Good Faith in European Contract Law: Going way...way...way beyond Lady Duff Gordon

Many American attorneys will recall the Wood v. Lucy, Lady Duff Gordon case as an illustration of the "good faith" principle in American contract law. In short, the concept meant simply that there was an implied promise within a contract that a party will use its best efforts to fullfill its terms.

The "good faith" concept exists within many other legal systems, but its implications can be much farther reaching. This is particularly true in civil law jurisdictions such as the Netherlands, Germany and Switzerland where the good faith principle may impact a contractual relationship in ways Americans would never think possible. As an example, good faith considerations are used in some European jurisdictions by courts or arbitrators to amend or completely override express contract terms. The good faith concept has also been used in the Netherlands as a basis for extending pre-contractual liability to parties who have engaged in negotiations but have not yet agreed to a deal (this liability is not based on reliance or promissory estoppel).

Good contract drafting and the use of letters of intent or memorandums of understanding can help parties involved in cross-border relationships avoid unexpected results. Nevertheless, the interpretation of the "good faith" concept is a major difference between contract law in many European civil law jurisdictions and the United States.

Introduction

A few months ago, when the reality of the global economic crisis started to truly sink in, the international media couldn't seem to run enough quotes from various leading politicians and commentators declaring that "capitalism is dead". The real implication of that sentiment seemed to be more that "American capitalism is dead", as opposed to an obituary proclaiming Adam Smith's legacy to be six feet under. Let's face it, private property and competition within the trade in goods and services isn't going to go away because of this downturn. However, there is a real sense that business will be different from here on out, and that the American viewpoint which regards government regulation as anathema to good business has had its day.

Whether this crisis represents the point at which the United States begins to step away from its position as the global economic leader or not is something for the historians to debate decades from now. The present reality is that trading relationships between countries must be strengthened in order for individual economies to be lifted out of the current mess, and one of the most crucial business corridors in the world is the one which spans the Atlantic between Europe and the United States.

This blog is dedicated to commenting on legal and political developments in Europe as they relate to investment and trade. As an American attorney who has spent the better part of the last decade working in Europe, I have always been amazed by the fact that sophisticated parties from either side of the Atlantic still often lack basic knowledge of each others systems. Hopefully, this personal effort will help to disseminate knowlege regarding the laws and policies which underly this vital trading relationship during this period of global economic change.