A Comparative Study of Good Faith, Fair Dealing, and Precontractual Liability
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A Comparative Study of Good Faith, Fair Dealing, and Precontractual Liability Nadia E. Nedzel* I. INTRODUCTION ................................................................................... 98 II. THE CONCEPT OF GOOD FAITH .......................................................... 99 A. United States Law ...................................................................... 99 1. Definition and Statutory Law ........................................ 102 2. Common Law Duty of Good Faith ............................... 104 B. Civil Law.................................................................................. 109 1. Culpa in Contrahendo .................................................... 112 2. French Law ..................................................................... 113 III. WHEN THE DUTY OF GOOD FAITH ARISES ....................................... 116 A. The Process of Contracting .................................................... 116 B. Preliminary Agreements and the Duty of Good Faith ........... 117 1. United States ................................................................... 118 2. French Law ..................................................................... 125 C. Duty of Good Faith in the Absence of any Preliminary Agreement ................................................................................ 128 1. American Law: Promissory Estoppel .......................... 128 2. French Law ..................................................................... 137 3. Mixed-Civilian Jurisdictions .......................................... 140 IV. REMEDIES ......................................................................................... 146 A. Preliminary Agreements.......................................................... 146 B. Precontractual Bad Faith ....................................................... 147 1. United States ................................................................... 147 2. France .............................................................................. 149 V. A PPLICATION OF INTERNATIONAL LAW ............................................ 150 A. Vienna Convention .................................................................. 150 B. Unidroit Principles .................................................................. 151 VI. CONCLUSION .................................................................................... 153 * Forrester Fellow, Tulane University Law School; LL.M., Northwestern University 1997; J.D. Loyola University, 1995; B.A. Northwestern University 1977. The author would like to thank Professor George P. Fletcher for suggesting the topic, and Professors Richard E. Speidel, Vernon Valentine Palmer, and Joachim E. Zekoll without whose encouragement, insightful comments, and challenging criticism this article would not have been possible. Mistakes remain mine alone. 97 98 TULANE EUROPEAN & CIVIL LAW FORUM [Vol. 12 I. INTRODUCTION “If good faith has been taken away, all intercourse among men ceases to exist.”1 The continued growth of today’s global market demands resolution of certain conflicts between different legal systems in order to facilitate contracts between multi-national parties. One often discussed area of tension is precontractual liability. Both common law and civil law systems impose a duty of good faith on the performance or enforcement of an existing contract.2 The question is whether a duty of good faith and fair dealing applies to precontractual relationships. Civilian jurisdictions generally impose a duty of good faith in precontractual negotiations. French legal theory maintains that such a duty exists.3 On the other hand, it is generally agreed that common law theory denies the existence of a duty of good faith in the absence of an enforceable contract. Although American legal theory argues that there is no precontractual duty, remedies for precontractual misbehavior are in fact provided by promissory estoppel and various tort doctrines. This Article argues that American common law, through promissory estoppel, has de facto adopted a theory imposing an obligation to refrain from bad faith in negotiations and that this obligation closely resembles both the usual implied covenant of good faith and the civilian concept of liability for precontractual bad faith as it is used in France. The Article begins by defining the duty of good faith under French4 and American law and discussing the interplay between the underlying contract and tort theories. The second part of the Article will focus on the point at which the duty may arise in the course of negotiations. Third, the measure of damages under both schemes will be discussed. Finally, the differences will be examined in light of the good faith requirement 1. HUGO GROTIUS, DE JURE BELLI AC PACIS BOOK III (1625), quoted in J.F. O’CONNOR, GOOD FAITH IN INTERNATIONAL LAW 56 (1991). 2. See, e.g., RESTATEMENT (SECOND) OF CONTRACTS § 205 (1981); U.C.C. § 1-203, C. Civ. (France) art. 1134 al.3; BGB art. 242 [German Civil Code]; International Institute for the Unification of Private Law, Principles of International Commercial Contracts art. 1.7 (1994) [hereinafter Unidroit Principles]. 3. BARRY NICHOLAS, THE FRENCH LAW OF CONTRACT 48, 71 (2d ed. 1992). 4. French law does not follow the German culpa in contrahendo approach as it has developed from German legal scholar Rudolph von Jhering’s article, Culpa in contrahendo oder Schadensersatz bei nichtigen oder nicht zur Perfection gelangten Vertrögen (Culpa in Contrahendo or Damages for Contracts that are Void or not Brought to Perfection), in 4 JAHRBUCH FÜR DIE DOGMATIK DES HEUTIGEN RÖMISCHEN UND DEUTSCHEN PRIVATRECHTS 1 (1981) discussion infra text accompanying notes 83-91. 1997] PRECONTRACTUAL LIABILITY 99 delineated in the Vienna Sales Convention, article 7,5 and as expanded upon in Unidroit principles articles 1.7 and 2.15.6 The comparison of French and American approaches to the existence and nature of a precontractual duty of good faith shows that efforts to harmonize the two approaches are likely to be successful once attorneys become familiar with the scope and nature of such a duty. The Article will conclude with some recommendations for facilitating the development of law in both jurisdictions. II. THE CONCEPT OF GOOD FAITH In order for a comparative lawyer to gain a clear understanding of any particular concept, he must have some general understanding of the principles underlying the system of law he is studying, how those principles interact, and how the concept he is studying fits into the general scheme of things. Even the most basic principles of law, such as offer and acceptance, can differ from country to country.7 In order to understand why lawyers from common law countries are uncomfortable with the concept of a precontractual duty of good faith, one must begin by understanding what common law views as the fundamental principles of contract law. A. United States Law Since its development in the latter part of the eighteenth century, common law has emphasized consideration and the parties’ intent to be bound as necessary to the enforcement of a contract, rather than emphasizing the theory that promises are binding as a matter of fidelity 5. U.N. Conference on Contracts for the International Sale of Goods, Final Act April 11, 1990, U.N. Doc. A/Conf. 97/18, reprinted in S. Treaty Doc. No. 98-9, 98th Cong., 1st Sess. and 19 I.L.M. 668 (1980) [hereinafter Vienna Sales Convention] (“in the interpretation of this Convention, regard is to be had to its international character and to the need to promote uniformity in its application and the observance of good faith in international trade.”). 6. Unidroit Principles Art. 1.7 provides that “each party must act in accordance with good faith and fair dealing in international trade,” and “the parties may not exclude or limit this duty.” Art. 2.15 provides: (1) A party is free to negotiate and is not liable for failure to reach an agreement. (2) However, a party who negotiates or breaks off negotiations in bad faith is liable for the losses caused to the other party. (3) It is bad faith, in particular, for a party to enter into or continue negotiations intending not to reach an agreement with the other party. 7. Steven A. Mirmina, A Comparative Survey of Culpa in Contrahendo, Focusing on Its Origins in Roman, German, and French Law, as Well as Its Application in American Law, 8 CONN. J. INT’L L. 77, 79 (1992). 100 TULANE EUROPEAN & CIVIL LAW FORUM [Vol. 12 and honesty.8 In emphasizing consideration and intent, common law assumes that there is a clear distinction between the relationship called a “contract” and the relationship between those who have merely entered negotiations looking to the formation of a contract.9 The converse to the proposition that creation of a contract relation results in the immediate existence of rights is that until a contract has been created, no contract- related rights exist.10 Courts that do not recognize a middle ground between a completed contract and no contract at all are confronted with a dilemma when the unreasonable behavior of one party to negotiations causes damage to the other party.11 They become torn between the black letter law which dictates that no contract was formed and the desire to provide a just remedy to the party damaged.12 The duty of good faith attaches only with the creation of a contract, and has traditionally been described as “an implied covenant that neither party shall do anything which will have the effect of