might be made for unpaid rent).314 That position equates to the approach taken in Common law and mixed systems.

(d)  Model law

The DCFR follows the German approach in clearly permitting restitution following termination for breach, in classifying this as a contractual and not an enrichment remedy, and in providing for substitutionary methods of effecting such restitution if exact restitution in kind cannot be achieved.315 A change of position defence, such as would be maintainable if the claim were in unjustified enrichment, is not permitted: where a benefit cannot be returned because, for instance, it has been consumed, payment for the value of the benefit must be made.316 Restitution is not required in respect of a performance that has been met with a reciprocal conforming performance of the other party,317 so that, for instance, payments under a staged contract for portions of work which have been properly performed would be irrecoverable. Adoption of the DCFR approach would be to the manifest benefit of both English and Scots law, in providing both clarity and equity to the law’s treatment of restitution following termination for breach.

10.  Good faith and contractual remedies

The doctrine of good faith is evidently not a remedy as such, but rather a principle informing contract law generally and the rights created under contracts more particularly. Given that good faith is a principle which has been used to regulate the exercise of contractual remedies, it is appropriate to conclude the discussion of contractual remedies with an examination of how such regulation has operated in the systems studied.

On one view, good faith is of the very essence of all promises, whether contractual or unilateral. On this view, the existence of promissory liability is founded upon a relationship of trust existing between the promisor and promisee, the promisee taking the promisor at his word and thus placing his faith upon the pledged performance. Whether it is necessary to describe all promises in this fashion is, however, doubtful.318 If a promisor becomes bound in law to honour a promise simply by uttering the

promissory words with the intention that the undertaking becomes binding on him, then it would seem to be irrelevant whether or not the promisee trusts the promisor to honour that undertaking: whether or not such trust exists as a matter of fact, the promisor is still required to honour his promise. On this view, while trust and faith may as a matter of fact flow from many promissory undertakings, they are not essential to the valid constitution of a promise. Given the definition of a promise suggested in Chapter 1, this seems the better view. Unless the need for trust and good faith are written into the very definition of a promise – so that a promise is defined as ‘a statement by which one person, in furtherance of a relationship of trust and good faith with another, commits to some future beneficial performance, or the beneficial withholding of a performance, in favour of that other person’ – then it does not seem correct to state that a promise requires the presence of trust and good faith before it can come into being. Indeed, in reality, many promisees may well be beneficiaries of promises from people in whom they have little if any faith or trust, yet the law considers them beneficiaries under valid promises nonetheless.

Even if good faith (and trust) are not necessary components of the very idea of a promise, however, promissory liability has nonetheless proven to be a fertile field in which good faith has put down roots. Particularly in civilian jurisprudence, the doctrine of good faith has been used to regulate the contract negotiation and formation process, to interpret the rights expressly undertaken by parties, to impose additional duties upon parties and, of most relevance for present purposes, to regulate the exercise of remedies in the event of breach. Such uses of the doctrine of good faith have caused concern among some promise theorists, especially in the Common law. A high regard for the value of the express promises undertaken by promisors would seem to allow little, if any, room for external interference with such promises, including remedies for breach thereof: the more the obligations established by promises are regulated or varied by external normative concepts such as good faith, the less regard will be shown by a legal system for the autonomous will of the promisor. The struggle between the poles of party autonomy on the one hand and extra-promissory normative control on the other is part of a wider and more fundamental philosophical and political battle between legal libertarianism and paternalism which rages well beyond the field of contract law, but adjudicating that debate is beyond the scope of the current work.

It is important to remember, of course, that good faith is capable of manifesting itself in at least two different ways, one subjective and the

other objective.319 Those who have concerns at the threat good faith poses to the inviolability of promises usually object most strongly to the objective manifestation of good faith. In its subjective sense, good faith means the actual honesty and fair dealing of the party in question (whether the promisor or promisee): did that party know, for instance, about a mistake made by the other and take advantage of it? If so, that constitutes a subjective absence of good faith (or perhaps even the positive presence of bad faith) which would merit the application of corrective measures in most systems. In its subjective sense, good faith has an established and largely uncontroversial role in Common law, mixed and civilian legal systems. In its objective sense, good faith concerns not the actual behaviour or knowledge of the contracting parties, but rather external community norms concerning appropriate behaviour, such as preventing the exercise of contractual remedies in a manner considered oppressive, or the imposition of a duty upon contracting parties to provide each other with certain information, or the implied duty on parties to cooperate to ensure that the goals of the contract are achieved. It is the interference constituted by the external imposition of such controls that lead to accusations that promises are being increasingly undermined in some legal systems.

It is possible to accommodate the requirements of subjective good faith within a regime which shows a high degree of respect for the actual promises made by the parties and which insists upon a strict enforcement of those promises. As subjective good faith has as its core the notion that a party ought to behave honestly and truthfully towards the other party, it is not difficult to argue that such a duty will accord in every case with the actual promises made by parties: after all, there is an ancient tradition of equating promising with truth-telling, as narrated in the earlier chapters of this book. Fried, for instance, has argued that the classic definition of good faith is honesty in fact,320 and that such honesty is the hallmark of the principle of contractual autonomy.321 On the other hand, it is harder to attempt to accommodate objective good faith, of the type which imposes normative controls on the exercise of remedies, in a way which is consistent with respect for the promises made by the parties. If, for instance, parties specify that termination for breach is to be available automatically in certain circumstances, why, if one of those circumstances arises, should the party in breach be required to be given a second chance to perform (as

319See Hesselink, ‘The Concept of Good Faith’, 471.

320See the Uniform Commercial Code, §1–201(b)(20).

321Fried, Contract as Promise, p. 77. Fried argues that to this idea of honesty must be added the idea of loyalty.

German law so requires)? This, it might be said, undermines the stipulated requirement of performance, and provides for a right to cure imperfect performance which the parties might have chosen for themselves but did not.

The potential for objective good faith to regulate, or one might say interfere with, the operation of contractual remedies is seen most clearly in civilian systems. German law provides, in §242 BGB, that a debtor has a duty to perform according to the requirements of good faith, taking customary practice into consideration. Though this provision is ex facie limited to performance of the debtor’s duty, the German courts have been active in using the provision to create a wide ranging duty of good faith capable of creating pre-contractual duties, imposing further duties on the parties, and restricting the creditor’s exercise of its rights, among other functions. As regards moderating the exercise of contractual rights and remedies, some decisions exist to the effect that, in extreme cases, a party may not be entitled to enforce a right if such exercise does not reflect a ‘proper protection’ of its interest, for instance because, though a breach existed originally, it was subsequently cured by the time of purported termination for breach.322 In another case restricting an apparent unfettered right to terminate, it was held that if the exercise of the right occurs in circumstances where it breaches a constitutional right given to a party under the Basic Law (Grundgesetz), the exercise of the right can be said to breach the requirement of good faith imposed by §242.323

Such results are not unique to civilian systems, but may be seen in mixed legal systems also, especially in Louisiana with its code based upon the French Civil Code. Article 1759 of the Louisiana Civil Code provides that good faith is to ‘govern the conduct of the obligor and the obligee in whatever pertains to the obligation’.324 This provision has been used, inter alia, to restrict remedial entitlement. Thus, the Louisiana Appeal Court held in one case that a trial court had not erred in finding that A had

322BGHZ 90, 198.

323See BAG NZA 1994, 1080, where an unfettered right to terminate the contract was held to have been exercised against the requirement of good faith because it was motivated by reason of a dislike for the terminated party’s sexual orientation (whose expression found constitutional protection as an aspect of his right of personality).

324Levasseur argues that this provision provides a ‘general principle’ which pervades the entire law of the Civil Code, and has an ‘underlying presence’ (Louisiana Law of Obligations, para. 1.4.2), adding that the Code contains more specific manifestations of good faith, which demonstrate two of its aspects, namely the duty of loyalty and the duty of cooperation. See generally on good faith in a Louisiana and comparative context, Litvinoff, ‘Good Faith’.

breached a contract with B, in contravention of Article 1759, because A had terminated the at-will contract with B in order to award the contract to C.325 Such a result seems consistent with the approach of the German courts, which have similarly looked at the motivation for the exercise of remedies.

In South Africa, good faith is said to be an expression of constitutional values, but the precise way in which it operates has been somewhat controversial. Good faith was specifically mentioned in the concurring minority judgment of Olivier JA in First National Bank v. Saayman as a justification for setting aside a suretyship agreement (the majority took a different approach, saying that the agreement was void for lack of capacity). Olivier JA said: ‘I am convinced that the principles of good faith, founded in public policy, still play, and must continue to play, a significant role in our law of contract.’326 Applying those principles to the case before him, Olivier JA thought the bank ought to have ensured that the grantor of the surety had a sufficient understanding of the nature of what she was undertaking. It has been questioned whether such an approach means that good faith should be seen as providing a separate, independent ground for setting­ aside contracts, or not.327 Subsequently, in Brisley v. Drotsky 328 the Supreme Court of Appeal warned that Olivier JA’s judgment should be approached with caution. The majority expressed their agreement with the view of Dale Hutchison that while good faith has a creative, controlling and legitimating or explanatory function, it is not the only principle underlying contract law, nor perhaps even the most important one.329 The majority held that another such value is pacta sunt servanda, a value which is often in competition with good faith. When the values conflict, the court must perform a balancing act. So, if a particular rule or principle is regarded as unfair, it can be amended, but such amendment can only operate within the bounds of stare decisis, and where it does occur must happen incrementally and with caution. Individual judges are not authorised to refuse to give effect to contracts merely because they find them unfair.

English law has been even more reticent than South African law to give good faith any general, explicit role in constraining the exercise of

325N-Y Assocs v. Board of Commissioners 926 So. 2d 20 (La App 4 Cir 2006), writ denied 930 So. 2d 231 (La 2006).

3261997 (4) SA 302 (A), 326G.

327See Brand and Brodie, ‘Good Faith in Contract Law’.

3282002 (4) SA 1 (SCA).

329See Hutchison, ‘Good Faith in the South African Law of Contract’.

contractual remedies. What limited explicit role the concept performs derives largely from the implementation of the European Directive on unfair terms in consumer contracts, transposed into national law in the Unfair Terms in Consumer Contracts Regulations 1999.330 Good faith also operates explicitly within the restricted context of insurance contracts (contracts uberrimae fidei, or the ‘utmost good faith’), though in this context it founds, rather than restricts, the remedial entitlement to terminate such contracts for non-disclosure of any matter affecting the insured risk (such non-disclosure being deemed a breach of the requirement of the utmost good faith). Beyond this, however, good faith has little explicit role in the field of remedial enforcement, though it has been argued that many aspects of the English law of remedies reflect, under different guises, concerns which in other systems would be described as good faith in nature.331 Similar arguments have been made about Scots law, where again any role for good faith in the field of remedies is at best a latent rather than a patent one,332 despite a reference in the House of Lords in a Scottish appeal to ‘the broad principle in the field of contract law of fair dealing in good faith’.333 Such attempts to recast established rules and constraints in good faith terms are controversial, and any radical development in English or Scots law towards a more explicit good faith position is unlikely to precede a European harmonisation of contract law.

The recent proposals for harmonised contract law have all enshrined good faith within them, as references to a number of good faith provisions of the DCFR at various points in this work indicate.334 Typically, as in the case of the DCFR, this is by way of a general good faith provision,335 as well as by way of more specific manifestations of the good faith principle in relation to specific contract rules.336 The general provision in the DCFR (Article III.-1:103) makes clear the application of good faith to the control of remedies, by stating that the duty to act in good faith extends

330See Reg. 5(1), which states that 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’.

331See Friedmann, ‘Good Faith and Remedies for Breach of Contract’.

332See MacQueen, ‘Good Faith in the Scots Law of Contract’.

333Per Lord Clyde in Smith v. Bank of Scotland 1997 SC (HL) 111, 121.

334See, for instance the discussion on the duty to negotiate in good faith in Ch. 4, at p. 201.

335DCFR Art. III.-1:103.

336Such as the duty to negotiate in good faith: Art. II.-3:301(2). This approach of a general, but also more specific, enunciation of good faith duties is not without its difficulties: see Beale, ‘General Clauses and Specific Rules in the Principles of European Contract Law’.

to ‘exercising a right to performance, in pursuing or defending a remedy for non-performance, or in exercising a right to terminate an obligation or contractual relationship’. Such a statement, while clearly very much in the tradition of civilian systems, goes well beyond what English law or the mixed systems (with the exception of Louisiana) would consider an appropriate restraint on party autonomy. It is reflective of a view of contract law which sees party autonomy, and thus the rights promised by parties to each other, as requiring to be regulated in the interests of justice and fairness. This view is likely to gain ground as a result of the increased impact of EU law into national contract law as well as the increasing influence of the model codes. Whatever the merits or otherwise of such a development, it must be admitted that it represents a major challenge to the earlier paradigm of contract law as being mostly about what contracting parties have promised each other, though, as suggested at the end of Chapter 3, a reinvigorated will theory of contract law is able to accommodate such external control of party autonomy if that is considered desirable.