(1) Each party must act in accordance with good faith and fair dealing in international trade.
(2) The parties may not exclude or limit this duty.
1. “Good faith and fair dealing” as a fundamental idea underlying the Principles
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 above all Article 1.8, but see also for instance, Articles 1.9(2); 2.1.4(2)(b), 2.1.15, 2.1.16, 2.1.18 and 2.1.20; 2.2.4(2), 2.2.5(2), 2.2.7 and 2.2.10; 3.2.2, 3.2.5 and 3.2.7; 4.1(2), 4.2(2), 4.6 and 4.8; 5.1.2 and 5.1.3; 5.2.5; 5.3.3 and 5.3.4; 6.1.3, 6.1.5, 6.1.16(2) and 6.1.17(1); 6.2.3(3)(4); 7.1.2, 7.1.6 and 7.1.7; 7.2.2(b)(c); 7.4.8 and 7.4.13; 9.1.3, 9.1.4 and 9.1.10(1). 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, paragraph (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.
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.
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.
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.
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.
2. Abuse of rights
A typical example of behaviour contrary to the principle of good faith and fair dealing is what in some legal systems is known as “abuse of rights”. It is characterised by a party’s malicious behaviour which occurs for instance when a party exercises a right merely to damage the other party or for a purpose other than the one for which it had been granted, or when the exercise of a right is disproportionate to the originally intended result.
5. A rents premises from B for the purpose of setting up a retail business. The rental contract is for five years, but when three years later A realises that business in the area is very poor, it decides to close the business and informs B that it is no longer interested in renting the premises. A’s breach of contract would normally lead to B’s having the choice of either terminating the contract and claiming damages or requesting specific performance. However, under the circumstances B would be abusing its rights if it required A to pay the rent for the remaining two years of the contract instead of terminating the contract and claiming damages from A for the rent it has lost for the length of time necessary to find a new tenant.
6. A rents premises from B for the purpose of opening a restaurant. During the summer months A sets up a few tables out of doors, but still on the owner’s property. On account of the noise caused by the restaurant’s customers late at night, B has increasing difficulties finding tenants for apartments in the same building. B would be abusing its rights if, instead of requesting A to desist from serving out of doors late at night, it required A not to serve out of doors at all.
3. “Good faith and fair dealing in international trade”
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.
It should be noted that whenever the provisions of the Principles and/or the comments thereto refer only 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.
7. 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.
8. The facts are the same as in Illustration 7, except 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.
4. The mandatory nature of the principle of good faith and fair dealing
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 (paragraph (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 Articles 3.1.4, 7.1.6 and 7.4.13.
On the other hand, nothing prevents parties from providing in their contract for a duty to observe more stringent standards of behaviour (see, e.g., Article 5.3.3).