A civil law and common law perspective: Good faith and unconscionability in contracts
The real justification for the adoption of the doctrine of unconscionability is to permit courts to do openly what they had been doing covertly for years. The covert methods were in fact deficient. An installment contract might be found to be unconscionable due to an obscurely-worded provision and the circumstances peculiar to the appellant.
A US superior court while disagreeing with the District of Columbia Court of Appeals came to the conclusion that the necessary authority for finding the contract unenforceable could be supplied by applying the common law to this question. The court relied upon the Uniform Commercial Code as persuasive authority for its decision; it stated that the reasoning behind its decision was to adopt, the applicable section of the Code.
The court not only adopted the test of unenforceability stated in the Uniform Commercial Code, but it also explained the actual factors to be considered in the application of this test. The court based the finding of unconscionability on the absence of a meaningful choice on the part of one of the parties and the actual terms of the contract. Meaningful choice was construed as involving all the circumstances surrounding the making of the contract. The two essential circumstances designated by the court are the equality of bargaining positions and the comprehension, by the party charging unconscionability, of the terms of the contract. The court then concerned itself with how the test should be applied and adopted Corbin's suggestion: Where the terms are "so extreme as to appear unconscionable according to the mores and business practices of the time and place," the clause should not be enforced. On the basis of this test, the court remanded the case for a finding, as a matter of law, on the unconscionability of the installment contract.
It is evident that the courts are relevant to meet the question of unconscionability squarely and avoid a direct decision on the merits. The court in the case of Williams has helped to clarify litigation in this area, by supplying the test concerning the meaningfulness of choice. The court created a more distinct definition of the term "unconscionable." But even this test is not so narrow as to eliminate future confusion. What constitutes unequal bargaining positions still remains to be determined. In essence, however, this decision marks the first real application of Section 2-302 of the Uniform Commercial Code, and it will serve as a guide for further interpretation and clarification of that section.
Concept of Good Faith in English Law The concept of good faith is familiar in common law and seems originally to have found its way into equity through the Canon Law. After the formalization of equity in England in the 17th century, the idea of a generally applicable principle of good faith weakened. In the 18th century, Lord Mansfield, "the father of English commercial law", found good faith to be a "governing principle ... applicable to all contracts and dealings". Thus, good faith then seemed to have a safe harbour in English law, although at this time not in the field of equity, but in the law of contract. Later, at the peak of the classical period of English contract law around 1870, there was a reaction against good faith. However, several examples of the opposite can be found even from that time. Presently, the majority view is that good faith is not a generally applicable principle in English contract law.
The unity of the common law systems regarding the treatment of good faith is disintegrating. Even though most common law countries seem to deny pre-contractual good faith as a general principle, there are signs, albeit mostly minor, of the opposite in Canada, Scotland, Australia and the United States. Even if the common law systems still show a somewhat unified front towards good faith in the formation of contracts, this is not the case with the later stages of the contract. Not only the United States but also Canada and Australia seem to have accepted good faith in the performance and enforcement of a contract.
The English contract law debate has shown genuine concern for the risk of having to adopt a generally applicable duty of contractual good faith. The voices heard are so strong that they cannot be dismissed merely as desperate attempts by tradition-bound lawyers to guard the homogeneity of domestic contract law. Implanting good faith into the English common law of contract, it is argued, may impose a threat to its philosophical foundations and the entire case law that has cautiously been built upon that foundation.
Overwhelming evidence of the impact potential of good faith can be taken from a nearby example: Since the duty of good faith in performance and execution of contracts has won general acceptance in the United States, the application of good faith has exploded in such a manner that it now reaches into nearly every corner of American contract law. Furthermore, the fact that Anglo-American contract law can be described as imperialistic, ie, subjugating a major part of the legal order under its regime and thus applying contract law to matters that civil and Nordic law would handle in other fields of law, only enhances the potential impact of good faith. Arguably, the skepticism displayed towards good faith by a majority of English lawyers, consequently is not an exaggeration, it is a sign of health. If a general principle of good faith is accepted in English contract law, there probably would be no way of letting it enter the contractual environment in a controlled manner.
Unconscionability and Loyalty
The good faith concepts in civil law protect a party from unconscionable contracts as well as the other party's lack of loyalty. In Nordic law, there is no homogeneous good faith concept such as the ones found in civil law jurisdictions. Quite the opposite, a clear distinction is made between conscionability and loyalty, and the concepts most often used are the principle of conscionability (or reasonableness or fairness) and the principle or duty of loyalty. In sharp contrast to civil law, the connection between them is not apparent on the surface. In common law, there seems to be a somewhat similar approach as in Nordic law, even if one may see them as one or at least as closely connected. Also, the implementation of the EC Directive on Unfair Contracts Terms in Consumer Contracts seems to have caused some disturbance in England. One reason for this could be that the fairness test refers to good faith as a normative threshold. In my mind, the reference to good faith does not heighten the requirements. It gives the impression that the good faith norm might give relief where there is a significant imbalance not caused by a good faith breach. However, such an interpretation might not be intended. Mixing the concepts of unfairness and good faith in this manner might be awkward to most legal traditions. While the German version of the directive and the act of implementation uses "Treu und Glauben", the French act of implementation leaves out "bonne foi", despite that the directive refers to that expression. In the Swedish and Finnish translations of the directive, "good usage" has been chosen and the Danish version uses "good belief", even if referral could have been made to "loyalty". Apparently, the combination of conscionability and good faith is confusing not only in common law.
The legislation, similar in all Nordic countries, permits court review of contract terms. In addition to legislation as to "procedural unfairness" such as fraud, duress and undue influence, there is a general clause allowing court intervention. Adjustment or annulment of a contract term is possible on simply "substantive" and "objective" grounds, whenever a significant imbalance is revealed. The court is to consider all (invoked) circumstances, including those arising after the formation of the contract. If a term, or the contract as a whole, is otherwise deemed to be unfair, a defense entirely based on either "honesty in fact" or on the absence of negligence will be in vain. The general clause is not restricted to the protection of weaker parties, even if it is rarely applied outside of consumer relations. Consequently, the test is neither "procedural" nor "subjective", and it seems correct to state that these rules are primarily addressed to the courts. One may, of course, always contend that all rules addressed to courts ricochet back to the parties, and thus give guidelines as to future conduct, but in this case, this proposes either the existence of a party-addressed, extrajudicial duty to refrain from invoking unfair contract terms or a duty to renegotiate the contract. The majority view hardly supports such a proposition.
Good faith, however, is much more than the judicial review of contract terms. As noted above, good faith translated into Nordic legal concepts also comprises the duty of loyalty. This duty, according to the academic definition used in all Nordic countries, compels the parties to a contract to have due regard to the other party's interests. The loyalty therefore is to be shown primarily to the other party, and not the contract itself. The duty of loyalty is clearly addressed to the parties and it concerns their behavior instead of the terms agreed upon. The duty of loyalty works as a basis for supplementing the contract with obligations of secondary character, restriction of abuse of rights and pre-contractual liability.
(The writer is an Advocate and is currently working with M/s Azimuddin Law Associates Karachi)
