity of any elevated findings of law or practice. Rather, case law on chartering is replete with

niggling on wording and terminology, beneficial only to hair splitters and future disputes. 2) No binding international law on chartering terms The law of chartering suffers from another major defect. The chartering markets and their attorneys have resisted any international law to bind voyage, time or bareboat charterparties. The Hague and Hague/Visby Rules and the Hamburg Rules do not apply to charterpaties, because the Rules specifically exclude the application of charterparties in art. 5 and the Hamburg Rules at art. 2(3).216 Carriage of goods under bills of lading, on the other hand, is subject to public order provisions, in virtue of the binding nature of the and Hague and Hague/Visby Rules at art. 3(8) and the Hamburg Rules at art. 23(1) & (2).

See The Jervis Crown [1992] 1 S.C.R. 1021; 1992 AMC 1910 (S.C.C.), and Bow Valley v. St. John Shipbuilding [1997] 3 S.C.R. 1210; 1999 AMC 108 (S.C.C.). 215 For example, a report by the Committee on Shipping of the Trade and Development Board of the UNCTAD Secretariat (United Nations Conference on Trade and Development) on 27 June 1990 entitled Charter Parties: A Comparative Analysis, commented on the fact that a large number of rider clauses (supplemental or additional clauses to the original charterparty form) are used in each charterparty. This practice results in the reality that charterparties tend to be unique to the parties. At times, judges in chartering cases have seemingly acknowledged the one-off nature of their decisions. See, for example, Hogarth v. Miller, Brother & Co. [1891] A.C. 48 at 62 (H.L.), where Lord Bramwell commented that : the case is of no great consequence in point of amount, nor I should think in point of precedent there is not likely to be another case like this, I should think. 216 See Tetley, Marine Cargo Claims 4th Ed., Chapter 2: Application of the Rules to Charterparties found online at: http://tetley.law.mcgill.ca/maritime/ch2.pdf for further discussion on limited instances where the rules may apply. See also Scrutton on Charterparties and Bills of Lading, 20 Ed., 1996) at 414-415, N. Gaskell, R. Asariotis & Y. Baatz, Bills of Lading: Law and Contracts (London: LLP Professional Publishing, 2000) at para. 1.65.

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3) Charterers, however, want the benefits of international law Charterers, however, have been energetic in lobbying to benefit from many international conventions and other instruments (e.g. the Limitation Conventions of 1957217 and 1976218 and the York/Antwerp Rules219), which, without regulating the details of charterparty contracts, nevertheless very much affect chartering in related shipping contexts. Certain provisions of other maritime law conventions also bind charterers, including provisions of the Hague Rules 1924 and the Hague/Visby Rules 1968/1979,220 the Hamburg Rules 1978,221 the Arrest of Ships Conventions of 1952222 and 1999,223 the Athens Passenger Convention 1974224 and the Civil Liability Convention 1992.225

The International Convention on the Limitation of Liability of the Owners of Sea-Going Ships, adopted at Brussels on October 10, 1957 and in force May 31, 1968, at art. 6(2), extends to charterers and their servants and agents the benefit of the shipowners limitation of liability 218 The Convention on the Limitation of Liability for Maritime Claims, adopted at London, November 19, 1976 and in force December 1, 1986, at art. 1(2), extends the shipowners right to limit liability under that Convention to charterers. 219 The York-Antwerp Rules 1994 on General Average also provide at Rule XVII on contributory values that: The value of the ship shall be assessed without taking into account the beneficial or detrimental effect of any demise or time charterparty to which the ship may be committed. 220 The Hague and Hague/Visby Rules contemplate that charterers may be carriers (art. 1(a)) and require that bills of lading issued under charterparties comply with their terms (art. 5). The same Rules also govern bills of lading issued under charterparties once those bills pass into the hands of third party holders and regulate their relations with the carrier (art. 1(b)). 221 The Hamburg Rules, art. 2(3), make bills of lading issued under charterparties subject to that Convention if it governs the relation between the carrier and the holder of the bill, not being the charterer (i.e. third party holders). Also, charterparty arbitration provisions may bind a bill of lading holder who has acquired the bill in good faith if the charterparty contains a special annotation so providing (Hamburg Rules, art. 22(2) a contrario). 222 Under the International Convention on the Arrest of Sea-Going Ships, adopted at Brussels, May 10, 1952 and in force February 24, 1956, claims relating to the use and hire of a ship whether by charterparty or otherwise and those relating to the carriage of goods in a ship whether by charterparty or otherwise are maritime claims permitting the arrest or seizure of the vessel to which such claims relate (art. 1(1)(d) and (e)). 223 The International Convention on Arrest of Ships adopted at Geneva, March 12, 1999 (not yet in force) at art. 1(1)(f) and (g), includes in the definition of maritime claim claims relating to the use and hire of ships and to the carriage of goods in ship, whether by charterparty or otherwise. 224 The Athens Convention relating to the Carriage of Passengers and Their Luggage by Sea, adopted at Athens, December 10, 1974 and in force April 28, 1987, at art. 1(b), includes charterers in the definition of performing carrier. Charterers may thereby incur liability under art. 4 of that Convention., 225 Under the International Convention on Civil Liability for Oil Pollution Damage 1992, adopted at London, November 29, 1969, in force June 19, 1975, as amended by the Protocol adopted at London, November 27, 1992, in force May 30, 1996, at art. III(4)(c), no claim for compensation for oil pollution damage may be made against charterers (including even bareboat charterers),

217

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Arguably, charterers can even be affected indirectly by the Salvage Convention 1989, in respect of the determination of the quantum of the salvage reward.226 Of particular significance is the International Safety Management Code (ISM Code),227 which requires shipowners and operators (including bareboat charterers) to establish a safety management system setting out detailed procedures to ensure safety and pollution prevention for their vessels, providing for procedures regarding the reporting, investigating and analysis of accidents and non-conformities and establishing lines of communication between shoreside and shipboard personnel.228 Certain civilian countries, such as France229 and Italy230 also have national legislation which regulates chartering contracts, in at least a rudimentary fashion. In consequence of these changes in the last century, charterers can no longer declare that they are governed by the common law alone. 4) No strictly drafted uniform forms Similarly owners, charterers and their attorneys have resisted strictly drafted charterparty forms, with the result that the various standard forms are usually so broad in their terms and in what may be added or deleted during negotiations, that there is

unless the damage resulted from their personal act or omission, committed with intent to cause such damage, or recklessly and with knowledge that such damage would probably result. 226 The International Convention on Salvage 1989, adopted at London, April 28, 1989 and in force July 14, 1996, at art. 13(2) provides that: Payment of a reward fixed according to paragraph 1 shall be made by all of the vessel and other property interests in proportion to their respective salved values. The property interests of charterers could thereby figure in the calculation of the salvage reward. 227 The International Safety Management Code for the Safe Operation of Ships and for Pollution Prevention, adopted as an Annex to the International Maritime Organizations (IMOs) Assembly Resolution A.741.(18) of November 4, 1993, and later adopted on May 24, 1994 as Chap. IX of the Safety of Life at Sea (SOLAS) Convention 1974, and which is applicable as of July 1, 2002 to all categories of vessels of 500 gross tons and over. 228 On the ISM Code, see generally Tetley, International Maritime & Admiralty Law, supra, note 90, at 465-467; A.J. Rodriguez & M.C. Hubbard, The International Safety Management (ISM) Code: A New Level of Uniformity (1999) 73 Tul. L. Rev. 1585. 229 Loi no 66-420 du 18 juin 1966 sur les contrats daffrtement et de transport maritimes, J.O. June 24, 1966, p. 5206, at arts. 1-14 and its accompanying Dcret no 66-1078 du 31 dcembre 1966,J.O., January 11, 1967, p. 483, at arts. 1-30. 230 Codice della navigazione (the Italian Navigation Code), 1942 at arts. 384-395.

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continual litigation and little general jurisprudence even for the benefit of charterers, let alone jurisprudence which may be useful for other branches of maritime and commercial law. As has been noted, [m]ore than fifty charter parties have been approved by the Baltic and International Maritime Council (BIMCO), most of which are voyage charter parties covering various trades.231 Apart from the standard forms there are other forms of charterparties, for example, most jurisdictions allow oral charterparties.232 As well, private charterparties are used by some very large charterers and several large shipping companies also have their private forms.233 5) Tanker charters Fortunately, tanker charters do have fairly standard forms, with standard divisions of rights and responsibilities between owners and charterers. It has been argued that the reason for the use of standard forms for tanker charterparties is twofold: partly because of the specific characteristics of this type of carriage, and partly reflecting the relatively stronger bargaining power of tanker charterers.234 6) How many owners and charterers can dance on the point of a needle? One may conclude as to the law of chartering that there is little that is fixed because there is no binding statute, no principle of public order or good faith and few standardized forms that are not modified at will. There are nevertheless continual discussions, excellent texts and fine articles on the subject by the best minds in shipping
Charter Parties: A Comparative Analysis Committee on Shipping of the Trade and Development Board of the UNCTAD Secretariat (United Nations Conference on Trade and Development) on 27 June 1990, at 4 [Charter Parties: A Comparative Analysis]. Some examples of widely used charterparties are, for voyage charters: The Baltic and International Maritime Conference Uniform General Charter (the Gencon), the Baltimore Berth Grain Charter Party (the Baltimore Form C) and the Americanized Welsh Coal Charter (the Amwelsh). The two most commonly used forms for time charters are, the New York Produce Exchange Time Charter (NYPE), and the Baltic and International Maritime Conference Uniform Time Charter (the Baltime). For the text of the above two forms and further discussion on time charters, see Wilford, Coghlin, and Kimball, supra, note 199. 232 Ibid. 233 Ibid. 234 Charter Parties: A Comparative Analysis, supra note 231 at 4, citing Todd, P. Contracts for the Carriage of Goods by Sea, BSP Professional Books 1988, at 19.
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and maritime law. An example is a paper by the inestimable arbitrator Jack Berg at a BIMCO Seminar in New York on September 30, 2003. In his excellent exposition entitled Lateness at the Loadport, Mr. Berg follows the peripatetic trail of the acts, declarations and motives of owners and charterers in the drafting and performance of their charterparties in a number of cases. In his conclusion he states:235 Hopefully, the presentation of this paper will offer a better understanding of the rights and obligations of the parties to a charter party with respect to laycan and the canceling clause, the expected readiness date, and the nature and measure of damages one may expect on those issues in an arbitration. It is fair to say that owners and charterers have conflicting interests regarding the question of timely presentation and performance and that charter party negotiations more often than not involve attempts by each party to minimize its risk for lateness. For this reason, owners, charterers and brokers have drafted a multitude of additions, deletions and alterations to standard charter party texts to suit their individual needs. In short, owners seek to limit the cancellation option as best they can and liberalize the expected readiness requirements. Charterers have contrary interests and that is because they must tailor their purchase and sale contracts to a vessels laycan and expected readiness dates. So, the few standard examples of charter party clauses Ive included in this paper are simply samples of standard phraseology that are often significantly modified. Therefore, I would suggest that the tailored specifics of the clauses in question be closely reviewed and questioned before one concludes if, when and where there may be a right to cancel for late presentation and whether there is a breach and claim for damages because of a missed expected readiness date. He adds: In the final analysis, disputes on these points will ultimately come before commercial maritime arbitrators for resolution.236 And that is the problem with chartering as I see it today. Each arbitral dispute is one-of-a-kind, and requires experts and even expert arbitrators to find a solution.

XVI. 1)

Good Faith and Charterparties Lack of good faith in chartering

235

J. Berg, Lateness at the Loadport, unpublished paper, presented at the Bimco Seminar in New York, 30 September 2003, at 12-13. 236 Ibid, at 13.

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That good faith is not deemed essential in the negotiation and performance of contracts under English common law237 is also a cause of one-on-one charterparty decisions and the unfortunate lack of uniformity of charterparty jurisprudence. That there is no basic obligation of good faith in English common law incites the parties to refuse to fully disclose what they know during the negotiations of the charterparty agreement238 and causes chartering disputes to be decided on the particular (often peculiar) facts alone. Absence of the necessity to act in good faith permits the parties to accept anomalies in the drafting of a charterparty, during negotiations, in the hope that if subsequent events and circumstances change for the worse, they may be able to interpret the anomalies in their favor. And because London is a major world chartering center, and because good faith is not recognized in English common law, a whole body of very special chartering decisions has arisen. The problem is compounded by the fact that when good faith and chartering are recognized and at issue, the English judiciary may adopt a different view of good faith from the arbitrator. In The Lendoudis Evangelos II,
239

the court heard an appeal from an arbitral award concerning whether

the estimate of duration of the voyage was given in good faith. The arbitrator held that the test of good faith was whether the charterers estimate was made reasonably at the

Sir Roy Goode, Commercial Law in the Next Millennium, Sweet & Maxwell, London, 1998 at 19; Sir R. Goode, Commercial Law, supra, note 51 at 117. There are however, some leanings towards a doctrine of good faith in the U.K., on a limited basis. See discussion on the House of Lords decision, The Star Sea, supra, note 48, where the House held that there was a postcontractual duty to exercise good faith, but 1) that it varies according to the point or stage at which it arises; 2) the duty in respect of claims is to only certain types of claims and before legal proceedings have commenced. See Soyer, supra note 49. For further discussion see section VI(6) of this paper. 238 They need only avoid overt misrepresentations during negotiations. See A. MandarakaSheppard, Modern Admiralty Law, (London: Cavendish Publishing, 2001), at 757: Under English contract law, the governing principle is that negotiating parties are under a duty not to mislead each other by positive misrepresentation of fact. There is no pre-contractual obligation or positive duty upon the parties to make full and frank disclosure of all material facts. The parties are free to make their own investigations. 239 [1997] 1 Lloyds Rep 404 (Q.B. Com Ct.).

237

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time of fixing, and he concluded that it was not and awarded damages.240 On appeal, the court overturned the award, holding that the test for good faith was whether the charterers genuinely believed at the time they fixed the ship that the voyage would last between 70 and 80 days.241 Although American common law is more developed with regard to good faith than English common law, the notion of good faith has yet to be thought of as a general principle governing all elements of contractual relations, as seen in the civil law traditions. The principle of good faith in American law is only applicable to performance of the contract,242 and as a result, the New York chartering jurisprudence also suffers many of the problems associated with the English chartering decisions. 2) The historical basis of lack of good faith in chartering It is interesting to note that the lack of good faith in chartering can be traced to the historical development of the Admiralty jurisdiction. Although Admiralty law is civilian in origin,243 not all elements of maritime commerce were subject to civilian Admiralty law. The English Admiralty courts, where all the lawyers and judges were civilian and trained in the Roman law tradition, applied civil law and procedure.244 The English common law courts, however, were determined to restrict the Admiralty courts jurisdiction245 and therefore charterparties, being contracts concluded within sight of land, were fairly

Ibid. at 405. Ibid at 406. For an interesting discussion of The Lendoudis Evangelos II, see Greg ONeill, Good Faith and Reasonableness in Relation to Representations, JSE Bulletin No. 36, The Japan Shipping Exchange 2002; also available on-line at: http://www.jseinc.org/en/bulletin/bulletin36/good_faith.htm. 242 Section 205 of the 2nd Restatement of Contracts, supra note 120, states that, [e]very contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement. 243 Tetley, International Maritime and Admiralty Law, supra note 90, at pp 9-19. The origins and development of Admiralty law has been through the civilian codifications such as the Roles of Olron, the Consolato del Mare and the Ordonnance de la Marine.(Ibid, at 12-14). 244 Ibid, at 16-17. 245 Ibid, at 18. The common law courts were so successful in fact that by 1670 the jurisdiction of the Admiralty courts was limited to in rem actions, and actions taken on the high seas, such as torts, and the creation of contracts. (Ibid).
241

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early on subject to common law courts. It is for this unfortunate historic reason, that charterparties, unlike other Admiralty matters, have not had the benefit of civilian principles such as good faith. 3) Slow advance of good faith in the common law Good faith is slowly finding increased favor across the common law world. This is to be hoped for, because the broad adoption of good faith into the common law and the resulting conformity with the civil law could assist towards international uniformity in commercial matters246 and in chartering, the negotiation and performance of which is not deemed to be subject to good faith.247 4) Good faith in chartering through the back door There are also signs, that good faith is entering into the law of charterparties innocuously and almost unperceived and on those occasions when a clause in the charterparty uses the words good faith. In The Lipa,248 a clause in a charterparty provided a description of the vessel including fuel consumption figures, along with the statement that all details given in good faith but without guarantee. The charterers complained that the vessel consumed excessive quantities of fuel. The arbitrators decided that the owners, although not held to an absolute warrantee regarding the consumption, nevertheless still had obligations. The arbitrators held that the charterers were able to claim fuel consumption in excess of a 10% margin set by the arbitrators on the warranted consumption.249 The court, in reviewing the arbitral award, held that there

246 247

Ibid, at 174-175. Although there have been notable exceptions. Good faith has been found to be applicable in the performance of a charterparty. Lord Denning in The Nanfri [1978] 2 Lloyds Rep, 132 at pp. 140-141 (C.A.), held that with regard to charterers making deductions from the hire in respect of fuel consumption and speed, a charterer is entitled to quantify his loss by reasonable assessment made in good faith, and deduct the sum so quantified from the hire. 248 The Lipa (2001) 2 Lloyd`s Rep. 17 (Q.B. Com Crt.). 249 Ibid, at 19.

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was no warranty about the vessels rate of fuel consumption.250 The owners were found to be only under the obligation to act without mala fides and to make estimations in good faith.251 Good faith is implied in charterparties on occasion when dealing with the expected date of arrival of the vessel at the port of loading. Thus there is often a statement as to when the ship will arrive at port or when she will be ready to receive cargo. Scrutton notes that the words expected ready to load by a certain date mean that in view of the facts known to the promisor when making his contract he honestly expects that the vessel will be ready as stated and that his expectation is based on reasonable grounds.252 This view has been adopted by Canadian courts, for example, in Melsa International v. Adecon Shipping, where the Federal Court of Canada adopted the view that it has always been held that the estimated date has to be given honestly and on reasonable grounds so that he has to sail from his last port on his approach voyage so as to get there in time.253 This obligation of honesty and reasonableness on the part of the shipowner has been used to infuse charterparties with a requirement of good faith. In The Linardos, Coleman J. held:254 There was, not surprisingly, no little discussion in argument as to whether all notices of readiness could start time running, even if given negligently or with knowledge that the notice was untrue. In the arbitration, it was submitted that the master must have acted in bad faith when he gave his notice of readiness but in the motion before this Court no alternative case was put forward founded upon the allegation that the master did act in bad faith or indeed was negligent when he did give notice of readiness. It is therefore unnecessary for the purposes of this appeal to determine that issue. It is sufficient to say for present purposes that a notice of readiness
Ibid, at 21. Ibid. 252 Scrutton on Charterparties and Bills of Lading, 20 Ed. 1996 at 93. 253 Melsa International Inc. v. Adecon Shipping Lines Inc (1997) 127 F.T.R. 313 at 371 (Fed. C. Can. per Nadon J.) quoting Lord Denning in The Democritos [1976] 2 Lloyds Rep. 149, at 152 (C.A.). 254 Cobelfret N.V. v. Cyclades Shipping Co. Ltd. (The Linardos) [1994] 1 Lloyds Rep. 28 at 32 (per Colman J.).
251 250

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proved to have been given by the master or chief with knowledge that it was untrue, that is to say in the knowledge that the vessel was not then ready, would be ineffective to start time running. There must by implication be a requirement of good faith. The requirements of reasonableness and honesty with regard to the estimated time or date of arrival have been combined with the express undertaking to proceed with all reasonable dispatch to the port of loading, to create an absolute obligation on the owner to sail for the loading port at a time when it is reasonably certain that the vessel will arrive at the loading port on or about the expected date.255 The English Court of Appeal has characterized this as an obligation to start on time and has held the shipowner responsible for any loss that occurs as a result of the breach of this obligation.256 It would appear that when importing obligations that deal with reasonableness, honesty and concepts such as all reasonable dispatch, the courts are really dealing with an implicit obligation on the part of the shipowner to act in good faith.

There have been courts that have taken the implicit duty to act in good faith in chartering one step further, by enforcing what appears to be an obligation to bargain in good faith. In Champion International Corp. v. The Sabina257, a potential charterer, Champion, was negotiating with the shipowner for hire of his vessel. Everything had been agreed on save the issues of lay days and quantities. The owner received an offer
J. Cooke, et al, Voyage Charters, (London: LLP, 1993), at 66. In the 2nd Edition of Voyage Charters (Cooke, J. et al, London: LLP, 2001) at 87 Cooke expands on the view expressed in the first edition: The obligation to proceed to the loading port, coupled with the express or implied obligation to do so with convenient speed or reasonable dispatch, must be construed with the expected ready to load date, if any stipulated in the charter. The combined effect of the provisions is that the vessel must commence the preliminary voyage to the loading port at such a time that it is reasonably certain that, proceeding normally, she can arrive at the loading port by the stipulated date, and in the absence of a suitably worded exceptions clause, this obligation is absolute. 256 The Beleares [1993] 1 Lloyds Rep. 215 at 227 (C.A.). See also The Democritos [1976] 2 Lloyds Rep. 149 (C.A.). 257 Champion International Corp. v. The Sabina 2002 FCT 1122 (Fed. C. of Can., per Blais J.), upheld by the Federal Court of Appeal, [2003] FCA 366, leave to appeal to Supreme Court of Canada refused, March 4, 2004, [2003] S.C.C.A. No. 518.
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for a better rate for a time charter from a third party, and subsequently refused to sign the agreement with Champion that had been agreed to and drawn up by the shipowners shipbroker. The court held that there was a meeting of the minds and that by reasons of the defendants wrongful and illegal repudiation of the fixtures, the plaintiff had no other alternative but to the charter a substitute vessel at a higher freight rate.258 One may argue that a contract was implied by the court on the basis of a duty to negotiate in good faith, because what would normally be essential terms as they involve price, were not yet decided. The underlying assumption in the case may be that in withdrawing from the negotiations at the last minute, the owner had not acted in good faith.

XVII. 1)

Arbitration and Chartering Arbitration in London and New York The vast majority of charterparties contain arbitration clauses, which call for

arbitration in London or New York.259 The New York Produce Exchange form, in clause 17, refers disputes to arbitration in New York by a panel of three arbitrators.260 On the other hand, the Baltime charter, in Line 174, refers disputes to arbitration in London, or any such place agreed on by the parties.261 These agreements to arbitrate are enforced

Ibid, at para 77. There are however charterparty forms which do not contain arbitration clauses, for example the Gencon and the C (ore) 7 charters, and such forms have, as a result, been subject to much criticism (Charter Parties: A Comparative Analysis, supra note 231 at 87). 260 17. That should any dispute arise between Owners and the Charterers, the matter in dispute shall be referred to three persons at New York, one to be appointed by each of the parties hereto, and the third by the two so chosen; their decision or that of any two of them, shall be final, and for the purpose of enforcing any award, this agreement may be made a rule of the Court. The Arbitrators shall be commercial men. (The text of NYPE can be found in Wilford, Coghlin, and Kimball, supra note 199). If the parties, however, wish to have the matter arbitrated in London, for example, the name of that city is typed in place of New York in Line 107 of the New York Produce form.( Wilford, Coghlin, and Kimball, supra note 199, at 485). 261 Wilford, Coghlin, and Kimball, supra note 199, para. 29.2 at 485. The 2001 revision of Baltime and the 1993 revision of New York Produce Exchange form of time charter (NYPE 93) include
259

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by the courts as well as in some instances by statute. In the United States Federal Arbitration Act, for example, section 2 stipulates that a written provision for arbitration in a charterparty is valid.262 2) International enforcement International agreements are important to ensure that arbitral awards are enforced. The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 imposes on States parties the duty to stay court proceedings if a dispute exists and a valid arbitration agreement is established, and to recognize and enforce foreign arbitration awards.263 3) Arbitration and reasons Chartering disputes are very often arbitrated in London and in London reasons are not obligatory, unless requested by both parties, while awards are only published with the consent of the parties. This fact has inhibited the formation of a broad rich jurisprudence.264 It has been noted that because arbitrators are not required to state the reasons for an award, reasons were often avoided so as to remove any possibility that a court could set aside an award for an error on the face of it.265 Although New York arbitrations usually permit reasons and the awards are usually published, the body of published decisions is very fact oriented and provides

alternative provisions, providing for arbitration in either London or New York, at the option of the parties, who delete from the form the option they disfavour. 262 Ibid, para. 29.74 at 497. When the charterparty agreement is oral, the contract will be valid, however the oral agreement to arbitrate is not enforced under the U.S. Arbitration Act (ibid). Similarly, in the United Kingdom, for the arbitration agreement to fall under the Arbitration Act 1996, it must also be in writing, by virtue of sect. 5. 263 Jackson, supra note 198, at 323. The United Kingdom ratified the New York Convention on September 24, 1975, and was enacted into national law by the Arbitration Act 1975, U.K. 1975, c. 3, and in operation on December 23, 1975 (Ibid). The 1975 statute was repealed by the Arbitration Act 1996, U.K. 1996, c. 23, but the Convention now has the force of law in the U.K. by virtue of sects. 100-104 of that Act. 264 There are considerable costs and delays in arbitrating in London; see Lucienne C. Bulow, A Users Experience of London and New York Maritime Arbitration (1998) ETL 293-319. 265 Jackson, supra, note 198 at 335.

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very few principles of law, which can be useful for future chartering disputes, let alone for other branches of law in general.

XVIII. Is a Statute (Convention) for Charterparties Unthinkable? Is suggesting a statute or an international convention binding on charterparties, or at least some of them, unthinkable? In the nineteenth century, Lord Herschell and others proposed statutes (often called a codifications) of the common law on bills of exchange and on the sale of goods. Despite enormous opposition, this came about through the remarkable drafting and knowledge of the law of Sir Mackenzie Chalmers. First came the Bills of Exchange Act, 1882,266 and then followed the Sale of Goods Act, 1894.267 The sky did not fall. No one was struck by bolts of lightning. And both statutes are deemed to have been successes. In Vagliano v. Bank of England, Lord Herschell, referring to the Bills of Exchange Act, 1882, made it clear that:268 The purpose of such a statute surely was that on any point specifically dealt with by it, the law should be ascertained by interpreting the language used instead of, as before, by roaming over a vast number of authorities in order to discover what the law was, extracting it by a minute critical examination of the prior decisions, dependent upon a knowledge of the exact effect even of an obsolete proceeding such as a demurrer to evidence. Sir Mackenzie Chalmers also drafted the Marine Insurance Act, 1906,269 codifying a field of law which up to that time was considered impossible to reduce to a statute, and which took years to be enacted by Parliament. Certainly it too has withstood

U.K. 45 & 46 Vict., c. 61. U.K. 56 & 57, c. 71. This statute lasted almost one hundred years without major amendment, until repealed and replaced by the Sale of Goods Act 1979, U.K. 1979, c. 54, as amended, which, however, repeats many of the 1894 statutes provisions. 268 [1891] A.C. 107 at 145 (H.L.). 269 U.K. 6 Edw. 7, c. 41.
267

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criticism and changing times and has formed the model on which many other nations have based their own marine insurance legislation.

XIX

Conclusion - Good Faith is Essential to Arbitration and to Chartering One may conclude that there is no fixed or consistent principle of good faith in

the common law, but that there is in the civil law. Lack of good faith while negotiating and performing contracts inevitably results in disputes between the parties. Arbitration, in its negotiation and performance, requires good faith on the part of the parties and the arbitrators. Otherwise the process may be slow, and expensive, while the result may be neither just, nor binding. Arbitration without good faith is not a viable alternative to proceeding before the courts. Chartering is a contract uncontrolled by a specific statute, unlike carriage of goods under a bill of lading, or sale of goods. Nor does it benefit from strict and binding uniform forms. That chartering is not generally subject to good faith in its negotiation or performance adds to the general uncertainty, when a dispute arises. And when one combines a charterparty dispute with the arbitration process, very considerable uncertainty can result for the parties. Such arbitration also spawns myriads of one-of-a-kind awards, which have little jurisprudential or commercial value for shippers, charterers, owners, merchants, arbitrators or judges. Each award is the settling of a very particular dispute under very particular facts and very particular terms of responsibility so that rarely are principles of a beneficial, general nature ever developed as guidelines for the future. More disputes can be the result.

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Prof. William Tetley, Q.C. Faculty of Law, McGill University 3644 Peel Street Montreal, Quebec Canada H3A 1W9 Tel.: (514) 398-6619 (office) (514) 733-8049 (res.) Fax: (514) 398-4659 E-mail: william.tetley@mcgill.ca Website: http://tetley.law.mcgill.ca