ARTICLE 1.7 - (Good faith and fair dealing)

Article 1.7 - (Good faith and fair dealing)

1. "Good faith and fair dealing" as a fundamental idea underlying the Principles

2. "Good faith and fair dealing in international trade"

3. The mandatory nature of the principle of good faith and fair dealing

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Article 1.7 - (Good faith and fair dealing)

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(1) Each party must act in accordance with good faith and fair dealing in international trade.

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(2) The parties may not exclude or limit this duty.

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COMMENT

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1. "Good faith and fair dealing" as a fundamental idea underlying the Principles

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There are a number of provisions throughout the different chapters of the Principles which constitute a direct or indirect application of the principle of good faith and fair dealing. See, for instance, Articles 2.4(2)(b), 2.15, 2.16, 2.18, 2.20, 3.5, 3.8, 3.10, 4.1(2), 4.2(2), 4.6, 4.8, 5.2, 5.3, 6.1.3, 6.1.5, 6.1.16(2), 6.1.17(1), 6.2.3(3)(4), 7.1.2, 7.1.6, 7.1.7, 7.2.2(b)(c), 7.4.8 and 7.4.13. This means that good faith and fair dealing may be considered to be one of the fundamental ideas underlying the Principles. By stating in general terms that each party must act in accordance with good faith and fair dealing para. (1) of this article makes it clear that even in the absence of special provisions in the Principles the parties' behaviour throughout the life of the contract, including the negotiation process, must conform to good faith and fair dealing.

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Illustrations

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1. 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.

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2. A contract for the supply and installation of a special production line contains a provision according to which A, the seller, is obliged to communicate to B, the purchaser, any improvements made by A to the technology of that line. After a year B learns of an important improvement of which it had not been informed. A is not excused by the fact that the production of that particular type of production line is no longer its responsibility but that of C, a wholly-owned affiliated company of A. It would be against good faith for A to invoke the separate entity of C, which was specifically set up to take over this production in order to avoid A's contractual obligations vis-à-vis B.

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3. 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.

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4. Under a line of credit agreement between A, a bank, and B, a customer, A suddenly and inexplicably refuses to make further advances to B whose business suffers heavy losses as a consequence. Notwithstanding the fact that the agreement contains a term permitting A to accelerate payment "at will", A's demand for payment in full without prior warning and with no justification would be against good faith.

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2. "Good faith and fair dealing in international trade"

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The reference to "good faith and fair dealing in international trade" first makes it clear that in the context of the Principles the two concepts are not to be applied according to the standards ordinarily adopted within the different national legal systems. In other words, such domestic standards may be taken into account only to the extent that they are shown to be generally accepted among the various legal systems. A further implication of the formula used is that good faith and fair dealing must be construed in the light of the special conditions of international trade. Standards of business practice may indeed vary considerably from one trade sector to another, and even within a given trade sector they may be more or less stringent depending on the socio-economic environment in which the enterprises operate, their size and technical skill, etc.

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It should be noted that the provisions of the Principles and/or the comments thereto at times refer only to "good faith" or to "good faith and fair dealing". Such references should always be understood as a reference to "good faith and fair dealing in international trade" as specified in this article.

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Illustrations

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5. Under a contract for the sale of high-technology equipment the purchaser loses the right to rely on any defect in the goods if it does not give notice to the seller specifying the nature of the defect without undue delay after it has discovered or ought to have discovered the defect. A, a buyer operating in a country where such equipment is commonly used, discovers a defect in the equipment after having put it into operation, but in its notice to B, the seller of the equipment, A gives misleading indications as to the nature of the defect. A loses its right to rely on the defect since a more careful examination of the defect would have permitted it to give B the necessary specifications.

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6. The facts are the same as in Illustration 5, the difference being that A operates in a country where this type of equipment is so far almost unknown. A does not lose its right to rely on the defect because B, being aware of A's lack of technical knowledge, could not reasonably have expected A properly to identify the nature of the defect.

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3. The mandatory nature of the principle of good faith and fair dealing

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The parties' duty to act in accordance with good faith and fair dealing is of such a fundamental nature that the parties may not contractually exclude or limit it (para. (2)). As to specific applications of the general prohibition to exclude or limit the principle of good faith and fair dealing between the parties, see Arts. 3.19, 7.1.6 and 7.4.13.

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On the other hand, nothing prevents parties from providing in their contract for a duty to observe more stringent standards of behaviour.

UNIDROIT Principles of International Commercial Contracts with Official Commentary [1994]

PREAMBLE

CHAPTER 1 - GENERAL PROVISIONS

CHAPTER 2 - FORMATION