“The commercial world bases its transactions … upon the hypothesis of honesty.”
It is difficult to share this overly optimistic view expressed by the great Bowen LJ nearly 130 years ago in Easton v London Joint Stock Bank (1886) 34 Ch D 95. The commercial world in which we now operate bases its transactions, not upon any misplaced or misconceived notions of honesty and good faith, but instead on the tried-and-tested formula of 200 pages worth of representations and warranties, positive obligations, negative covenants, events of default, liquidated damages and indemnity clauses etc. Bowen LJ’s thesis has not survived the test of time. Commercial men would rather earn compound interest calculated on daily rests than earn each other’s trust.
A more realistic (and cynical) view was expressed by Bingham LJ in Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1988] 1 All ER 348:
In many civil law systems, and perhaps in most legal systems outside the common law world, the law of obligations recognises and enforces an overriding principle that in making and carrying out contracts parties should act in good faith. This does not simply mean that they should not deceive each other, a principle which any legal system must recognise; its effect is perhaps most aptly conveyed by such metaphorical colloquialisms as ‘playing fair’, ‘coming clean’ or ‘putting one’s cards face upwards on the table’. It is in essence a principle of fair and open dealing….
English law has, characteristically, committed itself to no such overriding principle but has developed piecemeal solutions in response to demonstrated problems of unfairness …
Like English law, Malaysian law does not recognise any free-standing general duty of honesty and good faith between parties to commercial contracts. This was reaffirmed by the Court of Appeal in the recent landmark case of Aseambankers Malaysia Berhad & Ors v Shencourt Sdn Bhd & Anor (Civil Appeal No. W-02-808-2009, 27 September 2013).
The facts of the case are very complicated, but in essence it involved an action by appellants who were participant banks to a syndicated loan for recovery of the loan from the respondent borrower and developer who had, despite restructuring, refinancing, deferments and extensions of time, persistently defaulted in its repayment obligations resulting in the loan facility being terminated.
What was so unusual about the case was that the respondent’s sole pleaded cause of action against the appellants in its counterclaim was that by terminating the loan facility, the appellants had breached “a duty to act in good faith and honesty” in granting and administering the syndicated loan. What was more unusual was that, after a 23-day trial, the High Court agreed that the appellants owed such a duty of good faith and honesty which had been breached, and gave judgment in favour of and awarded substantial damages to the respondent.
The Court of Appeal unanimously allowed the appellant’s appeal, ruling that the High Court was wrong to find the existence of such a duty of good faith. Two very substantial judgments were delivered: the leading judgment by Abdul Malik Ishak JCA runs to 106 pages, whereas the supporting judgment of Mohamad Ariff JCA occupies 65 pages. No doubt due to the commercial significance of the issue before the court, both judgments contain an unusually detailed and comparative discussion of the duty of good faith in contract law. Both judgments therefore merit close reading.
It is interesting to note that in rejecting the general duty of good faith contended for by the respondent, the Court of Appeal were very critical of the approach of the High Court judge in accepting and applying American authorities as establishing such a duty of good faith, without first carefully considering whether this was consistent or compatible with Malaysian law which is substantially similar to English law. This cautious approach towards American authorities does not appear to have been present in another recent Court of Appeal decision in Tudingan Timur Sdn Bhd v Che Mat Bin Padali (Civil Appeal No. A-02-1613-2011), which (wrongly) applied American law to hold that constructive trusts may be imposed simply when “there is a clear implication of unjust enrichment.”: see our previous article titled “Constructive Trusts and Unjust Enrichment: In Search of Principle” (30 September 2013).
Reverting to the present case, the following pertinent observations of Mohamad Ariff JCA, no doubt informed by the vast experience acquired during his Lordship’s previous incarnation as a leading commercial law practitioner, merit reproduction:-
“The relevant law on the facts of this appeal must surely be what is the duty of good faith and fair dealing in a banker-customer relationship in a loan transaction scenario? Can the duty of good faith and fair dealing be readily implied as a matter of contractual construction against this particular contractual context?
Absent any peculiar special relationship between Lender and Borrower, a Borrower-Lender relationship in a banking transaction, noted for very detailed and precise terms (invariably drafted and vetted by lawyers for both sides) being incorporated in the contract document, cannot with respect be a suitable subject matter to interpose any general obligation of good faith and fair dealing. The twin requirements of certainty and predictability in banking transactions have to be accorded primacy consistent with commercial needs and sensibilities. In my view, the banking industry is best guided, and its continuing growth secured, when disputes between parties can be resolved by reference to the actual written terms and conditions in the contract documents, without interposing them with an overarching and uncertain perceived equitable obligation of good faith and fair dealing …”
It is difficult to improve upon these observations of Mohamad Ariff JCA, which must necessarily apply a fortiori to most if not all complex commercial agreements (as opposed to consumer contracts) entered into at arms’ length between sophisticated commercial entities of “equal” bargaining power. One of the greatest strengths of the English common law, and by extension the various common law jurisdictions including Malaysia which are its progenitors and which aspire to the same ideals, is that freedom of contract means that parties to a contract are free to regulate their relationship based on such terms and conditions as they deem fit or necessary, with a high degree of certainty and predictability that their rights or powers thereunder will not be unnecessarily controlled or improperly curtailed by vague notions of good faith or honesty. The twin requirements of certainty and predictability referred to by Mohamad Ariff JCA apply not only to banking transactions; they permeate every type of commercial transaction which takes place outside the sphere of consumer contracts, and form the core and irreducible requirements for any mature and developed legal system with commercial and contract laws that are fundamentally sound and which correspond to the needs of commercial men.