In advancing the case for a universal doctrine of good faith in New Zealand law, Thomas suggests that good faith requires that a party to contractual negotiations is genuinely seeking a contract.78 A negotiating party may not therefore withdraw from the bargaining for reasons which are capricious or arbitrary. However, this reasoning overlooks how a principle of good faith would aid the victim of such conduct in the event that no contract comes into existence. The doctrine could only apply subsequent to contractual formation if it were to be introduced as a principle of construction. Clearly a wronged party in terminated negotiations would have no cause of action in contract on which to found a claim for a breach of good faith.
A broad principle of good faith conduct tends to blur the distinction between contractual and non-contractual obligations.79 The idea that a doctrine of good faith would encompass a pre-contractual duty to bargain in good faith whose breach may, at a minimum, justify an award of reliance damages, seemingly compromises the dividing line between contractual and non-contractual obligations previously thought to be axiomatic in New Zealand jurisprudence.80
Therefore, a critical issue for consideration is whether the subject doctrine can appropriately extend to regulate pre-contractual negotiations. Traditional reasoning would suggest that a distinction must be made between where there is an enforceable agreement and where there is no enforceable agreement. In the latter situation instances of bad faith conduct may give rise to remedies in tort, equity and statute, but not in
78
Thomas, above n 47, at 393.
79
See Friedrich Juenger, ‘Listening to Law Professors Talk About Good Faith: Some Afterthoughts’ (1995) 69 Tulane Law Review 1253, at 1254.
80
contract. The liability arises from an extra-contractual obligation.81 Indeed, if a plaintiff complains that he or she believed that a contract would ensue and relied on that belief to his or her detriment, the claim is, in reality, one relating solely to detrimental reliance rather than expectation loss. The action would fall more naturally within a tortious action for deceit rather than any cause of action associated with contract. The equitable doctrine of promissory estoppel may also provide a measure of protection in relation to pre- contractual promises and representations. The doctrine in New Zealand is not limited to dealings between parties who have prior contractual rights inter se.82 Conceivably s 9 of the Fair Trading Act 1986 (“FTA”) might also be relied upon by a victim of misleading and deceptive conduct in pre-contractual bargaining where the defendant is engaged in trade. The most obvious way for New Zealand lawyers to frame pleadings which seek to impose liability for bad faith discontinuation of negotiations may be to allege misleading and deceptive behaviour under s 9 of the FTA.83
The fact that a good faith doctrine may not extend to regulate pre-contractual conduct may not be a satisfactory outcome for proponents of good faith. It appears that the law of tort is unlikely to serve as an adequate substitute for good faith in the negotiation of contracts. A somewhat restrictive approach has been adopted in tort jurisprudence in
81
William Tetley, ‘Good Faith in Contract: Particularly in the Contracts of Arbitration and Chartering’ (2004) 35 Journal of Maritime Law and Commerce 561, at 565. See also Nadia E Nedzel, ‘A Comparative Study of Good Faith, Fair Dealing, and Precontractual Liability’ (1997) 12 Tulane European and Civil Law Forum 97, at 155.
82
Burbery Mortgage Finance and Savings Ltd v Hindsbank Holdings Ltd [1989] 1 NZLR 356, at 359 per Cooke P. See also Waltons Stores (Interstate) Ltd v Maher (1988) 76 ALR 513.
83
A similar situation is encountered by Australian lawyers. See generally John Carter and Michael Furmston, ‘Good Faith and Fairness in the Negotiation of Contracts: Part II’ (1995) 8 Journal of Contract Law 93, at 99. The damages that might be awardable for a bad faith discontinuation of negotiations under the Fair Trading Act 1986 may be limited. Conceivably damages might be claimed for wasted expenditure falling under the head of reliance loss. It is however contentious whether damages for loss of a chance to enter into a substantive contract could be sought as this may fall within the head of expectation loss which, it is generally accepted, cannot be claimed under the Fair Trading Act 1986. See Cox & Coxon Ltd v Leipst [1999] 2 NZLR 15. See below for a further discussion of the distinction between reliance and expectation loss in the context of pre-contractual negotiations.
relation to claims for pure economic loss.84 There is also a general reluctance to extend the duty of care principle in pre-contractual dealings because of the potential to subvert the law of offer and acceptance under classical contract law theory.85 In applying tort law, the courts will be cautious not to override the freedom not to contract. Indeed, there appears to be a general reluctance for the principles of tort law to interfere with the well- established rules of contract. Ordinarily there is no duty of care between business parties negotiating at arms length.86
This rationale was confirmed by the Supreme Court of Canada in Martel Building Ltd v Canada.87 The plaintiff was led to believe that the defendant would renew a lease at a specific rental but the defendant ultimately awarded the lease to a competitor. The plaintiff sued alleging, inter alia, breach of a duty of care in negotiations. The Supreme Court of Canada held that policy reasons militated against such a duty of care. The Court recognised that the very purpose of contractual negotiations is to ensure the most advantageous bargain. This is often at the expense of the other negotiating party. To impose a duty would hobble the marketplace and dissipate commercial advantage derived from privately acquired information. The retention of self-vigilance was said to be a necessary ingredient of commerce. The Court also considered that there are sufficient other causes of action in the pre-contractual forum without the need for a duty of care. To impose the duty would lead to wasted litigation.88
84
See Paula Giliker, ‘A Role for Tort in Pre-Contractual Negotiations? An Examination of English, French and Canadian Law’ (2003) 52 International Comparative Law Quarterly 969.
85
See Stephen Todd (ed), The Law of Torts in New Zealand (4th ed, 2005), at 185.
86
B S Markesinis and Simon F Deakin, Tort Law (4th ed, 1999), at 93; John Cartwright, Misrepresentation, Mistake and Non-Disclosure (2007), at 569.
87
[2000] 2 SCR 860. See also Banque Financière de la Cité SA v Westgate Insurance Co Ltd [1989] 2 All ER 952; Ontario Ltd v Cornell Engineering Co (2001) 198 DLR (4th) 615; Gross v Great-West Life Assurance Co [2002] ABCA 37; Prime Commercial Ltd v Wool Board Disestablishment Company Ltd (Court of Appeal, CA 110/05, 18 October 2006), at [39] per William Young P.
88
Accordingly, it cannot be said that a party to negotiations assumes responsibility for the other. It is not usually reasonable for one party engaged in bargaining to depend on the other. Each negotiating party must rely on his or her own judgment or a third party opinion. Tort lawyers generally take the view that parties to pre-contractual negotiations will primarily worry about their own interests rather than those of the counterparty.
Notably however, the Court in Martel recognised that its reasons were restricted to whether a tortious duty of care should be extended to contractual negotiations. The notion of a duty of good faith in negotiations was a matter that was expressly left open.89
Like tort law, it is also evident that the doctrine of estoppel and the FTA may not necessarily coincide with a doctrine of contractual good faith. For example, those remedies may not give rise to positive obligations to disclose certain matters in pre- contractual negotiations which an obligation of good faith may be understood to require.90 Further, the existing equitable and statutory remedies do not necessarily prevent a party from withdrawing from negotiations without regard to the interests of the other negotiating party. Therefore, whilst the application of the doctrine of promissory estoppel may be tantamount to a judicial declaration that negotiating parties must not bargain in bad faith, there is no evidence to substantiate the development or existence of a
89
Ibid, at [73] per Iacobucci and Major JJ.
90
The respective relationships between a doctrine of good faith, estoppel and the Fair Trading Act 1986 are discussed in Chapter 4 below. In relation to non-disclosure in pre-contractual negotiations, it is possible that the test for misleading and deceptive behaviour under the Fair Trading Act 1986 may be developed to include bare non-disclosure. In this respect, the Fair Trading Act 1986 may, to some extent, be perceived as an alternative to a good faith obligation of disclosure. For the prevailing test in New Zealand as to non- disclosure under the Fair Trading Act 1986 see Unilever NZ Ltd v Cerebos Greggs Ltd (1994) 6 TCLR 187 where the Court of Appeal suggested (at 192 per Gault J) that silence must affirmatively convey a false meaning. But see Hieber v Barfoot & Thompson Ltd (1996) 5 NZBLC 104,179. As to good faith and obligations of disclosure, see generally Nicola Palmieri, ‘Good Faith Disclosures Required During Precontractual Negotiations’ (1993) 24 Seaton Hall Law Review 70, at 179; Muriel Fabre-Magnan, ‘Duties of Disclosure and French Contract Law: Contribution to an Economic Analysis’ in Beatson and Friedman (eds), above n 75; S M Waddams, ‘Pre-Contractual Duties of Disclosure’ in Peter Cane and Jane Stapleton (eds), Essays for Patrick Atiyah (1991).
duty to negotiate in good faith under the current law.91 It may be wrong to rationalise the existing equitable doctrines and statutory provisions as necessarily requiring good faith behaviour in contractual negotiations.
The existing law within New Zealand can be contrasted with the civil law codifications in Europe. The latter clearly provide a remedy for an aggrieved party where negotiations are unjustifiably terminated.92 The obligation of good faith would be diluted to some extent if a good faith doctrine were introduced in New Zealand that did not accommodate a similar right. As a result, proponents of good faith are liable to suggest that the envisaged doctrine should extend to pre-contractual negotiations even where no contract is formed. This is the inference that can be drawn from the views of Thomas. Conceivably it would be necessary for the doctrine to assume equitable characteristics in addition to a foundation in the common law of contract if the ambit of the doctrine were to extend that far. The jurisprudential implications of this potential outcome require scrutiny.
The relationship between equity and the common law is a contentious issue. Under the Supreme Court Act 1860, the New Zealand Supreme Court had, since its inception, the jurisdiction to recognise actions at law and suits in equity. Legal and equitable remedies could also be granted in the same set of proceedings.93 However, it was unclear, as it was in England under the Judicature Act 1873, whether there had simply been a merger of the administration of equity and the common law or whether there had been a fusion of the substantive principles, rules and doctrines of equity and the common law.94 The latter phenomenon might support a doctrine of good faith which comprises both legal and equitable elements.
91
See Jane Edwards, ‘Negotiating Parties and Equitable Estoppel: Is There a Duty of Good Faith?’ (1999) 27 Australian Business Law Review 300, at 300 and 318.
92
See for example art 2:301(2) Principles of European Contract Law. It has been observed that ‘English law knows no general obligation of good faith in pre-contractual negotiations. In this respect it differs from civilian systems.’: Agnew v Lansförsäkringsbølagens AB [2000] 1 All ER 737, at 770 per Lord Millett.
93
Andrew S Butler (ed), Equity and Trusts in New Zealand (2003), at 14.
94
In United Scientific Holdings Ltd v Burnley Borough Council Lord Diplock, one of the most forceful exponents of fusion95, opined that:
[T]o perpetuate a dichotomy between rules of equity and rules of common law which it was a major purpose of the Supreme Court of Judicature Act 1873 to do away with, is, in my view, conducive to erroneous conclusions as to the ways in which the law of England has developed in the last 100 years…[T]he waters of the confluent streams of law and equity have surely mingled now.96
In Aquaculture Corporation v New Zealand Green Mussel Co Ltd Cooke P, when considering whether a monetary compensation could be awarded for a breach of the duty of confidence, suggested that equity and the common law are mingled or merged.97 As a result a full range of remedies could be available whether they originated in common law, equity or statute. Likewise, in Elders Pastoral Ltd v BNZ Somers J suggested that neither the common law nor equity is stifled by its origin.98 Because the two strands of law have been administered by one Court in New Zealand, each has borrowed from the other and that outcome has furthered the harmonious development of the law as a whole.
It is clear in New Zealand that breach of a legal obligation may give rise to an equitable remedy and vice versa in appropriate cases. However, the granting of remedies such as an injunction to restrain a tort or an order of specific performance of a contract is simply an exercise of the concurrent jurisdiction of the common law and equity rather than evidence of fusion.99 It is still debatable whether the distinction between legal and equitable causes of action and legal and equitable duties continues to exist or remains relevant. This is the critical issue pertaining to the good faith doctrine.
95
See John Dyson Heydon, W M C Gummow and Robert P Austin, Cases and Materials on Equity and Trusts (4th ed, 2003), at 27.
96
Cheapside Land Development Co Ltd v Messels Service Co [1977] 2 All ER 62, at 68.
97
[1990] 3 NZLR 299, at 301.
98
[1989] 2 NZLR 180, at 193.
99
The learned authors of Equity and Trusts in New Zealand have suggested that there is enough evidence of fusion to show that there have been moves towards an overarching law of obligations within New Zealand.100 A law of obligations implies that the law should be applied by focusing on the substance of legal obligations rather than on their historical origins, be it common law or equity.101 The process is essentially one of legal ecumenicism.102 Conceivably a plaintiff may have a cause of action and a potential remedy regardless of whether a contract has come into existence if the doctrine of good faith were to be informed under a law of obligations which could subsume equitable elements.
However, there are strong reasons against the courts introducing a doctrine of good faith which assumes both legal and equitable characteristics under the guise of a general law of obligations. Arguably the point has not yet been reached in New Zealand law where it is immaterial whether a breach of duty is of a common law or an equitable duty.103 Equitable doctrines supplement common law doctrines104 but the traditionally distinct causes of action have not been merged. It would be dangerous to substantively modify principles under one branch of the New Zealand legal jurisdiction by foreign concepts that are imported from another branch.105 Accordingly, Meagher, Heydon and Leeming oppose a law of obligations:
Those who commit the fusion fallacy announce or assume the creation by the Judicature system of a new body of law containing elements of law and equity but in character quite different from its components. The fallacy is committed
100
See Butler (ed), above n 93, at 22. For arguments in favour of assimilation see Andrew Burrows, ‘We Do This At Common Law But That In Equity’ (2002) 22 Oxford Journal of Legal Studies 1.
101
Ibid, at 21.
102
Gary Muir, ‘Contract and Equity: Striking a Balance’ (1986) 10 Adelaide Law Review 153, at 183.
103
See generally Martin, above n 99, at 25.
104
Peter Birks, ‘Equity in the Modern Law: An Exercise in Taxonomy’ (1996) 26 University of Western Australia Law Review 1, at 52.
105
See generally Roderick Pitt Meagher, John Dyson Heydon and Mark James Leeming, Meagher, Gummow & Lehane’s Equity: Doctrines and Remedies (4th ed, 2002), at 54.
explicitly, covertly and on occasion with apparent inadvertence. But the state of mind of the culprit cannot lessen the evil of the offence.106
There are definite risks associated with the introduction of a good faith doctrine under a law of obligations. The courts must be hesitant to prevent quasi-contract rules being utilised as a means of bypassing contractual principles.107 There would be a serious risk that the doctrine could be used to undermine traditional common law contractual rules if good faith could apply independently of the common law of contract. The requirement for offer, acceptance and consideration is a prime example.
Similarly, the remedies for a breach of a non-contractual obligation generally are, and should remain, distinct from a breach of a contractual obligation. A good faith obligation extending to pre-contractual conduct may undermine the distinction between reliance loss and expectation loss. Undoubtedly there is an overlap between the two measures of damage. However, in Cox & Coxon Ltd v Leipst the majority of the Court of Appeal recognised that expectation loss may only be claimed where there is an obligation to perform.108 Thus, expectation loss is perceived as peculiar to contract law.109 It would be dangerous to permit a plaintiff to recover on the basis that he or she lost the benefit of a contractual bargain as a result of a breach of good faith where there is no pre-existing bargain.110 Pre-contractual damages do not therefore readily fit into a regime of gain based damages.111 To award contractual damages where there is an incomplete contract would ignore the risks of the negotiation process.112 This suggests that contractual good
106
Ibid. There is evidence to suggest that the distinction between law and equity is receiving renewed prominence. See Anthony Duggan, ‘Is Equity Efficient?’ (1997) 113 Law Quarterly Review 601.
107
See generally Samuel Jacob Stoljar, The Law of Quasi-Contract (2nd ed, 1989).
108
[1999] 2 NZLR 15, at 26 per Henry J.
109
See Burrows, Finn and Todd, above n 2, at 330.
110
Conceivably damages might be claimed for loss of a chance. Analogy might be drawn with claims for loss of a chance to reach a settlement agreement in litigation. See Maden v Clifford Coppock & Carter (a firm) [2005] 2 All ER 43.
111
Giliker, above n 84, at 972.
112
faith should remain distinguishable from notions of pre-contractual good faith. Each attracts distinct relief.
Further, if pre-contractual equitable duties and common law contract principles are to be subsumed into a general law of obligations113 under the rubric of good faith it may be necessary for that to occur through legislative codification rather than judicial pronouncement. For example, in New Zealand the common law and equitable rules relating to contractual mistakes were integrated not by the judiciary but instead by the legislature under the Contractual Mistakes Act 1977.114 It has also been recognised that the assimilation of the common law doctrine of duress and the equitable doctrines of undue influence and unconscionability is essentially a legislative task.115 Accordingly, the merger of legal and equitable duties in the field of contract law is arguably a matter that should properly be left to Parliament. The courts simply may not be competent to introduce a general and unifying doctrine of good faith which can give rise to contractual and non-contractual liability.
Therefore, the scope of the doctrine being appraised within this thesis should, and will, be kept within the bounds of conventional methodology. The subject doctrine is to be perceived as grounded in the common law of contract. It is not the function of this thesis