Principle of Good Faith in the Performance of Commercial Contract

A and B signed a contract, which stipulated that B should deliver the goods on a certain day before 12:00p.m, and if B failed to perform as agreed, it should pay 5% of the total amount of the contract to A for breaching the contract. However, B delivered the goods on 2:00p.m., A required B to pay 5% of the total amount of the contract for breaching the contract. Dispute raised, A brought the case to the court. Should A’s claim be supported? There are plenty of similar circumstances in various cases, such as, where both parties failed to stipulate the certain venue for delivery, whether the delivery party can ignore the requirement of delivery, and etc..

In order to determine whether the above actions are appropriate, which party can obtain the support of the courts, the principle of good faith (“GF”) shall be applied in analyzing such cases. GF is the basic principle in Civil Law, which regulate all actions throughout the execution, performance and termination of a contract. During the performance of a contract, GF shall be applied in 2 main aspects, which are the accompanying obligations and the explanation of an article in a contract.

Firstly, for the accompanying obligations, which refer to the obligations to fulfill payment obligations or to protect the interests of persons or property on the parties, based on GF in the performance of a contract. “Contract Law” Article 60 provides:. “The parties shall fully perform their respective obligations in accordance with the contract. The parties shall abide by GF, and perform obligations such as notification, assistance, and confidentiality, etc. in light of the nature and purpose of the contract and in accordance with the relevant usage.” Therefore, there are some obligations are accompanied with the performance of a contract, which cannot be exhausted in the contract. And the parties shall not refuse to perform its obligations by saying that such obligations have not been agreed or agreed clearly. For example, in the aforementioned case that the delivery venue is not stipulated clearly, if this venue can be determined according to the transaction habit on such field, the party refuses to deliver should be deemed as it has breached GF. In fact, there is a precedent in Japan, which says where the seller failed to ask the buyer who was willing to perform the contract in a good faith for some miscellaneous information, the seller shall not be exempt from the liabilities for the delay.

In addition, there are 2 issues shall be noted: (a) normally the accompanying obligations are not the obligations for reciprocal payment against delivery, when the party claims that the other party fails to perform the accompanying obligations, it shall not claim the Defense Right of Simultaneous Performance at the same time; (b) when the other party fails to perform the accompanying obligations, generally the party shall not terminate the contract. In the aforesaid case, according to GF, where B delayed the delivery for 2 hours, but caused no loss or other bad consequence to A, then the court may not support the claim of A.

Secondly, the application of GF in the explanation of a contract, which refers to GF shall be applied in the explanation of the relevant articles during the performance of a contract, when a contract fails to express clearly on a specific article, or the parties cannot figure out its rights and obligations due to lack of knowledge of law.

“Contract Law” Article 125 stipulates that, “In case of any dispute between the parties concerning the construction of a contract term, the true meaning thereof shall be determined according to the words and sentences used in the contract, the relevant provisions and the purpose of the contract, and in accordance with the relevant usage and the principle of good faith. ” In view of this, the explanation of the relevant articles shall be based on the objective condition and background of the execution of a contract, analyzing the true meaning of both parties and the current interest of both parties.

It should be noted that the principle of good faith can be applied only when the applicable laws and judicial interpretations cannot be applied to solve the specific problems. As in General theory of law of Obligation written by SHI Shangkuan, there is a typical case—-“Dai Xuefei”(戴雪飞) case, which says that for the phase “failed to sign the contract on time”. The literally explanation is “For whatever reason, if the buyer failed to sign the contract on due time, he shall be deemed as breaching the contract”, then the buyer has to choose neither loss the deposit, nor to accept the real estate format contract comprehensively and unconditionally, and the seller can make profit. This is unfair, so the second instance court applied GF, decided that the contract was not executed because both parties had not made agreement on the transaction, other than the buyer had breached the contract.

In conclusion, the parties shall perform the contract based on GF. GF can be applied only when the applicable laws and judicial interpretations cannot be used to solve the specific problems. Meanwhile, the disadvantaged party shall make good use of GF to protect their own interests.