Good Faith Performance

Author:Alan D. Miller - Ronen Perry
Position:Lecturer, Faculty of Law and Department of Economics, University of Haifa - Professor, Faculty of Law, University of Haifa
Pages:689-745
 
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689
Good Faith Performance
Dr. Alan D. Miller & Dr. Ronen Perry
INTRODUCTION ...................................................................................... 690
I. IDENTIFYING THE COMMON DENOMINATOR .......................................... 698
A. GOOD FAITH AS AN EXCLUDER .......................................................... 698
1. The General Framework ........................................................ 698
2. The Role of Community Standards ...................................... 703
B. RECAPTURING FORGONE OPPORTUNITIES .......................................... 706
1. The General Framework ........................................................ 706
2. The Role of Community Standards ...................................... 710
C. COMMUTATIVE JUSTICE .................................................................... 712
1. The General Framework ........................................................ 712
2. The Role of Community Standards ...................................... 717
D. REASONABLE COMMERCIAL STANDARDS ............................................ 719
1. The General Framework ........................................................ 719
2. The Role of Community Standards ...................................... 721
II. CHALLENGING THE COMMON DENOMINATOR ....................................... 724
A. COMMUNITY STANDARDS ARE DERIVED FROM PERCEPTIONS ............... 724
B. A BRIEF INTRODUCTION TO SOCIAL CHOICE ...................................... 727
C. THE FORMAL MODEL ....................................................................... 730
D. METHODS AND AXIOMS .................................................................... 732
E. A SIMPLE EXPLANATION OF THE PROOF ............................................. 740
CONCLUSION ......................................................................................... 744
Lecturer, Faculty of Law and Department of Economics, University of Haifa.
 Professor, Faculty of Law, University of Haifa.
The authors are grateful to Gerrit De Geest, Shuky Ehrenberg, Izhak Englard, Bernhard
Ganglmair, Mark Geistfeld, Leo Katz, Lewis Kornhauser, Henrik Lando, Ariel Porat, Matthew
Spitzer, Eyal Zamir, workshop participants at Tel Aviv University, the University of Amsterdam,
the University of Bologna, and the Max Planck Institute for Research on Collective Goods, and
participants in the 2012 ALEA conference at Stanford Law School, the 2012 EALE conference
at the University of Stockholm, and the 2012 EMLE conference at the University of Ghent for
fruitful discussions and valuable comments on earlier drafts. We are also indebted to the editors
of the Iowa Law Review for their remarkable work on this Article.
690 IOWA LAW REVIEW [Vol. 98:689
INTRODUCTION
This Article aims to unveil and undermine one of the most resonant
truisms in contract law. It shows that a dominant criterion used by courts
and academics in applying the omnipresent and overarching principle of
good faith is essentially flawed. Our argument is innovative in at least four
respects. First, it uncovers a common denominator of the major accounts of
good-faith performance in case law and academic literature—namely, resort
to community standards. While not unheard of, this test has never been
recognized or addressed as a unifying thread among the various theories.
Second, the Article distinguishes two forms of community standards:
common views of morality and common practice. This has never been done
before in this context. Third, the Article fiercely challenges the common
denominator by proving that all definitions of community standards are
either theoretically unsound or impractical. This conclusion undermines the
validity of current judicial practice and contemporary legal theories. Fourth,
the Article uses a novel theoretical perspective that can be labeled
“axiomatic jurisprudence,” employing tools from a branch of economics
known as social-choice theory. In this respect, it continues our recent
publication, which utilized similar tools to analyze the concept of
reasonableness in tort law.1
The good-faith doctrine is probably one of the most fundamental
principles in contemporary contract law,2 so much so that its relatively
recent acceptance in American law is often overlooked. The common law of
contracts, as manifested in the first Restatement of Contracts3 and major
contract law treatises,4 did not recognize a general duty of good faith.5
1. Alan D. Miller & Ronen Perry, The Reasonable Person, 87 N.Y.U. L. REV. 323 (2012).
2. See, e.g., 2 E. ALLAN FARNSWORTH, FARNSWORTH ON CONTRACTS 393 (3d ed. 2004)
(“The concept of good faith has, in a relatively few decades, become one of the pecul iarly
American cornerstones of our common law of contracts.” (emphasis omitted)); D ennis M.
Patterson, Wittgenstein and the Code: A Theory of Good Faith Performance and Enforcement Under Article
Nine, 137 U. PA. L. REV. 335, 341, 343 (1988) (explaining that good faith is “a central principle
of contract law” as “[f]ew concepts in modern contract law have received as much attention as
‘good faith’”); Robert S. Summers, Good Faith Revisited: Some Brief Remarks Dedicated to the Late
Richard E. Speidel—Friend, Co-Author, and U.C.C. Specialist, 46 SAN DIEGO L. REV. 723, 726 (2009)
[hereinafter Summers, Good Faith Revisited] (“[T]here is no obligation in all of the U.C.C. and
in general contract law of more overall importance than the general obligation of good faith.”);
Mark Snyderman, Comment, What’s So Good About Good Faith? The Goo d Faith Performance
Obligation in Commercial Lending, 55 U. CHI. L. REV. 1335, 1370 (1988) (“The obligation to
perform in good faith is a ‘super-eminent principle’ . . . .”).
3. RESTATEMENT OF CONTRACTS (1932).
4. See Robert S. Summers, The Conceptualisation of Good Faith in American Contract Law: A
General Account, in GOOD FAITH IN EUROPEAN CONTRACT LAW 118, 119 (Reinhard Zimmermann
& Simon Whittaker eds., 2000) [hereinafter Summers, Conceptualization] (discussing major
treatises).
5. See Teri J. Dobbins, Losing Faith: Extracting the Implied Covenant of Good Faith from (Some)
Contracts, 84 OR. L. REV. 227, 228 (2005) (“[I]t did not receive widespread acceptance in the
2013] GOOD FAITH PERFORMANCE 691
Admittedly, such a duty had been mentioned by a few state courts by the
mid-twentieth century.6 But it received national acclaim only after Karl
Llewellyn, a professed Germanophile and the Chief Reporter for the
Uniform Commercial Code (“UCC”),7 imported the general duty of good
faith from the German Civil Code.8 The publication of the UCC in 1952 was
a watershed moment in contract law.9 Section 1-304 (formerly 1-203)
provides that, “Every contract or duty within [this Act] imposes an obligation
of good faith in its performance and enforcement.”10 The all-encompassing
nature of the concept is fortified by countless references throughout the
UCC, in numerous sections11 and comments,12 and in various contexts. Its
United States until the mid-twentieth century.”); Eugen e F. Mooney, Old Kontract Principles and
Karl’s New Kode: An Essay on the Jurisprudence of Our New Commercial Law, 11 VILL. L. REV. 213, 246
(1966) (explaining that the duty of good faith in performance did not fare well in Anglo-
American law); Summers, Conceptualization, supra note 4, at 119 (“Before the 1960s, it could not
be said that the American states acknowledged any general obligation of good faith in their
contract law.”); Robert S. Summers, The General Duty of Good Faith—Its Recognition and
Conceptualization, 67 CORNELL L. REV. 810, 810 (1982) [hereinafter Summers, The General Duty].
6. See, e.g., Kirke La Shelle Co. v. Paul Armstrong Co., 188 N.E. 163, 167 (N.Y. 1933)
(“[I]n every contract there exists an implied covenant of good faith and fair dealing.”); see also
Nelson v. Abraham, 177 P.2d 931, 934 (Cal. 1947) (en banc) (quoting Kirke La Shelle, 188 N.E.
at 167).
7. See Summers, Good Faith Revisited, supra note 2, at 724–25 (discussing Llewellyn’s role).
8. BÜRGERLICHES GESETZBUCH [BGB] [CIVIL CODE], Aug. 18, 1896, §§ 157, 242 (Ger.)
(imposing a duty of good faith in the interpretation and performance of contra cts); E. Allan
Farnsworth, Duties of Good Faith and Fair Dealing Und er the UNIDROIT Principles, Relevant
International Conventions, and National Laws, 3 TUL. J. INTL & COMP. L. 47, 51–52 (1994)
[hereinafter Farnsworth, UNIDROIT] (discussing the German roots of the UCC duty of good
faith); Saul Litvinoff, Good Faith, 71 TUL. L. REV. 1645, 1656 (1997) (same); see also James
Whitman, Commercial Law and the American Volk: A Note on Llewellyn’s German Sources for the
Uniform Commercial Code, 97 YALE L.J. 156 passim (1987) (discussing the German sources of the
UCC).
9. See, e.g., E. Allan Farnsworth, Good Faith Performance and Commercial Reasonableness Under
the Uniform Commercial Code, 30 U. CHI. L. REV. 666, 671 (1963) [hereinafter Farnsworth, Good
Faith Under the UCC] (“[B]y the time of the promulgation of the Uniform Commercial Code,
good faith performance had . . . become a poor and neglected relation of good faith purchase.
The Code revives it . . . .”); Michael P. Van Alstine, Of Textualism, Party Autonomy, and Good Faith,
40 WM. & MARY L. REV. 1223, 1242 (1999) (“The adoption of the UCC breathed new life into
the doctrine of good faith.”).
10. U.C.C. § 1-304 (2011).
11. U.C.C. §§ 1-309, 2-305(2), 2-306(1), 2-311(1), 2-328(4), 2-402(2), 2-403(1), 2-
506(2), 2-603(3), 2-615(a), 2-706(1), (5), 2-712(1), 2A-103(1)(a), (o), 2A-109, 2A-304(1),
2A-305(1), 2A-308(1), (3), 2A-405(a), 2A-508(5), 2A-511(3)–(4), 2A-518(2), 2A-527(2), (4),
3-202(b), 3-302(a)(2), 3-311(a), 3-403(a), 3-404(a)–(b)(2), 3-405(b), 3-406(a), 3-407(c),
3-409(c), 3-416(b), 3-417(a), (d)(1), 3-418(c), 3-420(c), 4-103(a), 4-109(a), 4-207(b)–(c),
4-208(a), (d), 4-209(c), 4-401(d), 4-404, 4-406(d)(2)–(e), 4-503(2), 4A-202(b), 4A-302(b),
5-109(a), 6-107(3), 7-203, 7-206(b), 7-208, 7-209(c), 7-210(e), 7-301(a), 7-304(c), 7-308(d),
7-404, 7-501(a)(5), (b)(3), 7-504(b)(4), 7-508, 7-601(b), 9-321(a), 9-330(a)(1), (b), (d),
9-403(b)(2), 9-405(a), 9-615(g), 9-617(b).
12. See Mooney, supra note 5, at 247 (“The phrase [good faith] also must appear at least
fifty times in the comments . . . .”).

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