understand its meaning and nature, and, secondly to understand its relationship with the notion of unfairness.
In the following pages, I will attempt to clarify the meaning of the principle of good faith in the context of the Kuwaiti code and its relationship to unfair terms to assess whether it is a sufficient foundation for contractual fairness. Owing to scarce resources, it would be helpful to examine the concept of good faith in other jurisdictions to understand its meaning and assess whether it should form the basis of contractual fairness.
The discussion will begin by considering the notion of good faith in comparative law and will then move on to analyse it from a Kuwaiti perspective.
1.3.1 Good faith in comparative law
Good faith is a universal concept that is recognized as one of the general principles of contract law in many legal systems around the world. The Principles of the European Contract Law54 and the International Institute for the Unification of Private Law (French:
Institut international pour l’unification du droit privé) (UNIDROIT) Principles of International Commercial Contracts55 acknowledge the importance of good faith and fair dealing in contractual relations. Its meaning, however, is not one that is recognized in the legal systems. In each legal system good faith is embedded in a particular arrangement of doctrine in which it plays its own distinctive role.
1.3.1.1 Good faith in German law
According to Zimmermann and Whittaker, there are two types of good faith in the Bürgerliches Gesetzbuch (BGB) or the German Civil Code: (i) subjective good faith (guter
54 Art. 1.201(1) provides: "Each party must act in accordance with good faith and fair dealing"
55 Under the heading good faith and fair dealing, Art. 1.7(1) states: "Each party must act in accordance with good faith and fair dealing in international trade".
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Glaube) and, more importantly, (ii) objective good faith (Treu und Glauben). Subjective good faith relates more to the personal knowledge, psychological condition or perception of the party. By contrast, objective good faith constitutes a standard of conduct to which the parties’ behaviour has to conform and by which it may be judged.56
The concept of good faith in its objective sense has been of significant importance in Germany where the principle of Treu und Glauben is found under the heading of
‘performance in good faith’ in section 242 of the BGB. This section reads: ‘The debtor must perform his obligation in accordance with the requirements of good faith taking into account the prevailing practice’.57 The literal wording of the text suggests that good faith regulates only performance of the obligation but the courts and legal writers have given its meaning a broader scope.58 In case law a fundamental principle of contract law has been derived from this article requiring the parties to the contract – the debtor and the creditor – to effectuate their rights and perform their obligations in accordance with good faith. The German courts have also relied on section 242, and section 15759 which relates to the interpretation of contracts, to create new causes of action where the statute has not provided a cause of action60 such as liability for breach of pre-contractual duties. The theory of fault in contracting (culpa in contrahendo) is a judicial creation, which finds its roots in section 242, entitles the injured party to claim for damages if the pre-contractual duty has been breached.61
56 Reinhard Zimmermann and Simon Whittaker, p. 30.
57 An English translation of the article is provided in Hugh Beale and others, p. 775. The original German text reads: "Der Schuldner ist verpflichtet, die Leistung so zu bewirken, wie Treu und Glauben mit Rücksicht auf die Verkehrssitte es erfordern", available at: http://www.gesetze-im-internet.de/
bgb/BJNR001950896.html.
58 Chantal Mak, Fundamental Rights in European Contract Law: A Comparison of the Impact of Fundamental Rights on Contractual Relationships in Germany, the Netherlands, Italy and England (Kluwer Law International 2008), p. 34
59 "Contracts are to be interpreted in accordance with the dictates of good faith taking into account normal commercial practice" (Verträge sind so auszulegen, wie Treu und Glauben mit Rücksicht auf die Verkehrssitte es erfordern).
60 Werner Ebke and Bettina Steinhauer, ‘The Doctrine of Good Faith in German Contract Law’ in Jack Beatson and Daniel Friedmann (eds), Good Faith and Fault in Contract Law (Oxford University Press 1997), p. 171.
61 Ibid., p. 172.
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Because the BGB does not define good faith and for purposes of the concretisation (or domestication)62 of the concept of good faith, there have been scholarly efforts63 to analyse the decisions of the courts to render the application of good faith as rational and objective as possible instead of leaving it to the subjective interpretation of each judge.64 The functions of good faith have been identified and systematically arranged in groups according to the cases that applied good faith. The process of concretisation has made the concept of good faith more understandable and sensible. In general, the German approach distinguishes three functions of section 242: (i) supplementary function as a basis for secondary or ancillary obligations, such as duty of information, co-operation and disclosure, as well as filling gaps in the law, (ii) limitation function to set limits to the rights and prevent their abuse, and (iii) corrective function that allows for adaptations to a contract in cases of changed circumstances.65 In addition to these three functions, section 157 of the BGB refers to good faith as a tool for interpretation and provides that contracts must be interpreted as required by good faith. The wide wording of section 157 enabled the German courts to intervene in contractual relations and provide for supplementary interpretation.66
Some commentators67 have asserted that the most significant doctrinal development based on section 242 was the judicial formulation of an appropriate and distinct body of rules for the control of the standard form of contracts.68 The courts reviewed and invalidated standard contract terms because they violated the principle of
62 Reinhard Zimmermann and Simon Whittaker (n 37), p. 23.
63 Franz Wieacker was the first to specify the theoretical status of Art. 242 and articulates the functions of good faith in his seminal work Zur rechtstheoretischen Prazisierung des § 242 BGB (1956).
64 Martijn Hesselink, ‘The Concept of Good Faith’ in Arthur Hartkamp and others (eds), Towards a European Civil Code (3rd edn, Kluwer Law International 2004), p. 474.
65 Chantal Mak, p. 34; Martijn Hesselink, pp. 475–478; Reinhard Zimmermann and Simon Whittaker (n 37), pp. 24–25
66 Reinhard Zimmermann and Simon Whittaker, p. 30.
67 Ibid., p. 27; Arthur Von Mehren, ‘A General View of Contract’ in Arthur Von Mehren (ed), International Encyclopedia of Comparative Law, vol VII (Tlibingen 1982), p. 70.
68 Some lawyers described the judicial intervention when the contract did not translate the parties’ true will as a "page of glory" in the records of the German judiciary; see Reinhard Zimmermann and Simon Whittaker, p.
27. For a historical overview of the judicial review of standard contracts in Germany, see Arthur Von Mehren, pp. 70–72. It should be noted that the German courts also invoked section 138.1, which prohibits legal transactions contrary to good morals (guten Sitten), to review and control standard terms.
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good faith.69 The resulting case law formed the foundation for new legislation on standard contract terms, and good faith was subsequently channelled and codified in section 9 (now section 307 of the BGB) of the Standard Contract Terms Act, 1976 (Gesetz zur Regelung des Rechts der Allgemeinen Geschäftsbedingungen) (AGB-Gesetz). According to section 9(1):
"Provisions in standard contract terms are void if they unreasonably disadvantage the contractual partner of the user contrary to the requirements of good faith.
1. In case of doubt, a provision is unreasonably disadvantageous if this provision is irreconcilable with essential basic principles of the statutory provisions from which the terms deviate, or
2. Essential rights or duties arising from the nature of the contract are restricted to a degree which jeopardizes the purpose of the contract being attained".70
The legislative inclusion of good faith as a test for fairness bears out the importance of good faith as an underlying principle in German contract law. The code uses it as a criterion to qualify a clause as unfair. However, the Act adds another requirement of a substantive nature for an unfair term to be invalidated and that is the term has to put the adhering party at an unreasonable disadvantage (unangemessen benachteiligen). The German approach seems to have strongly influenced the European conceptual framework of the notion of unfairness in consumer contracts, and the great similarity between the test of fairness in the AGB-Gesetz and the test of fairness in the Directive cannot be overlooked. The Directive refers to good faith at Art. 3(1), besides significant imbalance,
69 Martijn Hesselink, p. 479.
70 A translated version of AGB-Gesetz can be found at: http://www.iuscomp.org/gla/statutes/AGBG.htm.
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as a criterion to determine the fairness of the terms.71 In fact, the Directive inserted the requirement of good faith among the criteria due to its significance in German law and other continental systems.72
1.3.1.2 Good faith in English law
In contrast to Germany, English law does not recognize a general principle of good faith and takes a different approach, relying on a number of specific doctrines aimed at securing fair dealing to achieve the same outcome. The situation is not the same in other common law countries. In the United States, for example, good faith plays a comprehensive role and section 205 of the Restatement of Contracts (Second) states that: ‘Every contract imposes upon each party a duty of good faith and fair dealing in its performance and enforcement’.73 Furthermore, in Australia both courts and lawyers are open to the use of good faith in contracting and regard it as an enforceable duty.74
However, the concept of good faith is not totally absent in the English legal system. It appeared for the first time in 1766 in the historical landmark case of Carter v Boehm75 in which Lord Mansfield established the principle of utmost good faith (uberrimae fidei) in insurance transactions where the parties are bound to disclose all important facts relating to the risk before and in the course of the contract. Lord Mansfield described ‘of good faith’ as ‘the governing principle . . . applicable to all contracts and dealings’.76 However, despite the significance of this case, English courts have always opposed the recognition of a general principle of good faith on the grounds that it would
71 Art. 3.1 provides: "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".
72 Paolisa Nebbia, Unfair Contract Terms in European Law: A Study in Comparative and EC Law (Hart 2007), p. 143.
73 The Uniform Commercial Code, too, makes reference to good faith and defines it in section 1-201(19) to mean "honesty in fact in the conduct or transaction concerned".
74 Joseph Chitty and Hugh Beale, Chitty on Contracts (29 edn, Sweet & Maxwell 2004), para 1-022.
75 (1766) 3 Burr 1905.
76 At 1910.