(i) ‘Good faith’ as a fundamental legal principle
The principle of good faith may be considered as one of the fundamental legal concepts underlying the Unidroit Principles. The Unidroit Principles refer to the concept as “good faith and fair dealing”, as follows:
Article 1.7 (Good faith and fair dealing)
(1) Each party must act in accordance with good faith and fair dealing in international trade.
(2) The parties may not exclude or limit this duty.
By stating in general terms that each party must act in accordance with good faith and fair dealing, it is clear that even in the absence of special provisions in the Unidroit Principles, the parties’ behaviour throughout the lifecycle of a contract – including the negotiation process – is governed by the overriding principle of good faith (and fair dealing).
It is very difficult to grasp an abstract concept such as good faith and fair dealing. This concept is therefore thoroughly illustrated in the comments to the Unidroit Principles:
Illustration 1 (enabling the other party to perform duly).
A grants B forty-eight hours as the time within which B may accept its offer. When B, shortly before the expiry of the deadline, decides to accept, it is unable to do so: it is the weekend, the fax at A’s office is disconnected and there is no telephone answering machine which can take the message. When on the following Monday A refuses B’s acceptance A acts contrary to good faith since when it fixed the time-limit for acceptance it was for A to ensure that messages could be received at its office throughout the forty-eight hour period.
Illustration 2 (not avoiding responsibilities transferred to affiliates).
S contract for the supply and installation of a special production line contains a provision according to which S, the seller, is obliged to communicate to P, the purchaser, any improvements made by S to the technology of that line. After a year P learns of an important improvement of which it had not been informed. S is not excused by the fact that the production of that particular type of production line is no longer its responsibility but that of SAF, a wholly-owned affiliated company of S. It would be against good faith for S to invoke the separate entity of SAF, which was specifically set up to take over this production in order to avoid S’ contractual obligations vis-à-vis P.
Illustration 3 (not systematically and unjustifiably exercising discretional rights).
A, an agent, undertakes on behalf of B, the principal, to promote the sale of B’s goods in a given area. Under the contract A’s right to compensation arises only after B’s approval of the contracts procured by A. While B is free to decide whether or not to approve the contracts procured by A, a systematic and unjustified refusal to approve any contract procured by A would be against good faith.
Illustration 4 (no sudden and unjustified change in exercising contractual rights).
Under a line of credit agreement between B, a bank, and C, a customer, B suddenly and inexplicably refuses to make further advances to C whose business suffers heavy losses as a consequence. Notwithstanding the fact that the agreement contains a term permitting B to accelerate payment “at will”, B’s demand for payment in full without prior warning and with no justification would be against good faith.