Commentary and Critical Analysis on Adam's & Brownsword's, “Breach and Withdrawal” (Whether We Should have Good Faith/Good Reason when Terminating

Adam suggests that the current legal principles governing termination by the innocent party should include ‘good reason’. Brownsword goes further to suggest that a standard of ‘good faith’ should be impliedly read into each contract. Both seem to be in favour of adopting a narrower approach to contractual interpretation; however Adam’s approach is evidently much narrower than Brownword’s. For example, a comparison is made between the English law approach, where the test is whether the breach goes to the root of the contract and the modern Hong Kong approach first seen in Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd, where the question is in the actual consequences of the breach and if it has deprived the innocent party of substantially the whole benefit of what has been bargained for, at any rate a much narrower interpretation.
Adams points to two main deficiencies in the current principle. That is, first, if the innocent part has the right to withdraw for breach, then it is immaterial that bad legal reasons have been cited at the time of withdraw (see Maredelanto Cla Naviera SA v Bergbau-Handel HmbH [1971] 1 QB 164) and secondly, that a breach may be cited for legal grounds to withdraw when the innocent party’s reason for seeking withdrawal are wholly unrelated to the breach. Mellish LJ once even commented in Shand v Bowes at 112 and 115 that there is no requirement that the ‘real reason’ for seeking to withdrawal coincides with the cited reason of withdrawal. This seems almost like a positivist take on jurisprudence where morality plays little to no part in what the law is or should be. Adam is particularly critical of the fact that the innocent party may terminate the contract for personal economic reasons. For example, in Arcos v Ronaasen, the buyers were able to reject the timber for breach of condition even though they could have used it for precisely the intended purpose, the real reason is that timber prices has dropped and that the plaintiff is looking for a way to cut his losses. Adams argues that if the consequential approach adopted in Hong Kong was applied, the outcome may be quite different. Adams also notes that the law fails to distinguish between withdrawal for breach as opposed to withdrawal following breach. Adams argues that this is not in ‘good faith’, but is in fact in ‘bad faith’.
In this respect, two possible outcomes may arise in that the law can either secure a measure of calculability by favouring the classification approach adopted by the English Courts but at the expense of ‘hard cases’ or it can respond to hard cases with the consequential approach adopted by Hong Kong Courts but at the price of jeopardising calculability as well as fairness. This, in itself, raises a whole new issue of legal philosophical interpretation regarding the dominant moral values of society which is in some ways addressed in Commerce, the Common Law and Morality by Finn. The foundation of contract law is built upon objectivity due to, in Finn’s perspective, a way for the law to accommodate the changing principles of society. This is most evident in the formation stages of contractual relations where tests often possess an objective component. As such, Adam’s and to a lesser extent Brownword’s use of a more subjective and narrow approach, may only work for a limited number of cases and may even have negative consequences for others where an objective, broader view is necessary.
Adam proposes a number of reforms to current grounded legal principles in contract law. Notably, he proposes that the innocent party should have ‘good reason’ for seeking to withdraw. This includes (1) the culpability of the contract breaker being assessed and (2) A complete disallow of a right to withdraw for CER. It has been suggested that this brings the law closer to an overriding concept of good faith. However, this is not explicitly mentioned by Adams.
The main deficiencies in the proposed reforms suggested by Adams are the reduced levels of certainty and fairness to contracting parties. This may also have economic ramifications where the implications are much broader and far reaching. Furthermore, the concept discounts the possibility of withdrawal for breach, in combination with CER, as well as weakens the incentive for parties to ensure their contractual obligations are fulfilled as discussed by Donald Harris in Incentives to Perform or Break Contracts.
Not so different to Adam’s theory of termination with ‘good reason’, Brownsword adds a ‘good faith’ element. Brownsword’s conceptions of good faith encompass two elements. (1) Good faith as an exception, where there is no explicit requirement to act in good faith, but parties must then ensure that they do not cross the line of commercial standards and act in bad faith. Or (2) Good faith as the rule, where there is an explicit requirement to act according to some standard of good faith; seemingly in conflict with CCT. Brownsword makes a ‘tentative submission’(SM, p.42, Brownsword, p.244) that there are no grounds or evidence adduced that supports either concept of good faith on the basis of instrumental rationality. However, he indicates that a case in favour of good faith as the rule may be made out on grounds of ‘moral rationality’ (SM, p.42, Brownsword, p.244).
Brownsword goes further to suggest six non-exhaustive possible good reasons for the right to withdraw at 176. He continue by setting up a legal premise whereby suppose, a good reason for withdrawing is established, the innocent party must also (i) act in good faith and (ii) has reasonable grounds for believing that the particular supporting reasons apply.
Prima facie, Brownsword’s theory may seem fair and conscionable; however, his concept detracts from the classical contract theory in which each party is self-interested. In addition, it may make contracting a relatively less attractive option: the increased costs and the necessity to contract with respect to the legitimate interests of others limit the options available to contracting parties. Furthermore, Brownsword makes no suggestion as to how ‘community standards’ are to be discerned. Much like Adam, Brownsword’s theory also raises doubt about the certainty and predictability of contracting not to mention problems which may arise as to an arbitrary application of these principles.
All in all, the reform which Adams and Brownsword suggests are positive ones, however, concerns should be raised about the reduced certainty, especially in a common law system of jurisprudence. Both have similar approaches, which are inherently difficult to distinguish: both aims to prevent bad faith, and promote contracting in good faith. Nonetheless, Brownsword conceives a large overriding concept of ‘good faith’ to contract law, against Adam’s concept of ‘good reasons’ for the right to terminate. Here, Adam’s proposal differs in that it does not explicitly adopt a concept of ‘good faith’. Flexibility would generally be seen as greater in Brownsword’s approach although either approach leads to less certainty than is available in the law at present. The reforms may also weaken the incentive for parties to ensure their contractual obligations are fulfilled. And more importantly, may be unfair to the innocent party.