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    12:24 AM Kim Shi Yin (LLB, Singapore Management University)

    All in Good Faith: Recognising the Doctrine of Good Faith in Singapore’s International Sales Law

        

    As a signatory of the United Nations Convention on Contracts for the International Sale of Goods (“CISG”), Singapore must recognize the doctrine of good faith in international sales contracts governed by the said Convention. However, the working definition of good faith in Article 7(1) of the CISG has been accepted to be confined to the uniform interpretation and application of the CISG provisions in different domestic courts adjudicating CISG-related disputes, even though a more expansive interpretation of the term has been championed by numerous academics and commentators.

    The narrow interpretation of the good faith doctrine resonates with Singapore’s cautiousness in imposing obligations of good faith on parties under contract law. This was recently noted in The One Suites Pte Ltd v Pacific Motor Credit (Pte) Ltd [2015] SGCA 21 (“The One Suites”) where the Honorable Andrew Phang JA affirmed that “the law in this particular sphere (viz, good faith) continues to be in a state of flux”, yet refused to discuss the doctrine as it did not “come directly for decision before the courts”.

    Singapore’s reluctance to address the modern developments of the good faith doctrine must be juxtaposed against the legal developments in other parts of the world. In Bhasin v Hrynew (2014) SCC 71, the Canadian Supreme Court declared that the common law of contract should consider incorporating a doctrine that imposed upon all parties an implied duty to perform their contractual obligations in good faith. Honorable Cromwell J explained that “contracting parties must be able to rely on a minimum standard of honesty from their contracting partner in relation to performing the contract as a reassurance that if the contract does not work out, they will have a fair opportunity to protect their interests.”

    Similarly, in other common law jurisdictions such as the UK, the US, Australia and New Zealand, the courts have become more open to endorsing the good faith doctrine. Indeed, it seems that the once-elusive and much-feared concept of good faith is increasingly being well-received in various common law jurisdictions.

    The legal doctrine of good faith ought to be recognized in Singapore, particularly in the field of international sales law. This is because the doctrine responds to the needs unique to that of international sales transactions.

    The current status of the doctrine of good faith in Singapore

    In Singapore, the good faith doctrine is recognized in various manifestations in other fields of law, such as equity, insurance and employment contracts. In such instances, the courts recognize a fiduciary relationship between the parties on which a duty of good faith is established. However, in traditional business law and commercial dealings regulated by contract, the operation of good faith as an independent principle of law has been explicitly rejected.

    There seems to be a general reluctance by the Singapore courts to reexamine whether the good faith doctrine continues to remain irrelevant in contract law. In The One Suites, the Court of Appeal expressed its reluctance to examine whether the duty to cooperate could be implied into a contract. Reason being, such an examination would necessitate the discussion on widening the doctrine of good faith accepted under Singapore contract law, in which the court was hesitant to engage.

    In AREIF (Singapore I) Pte Ltd v NTUC Fairprice Co-operative Ltd [2015] SGHC 28 (“AREIF’), the court held that any general duty that the contracting parties owed to each other, including the duty of good faith, only extended insofar as it was expressly stipulated in the contract. However, the court did not seem to take a stance on whether a specific duty of good faith concerning the certain aspects of contractual performance could be implied into the contractual relationship. The court’s discussion on the party’s inability to rely on his own wrongdoing to enforce his contractual rights seems to suggest that penal consequences accrue when that party acts dishonestly, or otherwise, in bad faith in the performance of its contractual obligations – that certain secondary rights (i.e. the legal remedies accruing from the infringement of his primary rights) are deemed to have been waived. If the “absence of bad faith” can be interpreted to mean good faith, then arguably, the holding in AREIF does not preclude the implication by way of fact an obligation to perform the contract in good faith, since such an implied term would have to be specifically worded and dependent on the facts of the case to warrant such an inference.

    In Ng Giap Hon v Westcomb Securities Pte Ltd [2009] 3 SLR(R) 518, the court rejected the notion that a term mandating parties to perform the contract in good faith could be implied by way of law. However, the court expressly alluded to the possibility of implying the obligation of good faith performance into commercial contracts.  Honorable Andrew Phang JA held that in certain situations, a duty of good faith could be implied by way of fact between the contracting parties. Nonetheless, the implication of a good faith obligation was not found on the facts.

    Evidently, insofar as the good faith doctrine has been discussed in the domestic courts, Singapore has yet to establish that an obligation of good faith existed between commercial parties in a contractual relationship based on the facts of any particular dispute. But despite the court’s reluctance to recognize a general doctrine of good faith in contract performance under Singapore domestic law, the dicta in Westcomb, AREIF and The One Suites are not fatal to the finding of good faith in international commercial contracts for two main reasons. First, the unique nature of international contracts requires us to look beyond purely domestic law and draw inspiration from other jurisdictions and legal literature about international business transactions. The One Suites, AREIF and Westcomb concern disputes that operate purely in the domestic context. It is possible that to date, the Singapore court’s past deliberations on the good faith doctrine were mainly influenced by, if not confined to, the common law doctrine of good faith as adapted from the traditional UK legal regime, which traditionally rejected the operation of the good faith doctrine in domestic contract law. Admittedly, while the concerns for rejecting the good faith doctrine still apply in the context of international sales, there are other competing considerations unique to such transactions that present an even stronger case for the adoption of the good faith doctrine. For instance, in RJ & AM Smallmon v Transport Sales Limited and Grant Alan Miller [2011] NZ CA 340, the New Zealand Court of Appeal expressly rejected reverting to domestic law to determine international sales issues related to the CISG, confirming the need to give the CISG a uniform and consistent interpretation across jurisdictions. Should this doctrine apply, then the domestic court’s position on good faith is arguably redundant to international sales law.

    Second, it bears noting that for certain international sales transactions, the doctrine of good faith has been incorporated into Singapore law. The soft law of lex mercatoria, which assumes a universal application to international trade, is argued to impose on the parties the obligation of performing the contract in good faith. Thus, lex mercatoria can be a reference point in determining whether Singapore ought to, and if so, how to, be recognized in Singapore.

    Can lex mercatoria be a source of law?

    Lex mercatoria is understood as a set of legal norms, or a body of soft law that is neutral, capable of serving as the lex contractus, and independent of any domestic legal regime. Since they are not supported by any governmental authority, the principles of lex mercatoria have no binding character unless the contracting parties choose to bind themselves to them.

    It is important to note that written law such as the CISG and the soft law of the International Institute for the Unification of Private Law (“UNIDROIT”) principles are recognized not to be the sole source of international sales law. For instance, the party autonomy conferred upon the contracting parties to apply or exclude the CISG in whole or in part, pursuant to Article 6, suggests that the parties’ right to self-regulation is recognized under international sales law. The CISG merely provides the basic default sales rules which parties can freely modify. This implies that international sales law cannot be fully understood by studying the CISG or any written law in isolation. Sales contract practice, model contracts, standard clauses, also govern a particular contract, and yet are often ignored in the study of international sales when one blatantly assumes a narrow conception of lawmaking power to fall solely within the state’s purview. Nonetheless, if we take that international sales law can be created through private practice, then evidently international sales law not only encompasses the CISG (supplemented by domestic law), but also the sales contracts themselves which may either exclude or modify the CISG, or supplement its rules with provisions tailored to meet certain problems and needs faced in practice.

    Even if one subscribes to the narrow view that the lawmaking power falls only in the hands of the state, one must point out that many domestic laws also recognize the general rules of trade within industry practice to supplement where the written law falls short. Certain municipal systems not only contain rules unique to a particular legal system, but also incorporate universally recognized techniques and principles. For instance, section 4 of the Australian Goods Act (1958) (Vic.) states that principles of common law, equity and law merchant (or lex mercatoria) shall apply in sales law. In the United States, section 2-103(b) of the UCC provides that “Unless displaced by the particular provisions of this Act, the principles of law and equity, including the law merchant…shall supplement its provisions.” Furthermore, CISG case law has held that any gaps in the CISG could be filled by general principles of international sales, namely, lex mercatoria, in order to achieve the adhesion of private international law in a uniform manner. In fact, the concept of lex mercatoria is not foreign to Singapore law. Trade terms such as the Incoterms 2010 and Uniform Customs and Practice for Documentary Credits ("UCP 600”) are recognized terms used in international shipping and financing transactions. Furthermore, in R1 International Pte Ltd v Lonstroff AG [2014] SGHC 69, the court affirmed that in markets where the use of standard form contracts are common, it is possible for standard terms to be incorporated into a contract only after its conclusion.

    The fact of the matter is that nowadays, modern commercial contracts are extremely complex. As such, lawmaking states or contracting parties are unlikely to foresee all the problems that may arise in an international commercial transaction during the formation stage of the contract. Nor is the contract likely to address meticulously every possible detail of the problems related to the contract. As such, trade usages and common practices are often utilized to fill the gaps in the contract in interpreting the parties’ intentions and contract’s terms. They constitute the core of lex mercatoria.

    Is the doctrine of good faith embodied in the corpus of lex mercatoria?

    A problem lies the vague notion of lex mercatoria. It is difficult to ascertain with sufficient certainty what the content of lex mercatoria is, let alone whether a particular doctrine falls within its ambit.

    Nevertheless, by tracing the historical development of lex mercatoria, good faith can be seen to have developed contemporaneously with the development of trade. The doctrine was said to originate from Europe, where it was first codified in the Roman Twelve Tables in 450 B.C. The rise of the merchant class engendered the development of the good faith obligation in contractual relationships in order to facilitate the growth of the commercial sector, the reciprocity of rights, fair exchange and equitable distribution of the benefits and burdens in a commercial sales transaction. Even until today, the good faith doctrine has been recognized and applied in many dispute resolution processes. Arbitration jurisprudence has shown that the principle of good faith has governed international trade relations. For instance, in ICC Award No. 8365 (1997), the court declared that “the applicable rules of lex mercatoria should comprise various principles” including, inter alia, “the principle that contracts must be executed in good faith”, and “the principle that in case that unforeseen difficulties arise after the conclusion of the contract, the parties must negotiate in good faith to overcome them.” In ICC Award No. 9593 (1998), the arbitrator stated that “the obligation to cooperate in good faith in the performance of the contract has also become a fundamental element of the usages of international trade.” This means that the contracting parties not only have a duty not to obstruct the other party’s contractual performance, but also, in certain situations, facilitate the performance of the other party.

    If one were to define lex mercatoria from a functional perspective, i.e. to construe lex mercatoria as a set of self-regulatory laws that respond to the needs of the international sales practice, then arguably good faith has taken foothold within lex mercatoria. A major concern for lex mercatoria is the need to ensure the efficiency and security in contractual relationships. It has often been argued that the doctrine of good faith is especially necessary in international contracts. Nowadays, international business transactions are becoming increasingly complex. Business deals are being negotiated with minimal, if any, face-to-face contact. While technological advancement is now making possible greater volume of sales over longer distances and at a greater speed, the benefits of technology open up a Pandora’s Box of a new set of problems that were previously not an issue in domestic sales transactions. For instance, international sales transactions have more issues to ponder as compared to domestic transactions, such as delivery methods and costs, language and other communication barriers, the main currency adopted for payment of goods, choice of law and jurisdiction clauses, etc. Additionally, contracting at (slightly more than) arm’s length precludes a party’s opportunity to gauge the trustworthiness of a prospective business partner. In order to overcome most of the problems that come with international sales and to ensure that the sale commences smoothly and successfully as agreed upon by the parties and to the best of their ability, the mutual confidence between parties must be guaranteed. To maintain this mutual confidence, the agreements must be viewed in a larger context of the overall relationship between the parties, and their common expectations and intentions as to the purpose of the contract. In this regard, we can understand the need for efficiency rules to deal with the good faith interpretation of the contract and related statute (which are rendered inefficient ambiguities and gaps), and those concerning the cooperation among parties (to facilitate performance of the contract according to parties’ reasonable expectations).

    Admittedly, every time contract law favors a purely moralizing approach to business, it is faced with harsh criticism and negative reception. The good faith doctrine is of no exception. There are mainly two concerns for introducing the doctrine into contract law. First, the good faith doctrine is vague and would cause much uncertainty as to the obligations that contracting parties have towards each other. After all, uncertainty is the anathema to the law of contract, which should aim to provide predictable and unambiguous rules to facilitate business transactions. The “reasonable man standard” approach to good faith does not provide any guidelines as to the parties’ contractual obligations towards each other, unless clarified in court in the litigation process. Along a similar vein, the recognition of the doctrine of good faith could potentially impose unlimited liability on a particular party, and this is not necessarily an effect intended of the courts, particularly when the scope of such an obligation is unclear in the first place. Second, contractual relationships are also unlike contracts uberrimei fidae, where a fiduciary duty can be presumed among parties so long as they fall within a fixed category of relationships. Contracting parties do not owe each other any duty beyond what is stipulated in the contract, because had parties intended otherwise, they should have stipulated such a clause into the contractual agreement in the first place.

    Nonetheless, these concerns are arguably more illusory than real. First, the good faith doctrine has already been established in contract law, albeit in different guises. As noted by some legal professionals, some common law jurisdictions use a variety of doctrines to mitigate against the problem of “unfairness” arising from the absence of the good faith obligation. Contract law is not a stranger to concepts such as “playing fair”, “the objective reasonable man standard”, the “clean hands” equitable doctrine and “putting one’s cards face upwards on the table”, all which arguably manifest some element of good faith in a sense that the parties’ reasonable expectations out of the contract are given effect to. Furthermore, legal concepts such as due diligence, balance of probabilities and the reasonable man standard have taken root in the Singapore jurisprudence, despite being vague in definition as well as in their application. This author would like to recall the debate and backlash when the concept of natural justice was first introduced. Lord Reid in Ridge v Baldwin [1964] 1 AC 40 firmly criticized the skepticism, arguing that the objections were “tainted by the perennial fallacy that because that something cannot be cut and dried or nicely weighed or measured therefore it does not exist.” Ironically, where the good faith doctrine has taken root and been codified in many jurisdictions, such as in civil law countries in Germany and Switzerland, as well as some common law jurisdictions such as the United States, a working framework of good faith that caters to the needs of commercial relationships has been successfully established and incorporated. Hence, perhaps the critics of the good faith doctrine are more pessimistic than cautious towards interfering with the status quo.

    In relation to the second concern, good faith is necessary to preserve the long-term business relations between contracting parties. As recognized by the Singapore courts in Hewlett-Packard Singapore (Sales) Pte Ltd v Chin Shu Hwa Corinna [2016] SGCA 19, the construction of contractual terms should be “anchored in the express contractual language, the internal and external contexts of the contract, and, more broadly speaking, the contractual purpose” (emphasis added). It is thus difficult to imagine how good faith cannot be construed into the contract where the precise purpose of the contract is the fulfilment of each parties’ respective end of the bargain. While it is argued that good faith cannot be proven to be necessary for commercial relationships, it is also difficult to see how one can convincingly argue otherwise: for contracting parties to expect unfairness, deceit, and a flippant, half-hearted attitude towards seeing the contract go through. After all, contracts are formed based on agreements, understandings, and the meeting of the minds, built upon foundational notions of accord, and common purpose.  In other words, contracting parties need to be able to rely on the promises made by the other contracting parties. Explained in this manner, the good faith doctrine in lex mercatoria seems to assume an approach that is more inclined towards loyalty than purely altruism, the latter of which is arguably a wider and more far-reaching manifestation of the doctrine. An obligation of good faith in the form of contractual loyalty would simply preserve the parties’ obligations towards achieving the mutual performances intended and expected by the parties, in effect retaining the integrity and essence of the contract. Perhaps, then, the introduction of good faith into contract law would not be as radical as feared by its apprehensive objectors.

    In a wider, normative perspective of the law, there is nothing wrong with the law assuming a moralistic, interventionist role towards contractual relationships. It is often argued that a significant role of the law, besides ensuring the efficient operations of the social contract and party-to-party transactions, is to promote ethical normative behavior, particularly in commercial transactions. Simply because good faith and fair dealing practices are not expected out of commercial parties, does not mean that it should not be, particularly if they meet the needs of the international trade community. Given the unauthoritative characteristic of lex mercatoria, it is argued that the moralization of international sales law cannot come from transnational law. Only when the states enshrine the doctrine of good faith in contractual performance within their domestic jurisdictions – whether via statute or by way of common law – can the law’s normative aspirations be fulfilled.

    Conclusion

    Although the Singapore courts remain hesitant to embrace the doctrine of good faith wholeheartedly, the good faith doctrine is here to stay in the area of international sales law. The ratification of the CISG and the incorporation of Article 7(1) into Singapore’s domestic law is but a precursor to greater recognition of the good faith doctrine in the future. Looking behind the political motivations for ratifying the CISG, Singapore was and remains keen to harmonize its domestic laws with new trading partner-states and investors in order to elevate its status as promote itself as an international and regional trading hub and as one of the top regions for ease of doing business. Given the importance of good faith in international sales transactions and the widespread recognition of good faith in lex mercatoria, the further extension of the doctrine towards contractual performance would hasten the harmonization process of international sales law. On a more ideational note, the judicial backing of the good faith doctrine would be congruent with the promotion of good practices in international sales in order to foster mutual long-term business relations.

    * This blog entry may be cited as Kim Shi Yin, “All in Good Faith: Recognising the Doctrine of Good Faith in Singapore’s International Sales Law” (26 August 2016)  (http://www.singaporelawblog.sg/blog/article/168)

    ** A PDF version of this entry may be downloaded here

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