Good Faith Means Different Things in Different Systems

Good faith appears in contracts constantly, sometimes as an express clause and sometimes as an implied standard. What it requires depends heavily on where the contract is governed.

Two broad traditions

Civil law systems generally recognise a background duty to perform and negotiate in good faith, treating it as a general principle running through the whole of contract law. It applies without being written down.

Common law systems have historically been more reluctant, preferring certainty and the freedom to pursue self-interest. Duties of that kind are recognised in particular categories rather than universally.

The gap has narrowed, with several common law jurisdictions now implying such duties into long-term relational contracts. It has not closed, and the divergence remains real.

What the duty tends to prohibit

Where recognised, good faith rarely requires a party to sacrifice its own commercial interests. It more commonly prohibits dishonesty, the deliberate frustration of the contract's purpose and the abusive exercise of a discretion.

That distinction is important. A party may drive a hard bargain and still act in good faith; it may not lie about facts or exercise a power for a purpose the contract never contemplated.

Discretion clauses attract the most attention

Contracts frequently give one party a discretion over pricing, approvals, bonuses or acceptance. Courts in many systems constrain how such a discretion may be used even without an express good faith clause.

The usual constraint is that it must be exercised honestly, for the purpose it was given, and not arbitrarily or capriciously. It is a limit on process rather than a substitution of the court's own judgement.

This is why decisions under discretion clauses are often defended by showing how they were reached. The reasoning matters as much as the outcome.

Express clauses and what they add

Parties sometimes insert an express good faith obligation, particularly in joint ventures and long-term supply. Its practical content is often defined by the surrounding terms.

A clause requiring the parties to cooperate to achieve a stated objective is usually more useful than an abstract reference to good faith. Concrete obligations are easier to enforce.

Why the governing law clause carries the weight

Because the concept varies so much, the choice of governing law can change the answer to whether conduct was permissible. That choice is not a boilerplate detail in a relational contract.

Anyone entering a long-term agreement across borders should understand what the chosen law implies before signing, which is a question for a lawyer qualified in that system.