A Comparative Study on the Good Faith Principle of Contract Law

Zheng Qiang

Although Chinese law was deeply influenced by the civil law system of Europe in history, the modern Chinese law especially the Chinese law after the reform and open times of China was even more affected by the Anglo-American legal system, especially American law system. Some Chinese law scholars hold that in the modern Chinese law legislature the influence from England-American legal culture is something more than that from continental legal system, (1) due to the Anglo- American countries have gotten a leading position in politic, economy and culture of the whole globe, due to the great tendency of market economy in most countries of the world, also due to the general value inclination of the reform in China. This paper is to make a comparative study on good faith principle of contract law between China and America, something with significance would be revealed in the process hopefully.                    1. Similarities                    First of all, I want to look into the regulations of the good faith principle of contract law from the perspective of legislation in China and America.          In China, the General Principles of Civil Law of the People’s Republic of China and the Contract Law of the People’s Republic of China provides the good faith principle. The fourth clause of the General Principles of Civil Law of the People's Republic of China regulates:" In civil activities, the principles of the voluntaries, fairness and good faith shall be observed." According to this clause, all the civil activities concerning with contracts, all the rights and obligations connected to contracts, must follow the good faith principle. The draft of Contract Law of the People's Republic of China, which will probably be, promulgated this year ordains:" the parties exercise rights and perform obligations, shall observe the good faith principal."          In America, The good faith principle is enacted by the way of statute in U.C.C. and explained by the authoritative restatement of contract law. In Clause 1-203 of The Uniform Commercial Code, making sure that:" Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement." In the Restatement (second) of Contracts, the clause 205 claims:" Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement."          From those we can find that both China and America have provided the good faith principle in legislation. This phenomenon at least shows that: (1) China and America which exists respectively in different law systems both pay attention to the good faith principle in legislation and different countries with different legal traditions can enjoy the uniform cognition to the importance of the good faith principle of contract law. (2) The social and economic life have developed to such a complicated phrase that America which traditionally aimed the experience and precedents has to choose the general principle legislative mode to cope with the brand new cases appeared from time to time. This indicates the closer tendency of the continental legal system and England-American legal system, which influenced Chinese law very much. (3) No matter China or America both chose the legislative mode of general principle and make this principle has a very general intention and very wide extension, moreover, it also has a character of dynamic state. This offers another possible approach to the judge made law and the "moralization" of law.          Secondly, let's look into the judicial situations regarding to the good faith principle of contract law in China and America.          In China, the good faith principle of contract law appeared as the basic principle of civil law at first. Early before the principle was set in contract law, the court of China had adduced the principle indirectly to handle some cases such as cases handled by quoting the principle of change of circumstances.          In America, the good faith principle is applied much more to many situations in practical justice. Many of the cases are concerned with the limit to the discretion provided by the contract to a party.          For example, requirements and output contracts have been the subject of much litigation and academic discussion throughout the twenty century in America concerned the obligation to perform a commercial contract in food faith. The output contract is a kind of contract that the sellers enjoy the discretion to determine the quantity of the output they should provide. By contrast, the requirement contract is a kind of contract that the buyers enjoy the discretion to determine the quantity of the output. The problems or issues brought by these two kinds of contracts are that the party who enjoys the discretion may increase or decrease the quantity of the output on purpose under some circumstances they think it profitable, meanwhile leave the other party in a unprofitable position. For avoiding these results, U. C. C. 2-306 (1) provides:                    A term which measures the quantity by the output of the seller or the requirement of the buyer means such actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise comparable prior output requirements may be tendered or demanded. (2)                    In America, the courts even handled the cases that can not be applied with the U.C.C. by applying the good faith requirement of common law to limit the discretions of the parties. For instance, if contract provides without the permission of one party the other party can not transfer its right, if one party refuse to permit must follow the good faith { Cheney v. Jemmett, 693 P 2d 1031, at 1034(Idaho 1984)}. And, Where a contract between an author and a publisher provides for ' approval ' of the manuscript by the publisher, courts regularly required that if approval is to be withheld, this must be done in good faith. (3) Other interesting, and more controversial, decisions have involved attempts by borrowers to impose liability on a lender that has exercise its discretion to call in loans or to refuse further advances without giving what, in the borrower's view, is fair warning. (4) A great deal of litigation has arisen from termination of agreements that are ostensibly terminable 'at will'. Courts have traditionally regarded franchise and distributorship agreements as terminable at will, in the absence of provision to the contrary. In recent years, however, a growing number of courts have recognized the substantial investment that is often required of the franchisee or distributor. Some of these courts have invoked the doctrine of good faith performance to protect the franchisee or the distributor. In some instances, the duties of good faith performance may not only proscribe conduct but may mandate affirm action as well. A party may thus be under a duty to take steps to co-operate with the other party in achieving the objectives of their contract. In a case arising under the ' approval ' provision of a contract between an author and a publisher, the court said that publisher's 'willful failure to a respond to a request for editorial comments on a preliminary draft' might be a breach of the duty of good faith performance. (5)          In America, A 1991 decision of the US Court of Appeals for the Seven Circuit is graphic. A lessee of a shopping center had the right to ask its lessor for financing of improvements and, if turned down, to exercise an option to purchase the property. It requested financing, make no reference to the option provision in the lease, and when the lessor refused to convey, the lessee sought specific performance. On appeal, the court of appeals, through Judge Richard Posner held that there has been a breach of the lessee' s duty of good faith performance, because, as Posner wrote:                    It is one thing to say that you can exploit your superior knowledge of the market...[but] another thing to say that you can take deliberate advantage of an oversight by your contract partner concerning his right under the contract. (6)                              It's clear to see through the comparison ahead that: (1) the judicial application of the good faith of contract law in China and America have come into the practical period, although with their different characteristics. The good faith principle has been playing an important and constructive role in justice and social economic life of China and America. (2) In China and America the good faith of contract law is used to overcome the "trouble" issues appeared in justice, some of them are the omissions of legislation, some of them are the shortcomings of contract, some of them are the excessive of rights, some of them are the avoidance of obligations, and so on. (3) This principle entitles the courts have the powers to handle the hard cases, enlarged the power of justice, enhanced the efficiency of justice and improved the social profit. (4) The fact that the good faith principle are thought highly in China and America which are quite different in legal traditions shows the principle itself with some nature satisfying the requirements from different justice.                                        2. Differences                    Firstly, I want to discuss the differences between China and America in legislation of the good faith principle of contract law.          In China, the good faith principle of contract law is provided in the General Civil Principle and Contract Law in the form of statute. According to the law, all the civil activities must follow the good faith. Cases have not the binding effect in China at present. Courts in China need not follow the judgements made by the upper courts or made by it before in handling cases. Although that judgements have some functions of guidance and persuasion to the cases in handling.          In America, the good faith principle of contract law is provided, as have been pointed out above, not only in U.C.C.as an abstract regulation but also in authoritative legal interpretation the Restatement (second) of Contract Law as statute presentations. Further, cases have played very important role in the legislation of the good faith principle.          Secondly, let's look into the differences between China and America in the judicial application of good faith principle of contract law.          The application of the good faith principle of contract law in China's courts is rarely found at present. Up still now we can only know very unique case that concerning the change of circumstances was applied onto the principle we are discussing now. According to the Contract law of China this principle is a compulsory provision, but there are some arguments about whether it should be endorsed by the upper courts or the Supreme People's Court when a case is handled by the lower courts and there is not a uniform conclusion at present.          In America, the application of the good faith principle of contract law has been to the developed period in courts. There have been many cases concerned to good faith. Further, the cases have been playing the very important roles in making up for and explaining the statute laws. Due to the statute enactment of the principle in U.C.C. and Restatement (second) of Contract Law and many cases concerned, the judges in America must follow the provision in statute meanwhile must observe the case law when they exercise powers of judgements. But, the judges do not lose or decrease their powers of judgements. On the contrary, the general enactment of the statute and the creative explanation and supplement from the cases, offer a large room for judges to handle all kinds of cases regarding to good faith creatively. And many kinds of cases concerned good faith was produced by nature.          It's not difficult to find that the judicial application of the good faith principle of contract laws in China and America is not only in different legal traditions but also in unsimilar development processes. There is a great difference in development in general. The first one is there is a great difference in the cognition and application to the good faith principle: the Chinese courts is stepping into the areas with a mode of very first attempt, and there is not the direct application of the principle at present, while, in America rich materials and experiences have been accumulated from the big amount of cases concerned. The second is the fundamental differences of the function of cases in the judicial process: the case law has not get its legal position in China at present, and the cases about good faith principle of contract law has not been produced yet; but America regards the cases as the magic weapon to explain and develop the good faith principle. The third is the power of judges in judicial practice are quite different: in Chinese court organizations, the power of judges is the presentation of the so-called organizational powers and the power of the judges is not clear; meanwhile, the judges of America have a much bigger discretion on the cases they handle. The emergencies of Varity of cases are the illustration and they are been called the " judge-made law". (7)          The third, I want to discuss the difference between China and America in the theory study about the good faith principle of contract law.          First of all, I must point out that there are great difference in the understanding about the concepts of good faith principle of contract law between China and America. In China's law society, four kinds of concepts about good faith principle were produced: (1) the requirements to the parties of civil activities that they must strictly observe the credit and not defraud; (8) (2) a compulsory general principle with an uncertain extension; (9)(3) the law maker's will to uphold the equilibrium among the interests of the parties in civil activities and society’s. The lawmaker 's aim is to safeguard the stable and harmony development of the society with the principle. The equilibrium of the interests of the three parties is the result of the realization of the principle, and the parties exercise their rights and perform their obligations with an attitude of honesty and good will is the approach to the result. (10) (4) the combination of morality and law with the double functions of moral and law regulation, so as to let the law be in rich elasticity and to let the courts enjoy a more larger discretion to get rid of the autonomy of the parties' will and regulate the right and obligation relation of the parties directly. (11)          In the United States, beside the UCC and Restatement (second)'s concepts to the good faith principle, there are these kinds of understandings to the concept: (1) the most restrictive answer is that the duty of good faith is 'simply a rechristening of fundamental principles of contract law', as Justice Antonin Scalia put it in the days when he was a federal Court of Appeals judge. Professor Farnsworth who is the reporter of the Restatement (second) took the position to regard the principle as the 'the significance of the doctrine is in implying terms in the agreement'. (12) (2) In 1968, Professor Robert Summers published an influential article on good faith in which he argued that ' good faith is best understood as an "excluder" ---it is a phrase which has no general meaning or meanings of its own, but which serves to exclude many heterogeneous forms of bad faith.' (13)(3) In 1980, Professor Steven Burton, of the University of Iowa, in a major article on good faith, introduced a 'forgone opportunity analysis'. He attempted to fashion a standard based on the expectations of the parties. He argued ' good faith limits the exercise of discretion in performance conferred on one party by the contract', so it is bad faith to use discretion 'to recapture opportunities forgone upon contracting' as determined by the other party's expectations --in other words, to refuse 'to pay the expected cost of performance'. (14)          In brief, in the United States, the good faith is regarded sometimes as the basis of a limitation on the exercise of discretion conferred on a party (Button’s view), sometimes as the basis for proscribing behavior which violates basic standards of decency (Summers' view), sometimes as merely the basis of an implied term to fill a gap or deal with an omitted case (Farnsforth's view).          The second side, more attentions are paid to the study from the perspective of provision of the good faith principle in China, meanwhile, from the perspective of fact in America. Because in China the good faith principle is during the time passing from legislation to justice, the attentions of people are of the tendency focussing on the regulation in law by nature. In America, the law society have been able to pay attention to not only the rule or provision but also the facts concerned with the good faith principle, due to widespread influences of expericism and pragmatism in philosophy and the influence of the sociological jurisprudence.          The third point is that there is a difference in the research scopes about the study of good faith principle in China and America---the cases are be put on different positions. In China, the theory studies on good faith have not truly touched the cases concerned, for the concrete judicial practice and the very academic tradition. Cases judged with the good faith principle of contract law are rarely found in China, the law society are laid in the puzzlement in the case study of good faith. Meanwhile, the legal studies in China have long been influenced by the reason jurisprudence, which is easy to lead summarization and ignorance to analysis and observance. And this constitutes a limit to the study of good faith principle and a big barrier to the development of the legal science in China. On the contrary, in America, the theory study on good faith is mainly based on the discussion of concrete cases and it would be difficult to shape an article concerned without the cases and facts. We can see that the cases are in the crucial position in the study of good faith in America.                              3. Conclusion                    In general, the good faith principle of contract law enjoys some similarities in legislation, justice and theory study respectively in China and America. Meanwhile, some differences more importantly exist between the two of them, due to the different historic, cultural, economic and political environments of the two great countries. I mean nothing to compare that is better and worse but points out the differences and similarities between them. Perhaps it's basically needed in developing the judicial practice and theory study about the good faith principle of contract law in China.                                                            Notes          * Doctor in Law of Beijing University, Visiting Scholar of Harvard Law School,1998-1999, Deputy Director of the Center of Sociology of Law of the Institute of Law of Chinese Academy of Social Sciences. Email: zhengq@pku.edu.cn          1. See Shen Zongling, 1996.          2.See Homestake mining Co v Washington Public Power Supply System, 476 f supp 1162,          at1168 (ND Cal 1979).          3.See doubeday and Co.Inc V courtids, 763 F 2d495 (2nd cir 1985).          4.Metropolitan life Ins Co V RJR Nabisco Inc 716 FSupper 1504,at 1517 (SDNY, 1989).          5.See Doubleday Co.IncV Courts 763F 2d 495, at 500 (2nd cirri 1985)          6. See Market Street Associates Ltd Partnership V Frey 941 F 2d 588, at 592, 594 (7th cir          19910).          7.See Shen Zongling,1985.          8.See Ma Yuan, 1992.          9.See Zhang Xinbao, 1986.          10.See Xu Guodong, 1992.          11.See Liang Huixing,1995.          12.See Tymshare Inc V covell 727 F2d 1145, at 1152 (DC Cir 1984).          13.RS Summers 1968.          14.See Burton,1980.