International Judicial Monitor

Published by the International Judicial Academy, Washington, D.C., with assistance from the
American Society of International Law
Spring 2015 Issue

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Private international law Discourse

The Principle of Good Faith in International Contract Law

By Carolyn A. Dubay, Associate Editor, International Judicial Monitor and Assistant Professor of Law, Charlotte Law School

Like public international law, international private law includes a number of general principles that manifest themselves in customary law (such as the lex mercatoria) and in international instruments. In the context of contract law, the principle of good faith can be found prominently in both the UNIDROIT Principles of International Commercial Contracts and the Convention on Contracts for the International Sale of Goods (CISG) and in other instruments, as well as in national laws and international commercial arbitration. The scope and enforceability of the good faith principle, however, varies significantly depending on the context, the applicable law, and the prerogatives of the tribunal called upon to resolve the contractual disputes. As such, while all agree that there is a general principle of good faith in international commercial law, there is little consensus on its definition and applicability.

Good faith in international trade and sales can be linked to the evolution of the international merchant law, or lex mercatoria. Not all domestic systems, however, recognize a specific, implied and enforceable duty of good faith in sales contracts. For example, English law does not recognize the implied duty of good faith and fair dealing in sales contracts, although the parties are free to include express good faith obligations in the contract terms. This position is directly contrary to the general American rule, embodied in the Uniform Commercial Code (UCC), that sales contracts do in fact contain such an implied duty. Similarly, under the German and French Civil Codes, contracting parties are understood to have obligations to act in good faith in contract negotiations as well as in performing contractual duties. The details and scope of the obligation even within these systems, however, varies significantly. For these reasons, while good faith is considered a general principle of international commercial law, its parameters have been difficult to harmonize in international instruments borne out of compromises among nations with disparate legal systems.

These variations on the theme of good faith beg the question of what is “good faith” in international private law? Regrettably, there is no consensus in this context either, as can be demonstrated through consideration of the values and norms embodied in the UNIDROIT Principles and the treaty terms and obligations found in the CISG. The differences in these instruments may be attributable to a number of factors, but generally reflect the fact that the UNIDROIT Principles serve vastly different purposes than the CISG.

UNIDROIT, formally known as the International Institute for the Unification of Private Law, works toward the goal of both modernizing and harmonizing commercial law through the formulation of uniform law instruments, principles and rules. While UNIDROIT has promulgated documents that have become international conventions, the “principles” such as the Principles of International Commercial Contracts are merely principles and rules that may be referenced by judges and arbitrators, or voluntarily adopted by contracting parties. As set forth in the Preamble to the UNIDROIT Principles, they may be applied: (1) when the parties have agreed on them as the governing law; (2) when the parties have agreed that the contracts is to be be governed by general principles of law, such as the lex mercatoria; (3) when there is a gap or ambiguity in the relevant rule in the governing law; (4) when it is appropriate to interpret or supplement international uniform law instruments; and (5) when it is useful to serve as a model for national and international legislators.

Conversely, the CISG, or the United Nations Convention on Contracts for the International Sale of Goods, is a treaty that provides the substantive rules governing the rights and obligations of parties to international

sales contracts. The CISG was developed under the auspices of the United Nations Commission on International Trade Law (UNCITRAL) in the 1970s and came into force in the original contracting states in 1988. As part of the treaty obligations of the contracting states, the CISG generally governs international sales contracts where both parties are located in contracting states. The CISG also may provide the substantive law where private international law principles (in other words, choice of law rules) dictate application of the law of a contracting state. Importantly, however, under the doctrine of party autonomy, contracting parties can exclude application of the CISG in favor of other substantive law and rules. When comparing this structure to the UNIDROIT Principles, the CISG supplies the substantive law unless the contracting parties opt-out, whereas the UNIDROIT Principles become applicable only where the contracting parties specifically opt-in. Because the CISG is a binding treaty obligation with the force of law, its term vary in many ways from the aspirational goals of the UNIDROIT Principles. These differences are particularly evidenced in the area of good faith.

Specifically, Article 1.7 of UNIDROIT imposes a non-derogable duty on contracting parties to “act in accordance with good faith and fair dealing in international trade.” This approach is reflective of many domestic regimes, such as in the United States, that generally recognize an implied duty of good faith and fair dealing in commercial contracts. The Principles do not themselves define “good faith,” although generally a standard of commercial reasonableness within the particular industry may be a relevant consideration as to what constitutes “good faith” or “fair dealing.” In addition, various articles of UNIDROIT incorporate the concept of good faith, which emphasizes the fundamental nature of the principle. For example, Article 4.8 states that good faith and fair dealing should be considered in contract interpretation. UNIDROIT also embodies the separate concept of “bad faith.” Article 2.15 of UNIDROIT provides that a party who intentionally terminates contract negotiations in “bad faith” is liable for losses to the other, and further defines “bad faith” to include a decision of “a party to enter into or continue negotiations intending not to reach an agreement with the other party.”

The CISG, on the other hand, does not make good faith an implied contractual obligation. This omission reflects not merely a concern about whether good faith is a mandatory rule binding on contracting parties, but also concerns about how international judges and arbitrators might define and apply such a generalized rule. As such, the CISG incorporates the good faith principle only as a general rule regarding interpretation of the Convention itself. In particular, CISG Article 7(1) provides that "[i]n the interpretation of this Convention, regard is to be had to . . . the observance of good faith in international trade." A consequence of this limited reference to good faith, the good faith principle is used not as a basis for finding a violation of the contract law, but merely as a way to support the interpretation of the CISG itself or of specific contract terms.

The real issue for international commercial sales is whether the distinction between UNIDROIT and the CISG with respect to good faith makes a difference. While abstract scholarly debate on this issue may focus on subtle distinctions, in practical terms, the CISG good faith principle expressed in Article 7 shapes the resolution of international sales disputes in much the same way as notions of good faith and fair dealing in domestic contract law. For example, courts and tribunals may ultimately consider, among other things, whether the proffered interpretation of a contract term is legitimate by consideration of the commercial reasonableness of the parties’ behavior, which in turn embodies generally understood values of good faith and fair dealing in international trade. Even so, judges and practitioners should be wary of assuming that the general principle of good faith has a universal meaning in international trade and commercial law.

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International Judicial Monitor
© 2015 – The International Judicial Academy
with assistance from the American Society of International Law.

Editor: James G. Apple.
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