Of textualism, party autonomy, and good faith.

• Author: Van Alstine, Michael P.

INTRODUCTION

"[I]t is possible to so draw a contract as to leave decisions absolutely to the uncontrolled discretion of one of the parties and in such a case the issue of good faith is irrelevant." But the trick is to tell when a contract has been so drawn--and surely the mere recitation of an express power is not always the test. Sometimes it may suffice.... But to say that every expressly conferred contractual power is of this nature is virtually to read the doctrine of good faith ... out of existence.(1) This observation of Justice (then Judge) Antonin Scalia about the force of good faith in contractual relations, though clearly intended to be rhetorical, in recent years has come to be almost prophetic. Paralleling a renewed emphasis on formalism in the interpretation of other legal texts--most notably, statutes(2) and treaties(3)--the 1990s have witnessed the rise of a new textualist approach to the contractual duty of good faith as well. In its extreme form, this view holds that every expressly conferred contractual power is presumptively absolute and unrestricted. Because the parties' writing reflects the sole repository of interpretive evidence, the textualist logic runs, every such express power renders altogether irrelevant any "implied" notions of "good faith" and "fair dealing."

Indeed, recent textualist courts have voiced irritation over suggestions to the contrary. "More often than we care to recall," the Seventh Circuit admonished a plaintiff in a recent opinion, "we have reminded litigants that ... [they] may not seek to litigate issues of `good faith' in lieu of abiding by explicit provisions of contracts."(4) As Justice Scalia warned only fifteen years ago,(5) this modern celebration of the authority of text threatens to consign the doctrine of good faith to an inconsequential marginal note in the law of contracts.

This renewed assault by the forces of formalism in contract should not come as a surprise. The duty of good faith in the performance and enforcement of contracts is now a familiar feature in our legal landscape.(6) Throughout its history, however, the doctrine has served as a focal point for controversy in the law of contracts.(7) This is so because it stands uneasily at the crossroads of two inherent tensions in the law. The first arises from the competing goals of providing determinate rules to ensure certainty in the contracting process, while at the same time preserving sufficient flexibility to accommodate the complexity of human interaction.(8) The second tension involves the closely related, but equally contentious, conflict between party autonomy and party heteronomy. At issue in this dimension is the need to reconcile the power of private parties to define for themselves the scope of their obligations with the role of the state in imposing minimal standards of honesty and fairness in the process.(9)

These tensions find their most challenging practical expression when the intangible notion of "good faith" collides with the apparent force of an express contractual term. Unfortunately, the law provides only cryptic guidance on the proper resolution of this conflict. It is now commonly recognized that the duty of good faith is "imposed" in every contract,(10) and cannot be disclaimed, even by express stipulation.(11) The duty thus applies as a matter of law and without the need for any affirmative action by the parties,(12) or, in more fashionable terminology, is an "immutable" rule of contract law.(13)

This is a rather awkward immutable rule, however. For in almost the same conceptual breath, the Uniform Commercial Code (UCC or "the Code"), for example, makes the "non-disclaimable" obligation of good faith subject to "standards" the parties may define by "agreement."(14) In other words, at some ill-defined level the force of good faith is indeed subject to the power of party autonomy. The precise interaction of the duty of good faith with express contract language thus remains an important jurisprudential mystery.(15)

The new textualist(16) approach offers a deceptively simple answer to this mystery: When the parties to a contractual relationship reduce their agreement to a writing, the office of the law is simply to enforce the express terms as written. In the terse prose of Judge Easterbrook of the Seventh Circuit, transactors are entitled to literal enforcement of their contracts, "even to the great discomfort of their trading partners, without being mulcted for lack of `good faith.'"(17)

This Article demonstrates that this new textualist trend misapprehends the role of good faith in contractual relationships. The duty of good faith performance springs from the simple idea that certain expectations of fair and reasonable conduct are so fundamental that the parties rarely mention them in negotiation, and almost never distill them into express terms.(18) The Article argues that the new textualism in contract goes astray in failing to recognize that this animating tenet of good faith applies even--indeed, in particular--to a discretionary power otherwise left unrestricted on the face of contractual text. In this context as well, the duty of good faith and fair dealing fulfills its essential function by protecting the justified expectations the parties have not reduced to express contractual language.

The argument on this score proceeds in three principal parts. Part I explores briefly the course of contract interpretation from the rigid formalism of classical contract theory through the modern contextualist approach. The goal of this exercise is to set the jurisprudential context for the analysis of the new textualism that follows. To complete this necessary context, Part I concludes with a review of the emergence of the modern duty of good faith as well as with an examination of the most influential scholarly theories on its proper conceptualization.

Part II turns to a detailed examination of the new textualism in action. This recent trend in interpretation renders irrelevant--or simply disregards--much of the received wisdom on the force of good faith in contractual relations. Although (in principle) the new textualist approach acknowledges a role for the parties' expectations in good faith analysis, the sum of that approach is that the only relevant expectations are those anchored in the express terms of the parties' writing. This view is thus little more than a modern resuscitation of what was thought to be an aging and seriously ailing "plain meaning" rule in contract interpretation.(19) The distilled consequence is that, in the face of an express contractual power, notions of "good faith" and "fair dealing" simply have no role to play at all.

The full impact of this approach comes into sharper focus when one views the substantial practical consequences that flow from its application. If every contractual power is presumptively absolute, the duty of good faith provides no limitation on any decision, for example, to exercise a discretionary right to terminate a contract, to set banking fees, to preclude an assignment or relocation of a dealership, to cease operations under a lease, or even to accelerate another party's performance obligations. In this way, the new restrictive view dispenses with good faith without a review of the parties' actual expectations or of the context in which the discretionary power arose in the first place.

Part III is the heart of this Article, for it examines the essential flaws of this new textualist approach to the duty of good faith. It first explores the centrality of the parties' justified expectations in the flexible interpretive philosophy embraced in the UCC and the Restatement (Second) of Contracts. The expectations protected by the duty of good faith amount to more than the "meaning" of a writing pressed from the surface of its words. In this sense, the duty of good faith thus operates as the ultimate repudiation of the textualist view that contractual "interpretation" involves merely uncovering the "answer" put "in" a writing by the parties.

Part III then exposes the poverty of the two fundamental premises of the new textualism. First, it challenges the factual assumption that, in absence of an express limitation, every grant of a discretionary right reflects an agreement of the parties that it is to be absolute. The analysis next turns to the new textualism's subtle but powerful normative foundation. Properly appreciated, the doctrine of good faith reverses the classical presumptions about the burden of expression in the case of discretionary contractual powers. It does so, contrary to the normative premise of textualism, by freeing the other party of any requirement to "protect itself" through negotiation of a corresponding express limitation on such discretion.

The Article concludes with a positive examination of the power of party autonomy to influence the content of the duty of good faith. There is persuasive force in the argument that informed transactors should be able to confer on one, or both, of them a specific discretionary right whose exercise is insulated from external standards of fair and reasonable conduct. As the final section of Part III argues, however, a heightened burden of expression should attend any attempt to achieve that end. This "burden of bargaining" will include both a requirement of explicitness and a duty to draw attention to any attempt to contract at variance from the strictures imposed by the duty of good faith performance.

The duty of good faith reflects important institutional values in the law of contracts. At its most elemental, it proceeds from the premise that the law ought to protect the fundamental expectations of good faith and reasonable conduct in the performance of contractual relations without requiring a corresponding express agreement of the parties.(20) In recent years, however, the rising tide of textualism has threatened to submerge this essential duty of good...