Professor A.F.M. Maniruzzaman examines the origins and development of the concept of good faith and in particular its application, scope and function in a contractual relationship

Maniruzzaman, A.F.M.

English

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16Amicus Curiae Issue 89 Spring 2012The concept of good faith has been a subject ofperennial controversy since it was derived from theRoman legal equivalent “bonas fides.” Juristic viewson and the legal conceptualization of the idea of good faithmay often vary across the cultural divides and legaltraditions. At a higher level of abstraction there may be asemblance of understanding that it is a moral principle andis reflective of all good senses such as honesty, goodconscience, fairness, equity, reasonableness, equitabledealing or fair dealing, etc, but its application may causethe divergence of opinions. This has caused someuncertainty about the nature of the concept itself and theconsequent unpredictability of the outcome of itsapplication.When focused on the content of good faith, the courtsin different countries as well as academic commentatorsseem to be often baffled. Nor in the sources of the lexmercatoria such as the UNIDROIT Principles ofInternational Commercial Contracts, the Principles ofEuropean Contract Law, and the United NationsConvention on Contracts for the International Sale ofGoods (CISG or the Vienna Sales Convention) can onefind a clear definition of the content of the notion of goodfaith. In order to rationalise good faith jurists haveproffered various legal theories ranging from efficiencyarguments to formal entitlements in the spirit of solidarityto its conceptualisation in a more specific sense as “a truebehavioural standard.” This dilemma pervades ininternational law in general and in the emerging case law ofinternational investment law in particular. Therefore, itproves the international arbitrator’s task in an investmentdispute all the more difficult as in any other field when itcomes to define the concept and to render any decision onthe basis of it.It thus merits a fresh look at the concept of good faith inorder to understand its scope and function in a contractualrelationship which is the focus of this article. In order toapply the concept to a particular context, good faith couldbe considered a functional or objective one in the sense ofa framework of relationship between the parties to acontract and cooperation being its underlying current. Inthis respect good faith is a framework concept based oncooperation as its philosophical foundation. Ininternational business-contracting the consideration ofmutual interests of the contracting parties in the spirit ofcooperative dealing seems to get favour in some quarters asa manifestation of modern trend of collectivism as opposedto the nineteenth century legacy of individualism.Farnsworth, however, observes:“Good faith performance has always required the cooperationof one party where it was necessary in order that the othermight secure the expected benefits of the contract. And thestandard for determining what cooperation was required hasalways been an objective standard, based on the decency,fairness or reasonableness of the community and not on theindividual’s own beliefs as to what might be decent, fair orreasonable. Both common sense and tradition dictate anobjective standard for good faith performance” (E AllanFarnsworth, Good Faith Performance and CommercialReasonableness Under the Uniform Commercial Code, 30 UCHI L REV 666 (1963)).It needs to be stressed that cooperation should not beunderstood in the sense of familial relationship such asmotherly love or brotherly affections, but must beconfined to the contractual relationship, hence the notionof good faith as a framework concept, ie fidelity to thebargain, as mentioned earlier. As far as the content of goodfaith is concerned the focus has to be specific in aparticular context concerned in the contractualframework to see if the parties have acted in the spirit ofcooperation, ie good faith cooperation (see L Carvajal-Arenas, ‘Good Faith in the Lex Mercatoria: An Analysis ofArbitral Practice and Major Western Legal Systems (PhDThesis, University of Portsmouth, 2011)). In numerousThe concept of good faith ininternational investmentdisputes – the arbitrator’sdilemmaby A F M Maniruzzaman21409 Amicus 89 Spring text.qxd:Text  29/5/12  14:51  Page 16domestic court decisions (eg United Group Rail ServicesLimited v Rail Corporation New South Wales [2009] NSWCA177: http://www.austlii.edu.au/au/cases/nsw/NSWCA/2009/177.html and see also relevant casesmentioned therein)) and in international judicial (eg theNorth Sea Continental Shelf cases (ICJ): http://www.icj-cij.org/docket/files/52/5561.pdf), and arbitral decisions(eg Wintershall v Qatar (1990) 15 Yb Comm Arb’n 30,Mechema Ltd (England) v SA Mines, Minérais et Métaux (MMM)(Belgium) (1982) 7 Yb Comm Arb’n 77) there seems to bea tendency to give weight to the context in which theconcept is to be meant. Article 31 (1) of the ViennaConvention on the Law of Treaties also points out theimportance of the context of the terms of the treaty whileinterpreting it in good faith. Therefore, the content of theconcept of good faith is more of a contextual nature thanthe concept itself understood in the abstract sense.The International Court of Justice observed: “(t)heprinciple of good faith is ‘one of the basic principlesgoverning the creation and performance of legalobligations’; it is not in itself a source of obligation wherenone would otherwise exist” (ICJ, Border and TransborderArmed Actions Case (Nicaragua v Honduras), Jurisdiction andAdmissibility, judgment December 20, 1988, ICJ Rep 69,at 105 (1988)).One may thus wonder if good faith can be understood intwo senses, viz, “macro good faith” and “micro goodfaith.” In respect of the former the abstract notion of goodfaith in the sense of honesty, fairness, reasonablenesssignifying its subjectivity may be meant, ie “macro goodfaith” – a horizontal approach, a layer of idea which isgeneric (ie an idea at a higher level of abstraction) and maynot be understood the same in different factual patterns asit will depend on its application to them. Thus, from thenotional point of view good faith in the macro sense isconsidered to act as a major interpretative principle.While, on the other hand, it should be appreciated thatwhat appears to be good faith in one context may notappear the same in another context with a different patternof facts, situations or surrounding circumstances. Thus, thenotion of good faith focusing on the particular contextconcerned – ie the vertical approach – may be understoodas “micro good faith” which brings with it the sense ofobjectivity rather than subjectivity understood in thehorizontal sense, ie “macro good faith.”It should be appreciated that the pacta sunt servandaprinciple, being the foundation of all contracts, is themanifestation of “macro good faith.” But “micro goodfaith” being applied in specific factual contexts may limitthe application of the pacta sunt servanda principle in orderto conform to it, even in changed circumstances that affectthe contract (see A F M Maniruzzaman, “State Contractswith Aliens – The Question of Unilateral Change by theState in Contemporary International Law” (1992) 9 J Int’lArb 141; Detlev Vagts, “Essays in Honor of OscarSchachter, Rebus Revisited. Changed Circumstances inTreaty Law,” 43 Columbia J Trans L (2005), 459).Therefore, the pacta sunt servanda principle in a contractualrelationship may not be applied as an incantation or in theabstract sense, rather it should be assessed in terms of“micro good faith.”The above conceptual paradigm may be termed as the“badge of good faith” and can be shown diagrammaticallyas follows. In the diagram (see above) “macro good faith”represents as a concept at a higher level of abstractionwhich sits horizontally and underneath it goes down“micro good faith” as a functional or objective conceptwhich is particularly pointed with its two arms –“cooperation” as the underlying current and “context” asthe target beam – to a focused issue in respect of whichgood faith is questioned. Thus, depending on whethergood faith exists or not in respect of a particular issue, the“badge of good faith” can operate as a thinking process andcan determine itself the worthy place where it belongs ( ieto certify the existence of good faith).In international investment law, substantive standards oftreatment (investment treaty provisions) such as fair andequitable treatment, full protection and security,protection of legitimate expectation, transparency, non-discrimination, national treatment and most favourednational treatment, are considered fundamentally based ongood faith, or manifestations or corollaries of good faith,but their content depends on the specific contexts in whichthey are applied. Here comes the crunch point when oneasks: even if a state literally complies with the foregoingstandards in respective cases, will it be always considered tohave acted in good faith in its relationship to the othercontracting party? Inversely, if a state acts in good faith tocomply with its non-investment international treatyobligations relating to human rights, the environment or 17Amicus Curiae Issue 89 Spring 2012COOPERATIONCONTEXT21409 Amicus 89 Spring text.qxd:Text  29/5/12  14:51  Page 1718Amicus Curiae Issue 89 Spring 2012climate change that may interfere with investors’ rights,will it be implicated in bad faith vis-à-vis the foreigninvestors? It is difficult to give any straightforward answersto these questions. The answers, however, may be foundspecifically in the contexts in which the notion of goodfaith is to be examined. In investment arbitrationjurisprudence such a contextual extrapolation seems to beincreasingly endorsed rather than the simple meaningattributed to a standard of treatment: see for example theS D Myers (S D Myers, Inc v Government of Canada (2000),partial award: http://italaw.com/documents/ SDMeyers-1stPartialAward.pdf;); Mondev (Mondev Int’l Ltd v USA:http://italaw.com/documents/Mondev-Final.pdf0; ADF(ADF Group Inc and USA (2003): http://italaw.com/documents/ADF-award_000.pdf); Loewen (The LoewenGroup, Inc and Raymond L Loewen v USA (2003):http://italaw.com/documents/Loewen-Award-2.pdf); andWaste Management ( Waste Management, Inc v United MexicanStates: http://italaw.com/documents/laudo_ingles.pdf).Often, in order to reflect good-faith cooperation in aninvestment contract situation the aforementioned standardsof treatment for foreign investors may have to be weighedagainst the state party’s competing public interests, such asthe protection of the environment, the promotion andprotection of human rights and the securing of theeconomic development of the host country. There seems tobe a growing support for such a stance amongst variousstakeholders such as host countries, NGOs, internationalorganisations (the World Bank and the IMF, etc.) andothers, though this aspect of international investment law isstill in the early stage of development.The scope and content of the standards of treatment forforeign investors may differ from contexts to contextsentailing the understanding of good faith in the microsense. As the comments to section 205 of the UCC alsostates, in a different domain of law though, that “[t]hephrase ‘good faith’ is used in a variety of contexts, and itsmeaning varies somewhat with the context.” To get a resultthen it would be advisable to look at the notion of “microgood faith” – a context-based one with the objectivity thatunderscores the framework of relationship, cooperationbeing its philosophical foundation. Good faith in aparticular situation should thus be understood not as anabstract concept but as a functional or objective one, i.e. inthe micro sense, covering all stages of a contract. Thismicro approach to good faith may help us solve majorproblems or disputes, as the adage goes: “good things comein small packages.”If the above conceptual clarification of good faith bearssome value, its relevance will not only be in internationalinvestment law but also in international law (in general)and other branches of international law and, above all, indomestic laws.• An earlier version of this article has been published inKluwer Abitration Blog.Professor A F M Maniruzzaman, PhD (Cambridge), FRSAThe author is Chair in International Law and International Business Law& Director of Research and Postgraduate Research Degrees, School of Law,University of Portsmouth. He is also an Honorary Fellow (Professorial) atthe Centre for Energy, Petroleum, and Mineral Law and Policy (CEPMLP),University of Dundee, Scotland.21409 Amicus 89 Spring text.qxd:Text  29/5/12  14:51  Page 18

The concept of good faith in international investment disputes - the arbitrator's dilemma

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