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Interpretation of Good Faith

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This article is written by Ananya Banerjee of Law College Durgapur, an intern under Legal Vidhiya

Abstract:

One of the strongest General Principles of law, good faith governs the entire legal system. In a stage where Customary or Treaty law has not yet taken shape, it maintains the integrity of international law. The ICJ Statute states in Article 38(1)(c) that the Court “shall apply the general principles of law recognised by civilised nations.” It is challenging to define good faith as an absolute legal norm because of its nature. In order to avoid attempting to define it, the purpose of this essay will be to discuss and illustrate its role in international law.

Introduction:

The definition of “good faith” has changed as a result of case law and depends on the situation. Definitions include acting in accordance with the spirit of an agreement, acting in accordance with the reasonable expectations of the parties, and being faithful to an agreed-upon common goal. Honesty in performance and loyalty to the parties’ deal are also included. The implicit covenant of good faith and fair dealing, or “good faith and fair dealing,” is a general presumption in contract law that the parties to a contract would deal with one another honestly, fairly, and in good faith so as not to impair the right of the other party or parties to profit from the contract. Regardless of the broad circumstances and understandings between the parties, when one party to the contract attempts to use a technical defence for breaching the agreement or when that party relies solely on specific contractual terms to refuse to perform his or her contractual obligations, it may result in a lawsuit (or cause of action) based on the breach of the covenant. When a written document is reviewed by a court or fact-finder, a “implied covenant of good faith and fair dealing” is present.

Good faith in various fields:

The requirement to exercise one’s civil rights in good faith is a broader obligation on individuals under Quebec contract law, and it has been recognised in some situations under common law regimes. While Canadian contract law recognises the obligation to negotiate in good faith when there is an imbalance in the negotiating power of the parties to a contract, English common law historically did not. Negotiations between franchisors and franchisees, between insurers and insured parties, contracts pertaining to marriage and separation agreements, invitations to tender, and fiduciary relationships are examples of situations that give rise to this duty. Courts may also recognise a duty to negotiate in good faith when there is an established relationship between the parties, particularly when the discussion is about supplementary terms in a fully formed agreement, as well as when parties to an oral agreement have agreed to discuss the terms to be included in a written agreement. The failure to negotiate in good faith may entitle the aggrieved party to restitutionary damages in cases where one party has invested money in expectation of a contract and the other party withdraws from negotiations in bad faith.

ICJ ruling in the Nuclear Test Case, as stated “Good faith is one of the fundamental principles controlling the formation and fulfilment of legal duties. International cooperation naturally fosters trust and confidence, especially in a time when it is becoming more and more important to do so in a variety of disciplines. The binding nature of an international duty is based on good faith, just as the fundamental principle of pacta sunt servanda in the law of treaties is. Therefore, interested States have the right to be aware of unilateral pronouncements, to have trust in them, and to demand that the duty resulting from such declarations be upheld. In light of this, the ICJ determined that a State can be bound by a unilateral act alone, such as a public declaration made by a State with the intent to be bound, can impose the legal maxim of pacta sunt servanda, which would otherwise only allow for the creation of legal obligations through a treaty.

The two key considerations when interpreting a treaty are (i) giving the treaty’s spirit priority over an overly intense focus on its precise wording, and (ii) looking for a reasonable interpretation in the sense of what an honourable and reasonable party could and should have understood in relation to the text as it has been adopted. These features prevent the exploitation of treaty parties and are consistent with good faith norms.

The parties to a treaty are required to comply with specific legal rules that result from good faith during the execution phase. These obligations go beyond the merely interpretive dimensions that were previously addressed. There are other kinds of obligations, such as the General Duty of Cooperation, the Duty not to defeat the Treaty’s object and purpose after it enters into force, the Duty of Rectitude, and others.

A party may not rely on a contract’s provisions under the equitable doctrine of estoppel if, “by its words or conduct,” it gave the other party reason to assume that some of the terms will be disregarded, construed in a specific way, or given a less strict construction. Estoppel by convention, one of the types of estoppel accepted in common law jurisdictions in Canada, operates when three conditions are met: 1) a “manifest representation” of a “shared assumption of fact or law” regarding the application or interpretation of a contractual delivery, 2) one party undertakes conduct in reliance on the “shared assumption” that transforms its status under the law, and 3) The party that relied on the provision demonstrates that it did so in a reasonable manner and would suffer material loss if the provision were strictly implemented. The Ontario Court of Appeal ruled that a representation by the party requesting execution of the contractual provision is not necessary for the “shared assumption” necessary to establish estoppel by convention. Promissory estoppel and estoppel by representation are two different but related types of estoppel recognised in Canada. These types of estoppel allow courts to enforce a promise or representation made by one party to a contract stating that it will not invoke a specific term of a contract or rely on a specific provision of law if the other party has acted inadvertently in reliance on that promise or representation. These types of estoppel help to mandate that parties to a contract act in good faith when invoking contractual terms under Canada’s common law provinces and territories.

Jurisdiction of states:

A legal authority or responsibility to act, such as jurisdiction or competence, has been reaffirmed in the Island of Palmas case (1928), where the rights granted by sovereignty are matched by a responsibility to defend the rights of other states in the area where that state exercises its sovereignty. There are a number of concerns that are predicated on, or at least cause, considerations of good faith when it comes to the establishment and termination of jurisdiction. Some of them, like “acquisitive prescription,” stem from the idea of relying on good faith (reasonable expectations). Others, such as the idea of rights abuse, stem from the necessity of a connection between the use of a competence and the purposes for which it was granted. In other words, good faith offers two major roles in the context of competences: it safeguards reasonable expectations and it safeguards goals and objectives.

Concepts of legal clarity and trust between the contracting parties are crucial to commercial law. Without certain assurances on the predictability of action and the concurrent protection of his economic interests, no one invests in investments or commerce. As a result, international commercial law and arbitration practice utilised the concept of good faith long before the WTO was established.[1] As an analogy to article 18 VCLT, 1969, the duty to negotiate in good faith gave rise to similar concretizations as in general international law. The principle of good faith has founded various rules in this subject area, such as the doctrine of legitimate expectations, doctrine of abuse of rights, estoppel, pre-contractual duties, and the duty to bargain in good faith. In addition to guiding contract interpretation, execution, and termination, good faith also obligates parties to make a good faith effort to lessen the harm caused by illegal activity by taking reasonable precautions. A party is also prohibited from making money off of its own wrongdoing. The parties have a responsibility to comply with the administration of evidence in the arbitration process and are forbidden from taking any actions that could potentially worsen the conflict or prevent the final judgement from being carried out.

Normative patterns develop in the ongoing cycle of demand and response through the establishment of reasonable expectations for future behaviour and consequently by the use of legal tools like reliance, acquiescence, or estoppel. As the depositary of the Reasonable Expectation Doctrine, the doctrine of good faith is ultimately the foundation of all these organisations. The reasonable expectations argument, however, cannot claim to offer an adequate justification for the development of all customary rules. This is obvious for the system’s central axiomatic customary rules (pacta sunt servanda), but it also holds true for a number of other rules, such as those that solidify through formal codification. Customary law development is an endeavour that has too many facets and is too intricate to be reduced to a one-size-fits-all approach.

An important subfield of international law known as administrative international law was created to protect employees of international institutions. The principle of good faith governs the contractual connections between the company and the employee, as established by the Court of Justice of the European Communities in the 1960 Lachmüller decision.[2] The protection of reasonable expectations, the effects of consent and estoppel, the prohibition of abuse and arbitrary action, and the prohibition of abuse of authority are all aspects of public law that we find to be in good faith in this area of international law.

The idea that pacta sunt servanda and obligatio est servanda are expressions of the norm of good faith has been made to represent the entirety of international responsibility law.[3] The entire legal system, which is built on agreements and usage, may be said to be nothing more than an expression of the principle of good faith, according to this excessively wide statement. However, the obligation to report is based on a number of principles –

  1. Ultra vires responsibility: The action-in-‘capacity’ criterion depends on the criterion of trust on good faith. The final solution, however, does not wholly rest on this guiding premise. To determine whether an agent or organ acts in ostensible authority, many factors than just apparent authority are taken into account.
  1. Rules Excluding from the Exhaustion of Local Remedies- The concept of good faith serves as the foundation for the exceptions to the general rule of exhaustion of local remedies. The three exclusions include other instances of estoppel, official assurances that local remedies are available, and the absence or ineffectiveness of local remedies.

The principles of collaboration and consent serve as the two cornerstones of the legislation governing the peaceful resolution of international disputes. Since a settlement attempt results in a shared process, such as a legal process, which can only be successful if there is a minimum of loyalty and coordinated effort, the cooperation principle is at issue. Since all methods of resolving international conflicts ultimately depend on the consent of the states involved, the idea of consent is pertinent. The principle of good faith is crucial in both situations: in the first, where cooperation is required for the protection of the process’ shared goals, and in the second, where consent limits a subject’s true intentions in favour of taking into account the true intent behind a particular action and what other subjects could and should have expected in light of it. Thus, as has been stated, the topic of the peaceful resolution of international disputes is dominated by the norm of good faith. This is made possible through “good faith negotiations,” “prospective overruling,” “execution of arbitral and judicial awards,” “prohibition of abuse of procedure,” and “provisional measures by ways of pendente lite.”  

Its legal foundation is the fair and equitable treatment (FET) clause and the good faith concept, or an analogue to fundamental ideas in municipal administrative legislation. Three areas—Contractual Arrangements, Informal or Formal Representations, and the General Regulatory Framework under Municipal Law—have seen the most application of the PLE principle.

When an investor reorganises his assets through the formation of new corporations or the acquisition of a new corporate nationality that permits the application of a Bilateral Investment Treaty (BIT)[4] with the sole purpose of gaining access to arbitration, the principle of abuse of procedure is applicable. The claim will be rejected for abuse of procedure if it is basically the same as an earlier one and is resubmitted under a circumvention of the law (transfer to another company).

Along with being important to the law of peace, good faith is equally important to the law of armed conflict. Article 37 of Additional Protocol I of 1977 to the Four Geneva Conventions of 1949 serves as the primary provision on perfidy today. According to the aforementioned law, it is forbidden to use perfidy to kill, harm, or capture an enemy. Additionally, perfidy is defined as engaging in conduct with the intent to betray the confidence of an enemy in order to make him feel that he is entitled to, or is required to provide, protection under the principles of international law applicable in armed conflict. Good faith must be crucial in this situation as well.

The idea of internal sovereignty has been defined as a state’s absolute power within its borders; external sovereignty, on the other hand, is the aspect that deals with a state’s international obligations and rights in respect to other states. The Lotus concept, which was created by the PCIJ in 1927,[5] declared that a State’s action in good faith had a constraining impact on its foreign sovereignty. As a result, where elements of good faith are involved and these elements require behaviour that is contrary to what a state may normally want to do, a state’s supreme authority or sovereignty may be curtailed.

Conclusion:

It is safe to conclude from the discussion above that the main purpose of good faith is to safeguard the legal subjects’ legitimate expectations, seek stability, legal certainty, and predictability, as well as to safeguard the object and purpose of legal processes against overzealous unilateral action that jeopardises shared processes and interests. The principle also forbids abusive and arbitrary behaviour, including the exploitation of legal privileges for objectives and purposes that are damaging to other people or the collective as a whole. The role of good faith will expand and lead to additional variations of this restriction as international law becomes more scattered and divided into “self-contained” regimes since, at its core, good faith operates to lend legal weight to expectations that States have in the behaviour of other States. Despite the fact that good faith may be difficult to define in general terms, it is nonetheless essential.

References:

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