“Good faith in the Scots law of contract: an undisclosed principle?” in A.D.M. Forte (ed),
Good Faith in Contract and Property Law, Hart Publishing, Oxford, (1999), 5-37
GOOD FAITH IN THE SCOTS LAW OF CONTRACT:
AN UNDISCLOSED PRINCIPLE?
Hector L MacQueen *
There is also an underlying principle of good faith in the Scottish law of contract
although it is difficult to find a clear and comprehensive statement of it.1
This comment appeared in 1995 in the first published part of the Principles of European
Contract Law, as one of the notes on national systems attached to the Article of the
Principles providing that each party to a contract must act in accordance with good faith
and fair dealing.2 The comment can almost certainly be attributed to Professor W A
Wilson, who was the Scottish representative on the European Contract Commission
responsible for the 1995 publication. Wilson is perhaps an unlikely champion of a good
faith principle in Scots contract law, an idea which prior to 1995 had been associated
with the neo-Civilian work of Sir Thomas Smith,3 and had otherwise been passed over
largely in silence in modern writings and judicial decisions.4 But in June 1997, when as
Wilson’s successor on the Commission for European Contract Law I had begun to
consider revision of and addition to the Scottish notes in preparation for the publication
of the second version of the Principles of European Contract Law, the House of Lords
pronounced on the case of Smith v Bank of Scotland.5 Smith extended to Scotland the
previous decision of the House in the English case of Barclays Bank v O’Brien,6 and in the
leading speech, Lord Clyde remarked at one point upon “the broad principle in the field
of contract law of fair dealing in good faith”.7 The decision in Smith is focused upon the
requirement of good faith as between creditor and debtor in a cautionary obligation,
underpinning a duty of disclosure to the cautioner and also a duty to warn the cautioner
* Professor of Private Law, University of Edinburgh. I would like to thank Michael Bridge, Martin Hogg
and Parker Hood for helpful comment on the initial draft of this paper. The conference discussion also
proved invaluable in assisting me to collect my thoughts, as did an earlier presentation at a seminar on
negotiations organised by the Royal Bank of Scotland in August 1997.
1 O Lando and H Beale (eds), The Principles of European Contract Law. Part I: Performance, Non-Performance and
Remedies (Dordrecht, Boston and London, 1995) p. 58. The second part, which will also contain a revision
of Part I, should be published in 1999.
2 Article 1.106 (Article 1:201 in the revised version). The duty may not be excluded or limited. Article
1.107 (to become Article 1:202) provides in addition that “each party owes to the other a duty to co-
operate in order to give full effect to the contract”.
3 T B Smith, A Short Commentary on the Law of Scotland (Edinburgh, 1962), pp 297-8, asserts without much
analysis or reference to authority that “in the Scottish law of contract bona fides is a general concept”, and
is mainly concerned to deny that uberrima fides is anything other than a synonym for good faith. The
implications are not pursued in his later treatment of voluntary obligations other than in a discussion of
concealment, mala fides and insurance at ibid, pp 835-7.
4 W M Gloag, The Law of Contract 2nd edn, (Edinburgh, 1929) has “good faith” as an index heading, but
there is no general discussion other than the observation (at p 400) that “it is a general rule that contracts
are to be construed on the assumption of honest dealing”; but there is no relevant heading in the contents
of or indices to W W McBryde, The Law of Contract in Scotland (Edinburgh, 1987); Walker, The Law of
Contracts and Related Obligations in Scotland 3rd edn, (Edinburgh, 1995); S E Woolman, Contract 2nd edn,
(Edinburgh, 1994); and The Laws of Scotland: Stair Memorial Encyclopaedia (SME), vol 15 (1996).
5 1997 SC (HL) 111.
6  1 AC 180.
7 1997 SC (HL) at p. 121B-C.
of the consequences of the obligation and to urge upon him or her a need to take
independent advice on the transaction. This requirement of good faith Lord Clyde saw
as a better basis for the introduction of O’Brien in Scots law than the English Equity
concept of constructive notice. Nearly all of Lord Clyde’s remarks about good faith were
therefore focused on the contract of cautionry, but it is apparent that he did not see the
requirement as limited to that particular context.8
This paper is first an attempt to explain why, following this case and some further
research, I decided to leave the note in the European Principles as it stood, adding only a
reference to Smith. But it also seeks to pursue some of the implications of that
conclusion in greater depth, in particular with regard to liability for pre-contractual
What is good faith in contract law?
It is best to begin with some discussion of what is meant by good faith in contract law.
This has been the subject of much debate in recent times. The background is that the
existence or otherwise of such a principle in contract law is one of the major divisions
between the Civilian and Common Law systems in Europe. Where the great Continental
civil codes all contain some explicit provision to the effect that contracts must be
performed and interpreted in accordance with the requirements of good faith,9 English
and Irish law are almost equally explicitly opposed to such broad concepts. This is not to
say that the Common Law is happy to countenance bad faith in contracts; but the
approach is, to paraphrase some well-known remarks of Lord Bingham, to avoid any
commitment to over-riding principle in favour of piecemeal solutions in response to
demonstrated problems of unfairness.10
Martijn Hesselink has provided an invaluable general analysis of what good faith
has been taken to mean in the Continental systems.11 First a distinction is drawn
between subjective and objective good faith. Subjective good faith is concerned with
knowledge of facts or events, or absence of knowledge, and affects mainly property law
and possession. In this sense good faith is perfectly familiar in English and indeed
Scottish law, both of which offer substantial protection to the bona fide possessor and to
the good faith purchaser of goods from a seller without title while denying it to the
acquirer in bad faith.
It is objective good faith, however, which is chiefly relevant to contract law.
Objective good faith is about external, or community, norms and standards imposed
upon contracting parties. Over time these norms and standards have been distilled into
particular rules, notably in Germany. But the content of good faith is not fixed or static,
and the existence of the general principle in the Codes enables the Continental judge to
innovate and develop the law in response to circumstances without infringing upon the
territory of the legislator. (It may be noted parenthetically at this point that in Smith v
Bank of Scotland Lord Clyde drew upon two property law cases to support the principle of
8 Further on good faith in cautionry see the contribution of A D M Forte to this volume, “Good faith and
utmost good faith: insurance and caution”.
9 French CC, art 1134; BGB, §§ 138, 242; NBW, arts 6:2, 6:248; Italian CC, arts 1175, 1337, 1366, 1375;
Portuguese CC, art 762(2); Spanish CC, art 1258; Greek CC, arts 200, 281, 288, 388; Swiss CC, art 2.
10 Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd  QB 433, 439 (per Bingham LJ). For
documentation of this statement see J Cartwright, Unequal Bargaining (Oxford, 1993); J W Carter and M P
Furmston, “Good faith and fairness in the negotiation of contracts”, (1994-95) 8 Journal of Contract Law 1,
93 (2 parts).
11 “Good faith”, in A Hartkamp et al, Towards a European Civil Code, 2nd edn (Nijmegen, 1998).
good faith in Scots contract law;12 if however the distinction between subjective and
objective good faith is sound, then it would seem that good faith in property should be
kept clearly apart from good faith in contract.13)
Three major functions of contractual good faith as interpreted on the Continent
are identified by Hesselink:
• supplementation (i.e. the insertion in the contract of duties to be loyal, to protect, to
cooperate, to inform)
• correction or limitation, to prevent abuse of right.
Hesselink goes on to show how these functions have operated in a number of
areas of contract law on the Continent:
• in respect of pre-contractual negotiations, where there may be a duty to inform or
disclose, and a liability for breaking off negotiations in bad faith;
• as a ground of invalidity, especially in relation to standard form contracts;
• as a basis for the interpretation of and gap-filling in contracts;
• as a way of dealing with unforeseen or changing circumstances and hardship;
• as a basis for contractual remedies such as the exceptio non adimpleti contractus under
which a party who has not received the contractual performance to which it is entitled
may withhold its own performance;
• as a control on the exercise of contractual remedies, in particular those of terminating
the contract or of seeking implement.
The debate about good faith in the Common Law world has been triggered by
various stimuli.14 In England and Ireland there has been the impact of European
Community Directives touching upon contract law and deploying the concept of good
12 i.e. Rodger (Builders) Ltd v Fawdry 1950 SC 483; Trade Development Bank v David W Haig (Bellshill) Ltd 1983
SLT 510 (1997 SC (HL) at p. 121B-C). On Rodger (Builders), see K G C Reid, The Law of Property in Scotland
(Edinburgh, 1996) paras 695-700.
13 See further Reid, Property, paras 131-137 (“Scots law makes no clear choice between subjectivity and
objectivity but takes something from both. Thus, on the one hand, the law inquires into the actual state of
mind of the possessor. … objectivity is allowed to manifest itself in two ways. For first, actual knowledge
is in certain circumstances supplemented by constructive knowledge; and secondly, knowledge, whether
actual or constructive, is deemed to be interpreted by the possessor in a manner which is in all the
circumstances reasonable. … Absence of actual knowledge of lack of title is in almost every case an
indispensable condition of bona fide possession.”) See also the contribution of D L Carey Miller to this
volume, “Good faith in property law”, and D N MacCormick, “General Legal Concepts”, SME, vol 11,
14 Notable contributions include J F O’Connor, Good Faith in English Law (Aldershot, 1990); the forum on
good faith in contract published in (1994-1995) 7-9 Journal of Contract Law; J Beatson and D Friedmann
(eds), Good Faith and Fault in Contract Law (Oxford, 1995); and the proceedings of the Sheffield conference
“Good Faith in Contract Law” held on 17 March 1997 (to be published by Dartmouth).
faith. By this means the lawyers and courts of both systems have been forced to
confront directly the meaning of good faith against a background in which a harmonious
Community approach is required. The most striking example is the Unfair Terms in
Consumer Contracts Directive 1993,15 under which a term in a consumer contract which
has not been individually negotiated may be struck down if, “contrary to the requirement
of good faith”, it causes a significant imbalance in the rights and duties of the parties, to
the detriment of the consumer. The Commercial Agents Directive 198616 also makes a
number of references to good faith.
This leads on to the possible European harmonisation of contract law at a much
more general level, one of the underlying but more long-term objectives of the European
Contract Commission. It seems almost certain that a general principle of good faith
would be part of such harmonisation.17 I have already quoted the relevant Article of the
Principles of European Contract Law, and a virtually identical provision can be found in
Article 1.7 of the other great recent restatement of contract rules, the UNIDROIT
Principles of International Commercial Contracts. Both sets of Principles find their roots in the
Vienna Convention on the International Sale of Goods 1980 (CISG), which the United
Kingdom appears to be on the verge of ratifying and thereby at last moving into line with
its European and other international trading partners. CISG avoids an outright
commitment to a principle of good faith, but Article 7(1), the product of a compromise
between the Civilian and the Common Law traditions represented in its creation, does
say that, in the interpretation of the Convention, “regard is to be had to … the
observance of good faith in international trade”.18
The question for the Common Lawyers is therefore whether to develop an
indigenous principle of good faith from the existing specific rules appearing to be based
upon it, or to await the harmonisation process as and when it comes, or to resist within
that harmonisation process the establishment of a general good faith concept.19 The
forces lined up against explicit recognition of a principle of good faith have an impressive
roll-call. They include Professor Roy Goode,20 Lord Steyn,21 Professor Hugh Collins,22
15 Council Directive 93/13/EEC, OJ 1993, L95/29; implemented in the UK by the Unfair Terms in
Consumer Contracts Regulations 1994 (SI 1994 No 3159).
16 Council Directive 86/653/EEC, OJ 1986 L382/17; implemented in the UK by the Commercial Agents
(Council Directive) Regulations 1993 (SI 1993, No 3053).
17 Note however that H Kötz and A Flessner, European Contract Law (Oxford, 1997) has no general
treatment of good faith. But cf H Kötz, “Towards a European Civil Code: the duty of good faith”, in P
Cane and J Stapleton (eds), The Law of Obligations: Essays in Celebration of John Fleming (Oxford, 1998), 243. H
McGregor, “The codification of contracts in England and Scotland (equity and good faith)”, in A M
Rabello (ed), Aequitas and Equity: Equity in Civil Law and Mixed Jurisdictions (Jerusalem, 1997), argues that the
Contract Code which he drafted as a basis for unifying Scots and English law in the 1960s (published as
Contract Code drawn up on behalf of the English Law Commission [Milan, 1993]) accepts the concept of good faith
in general but is explicit only in respect of performance, even then expressing the matter in terms of “fair
dealing” (section 201).
18 For recent comment see P Schlechtriem, Good Faith in German Law and in International Uniform Laws,
Centro di studi e richerche di diritto comparato e straniero, Saggi, conferenze e seminari 10, (Rome, 1997).
19 For discussion see H Collins, “Good faith in European contract law”, (1994) 14 Oxford Journal of Legal
Studies 229; G Teubner, “Legal irritants: good faith in British [sic] law or how unifying law ends up in new
divergences”, (1998) 61 Modern Law Review 11.
20 See his Commercial Law in the Next Millennium (London, 1998), pp. 19-20; also The concept of “good faith” in
English law, Centro di Studi e Richerche di Diritto Comparato e Straniero, Saggi, Conferenze e Seminari 2
21 See his “The role of good faith and fair dealing in contract law: a hair-shirt philosophy?”,  Denning
Law Journal 131; “Contract law: fulfilling the reasonable expectations of honest men”, (1997) 113 Law
Quarterly Review 433.
and, most strongly and fully, Professor Michael Bridge.23 A common concern is the
uncertainty which would result from the introduction of a standard of uncertain content
with strong moral overtones, and the damage which would be done to the commercial
contracting practices which have provided the bedrock of English contract law.
Traditionally its approach has been founded on the perceived bases of a market
economy, emphasising the right of each party to pursue its own interests, whether in the
creation or the exercise of contractual entitlements, and to leave the other to do likewise;
not at all consistent with a positive requirement of good faith, with its stress upon the
need to take account of the other party’s position and the regulation of abuse of right.
Most recently, Bridge has focused upon the problem of termination of contract,
and has argued strongly that the heterogeneity of commercial activity means that the law
cannot make use of broad general standards like good faith as a guide to whether or not
termination should be allowed. In his view,
what is needed is an informed treatment of different areas of commercial contract and
market activity. A general standard of good faith would deflect attention from the need
to deal with problem areas … in a critical and detailed way.
Equally, however, there are eloquent voices in England calling for recognition of
a principle of good faith,24 who can pray in aid not only supporters from Canada25 and
Australia,26 but also the adoption of the principle in the law of the greatest market
economy in the world, the United States of America. Thus § 1-203 of the Uniform
Commercial Code provides that “every contract or duty within this Act imposes an
obligation of good faith and fair dealing in its performance or enforcement”, and the
Code elsewhere defines good faith as “honesty in fact in the conduct or transaction
concerned” (§ 1-201(19)) and “the observance of reasonable standards of fair dealing in
the trade” (§ 2-103(1)(b)). This has been reinforced by a provision in the Restatement
(2d) of Contracts 1981 that “every contract imposes upon each party a duty of good faith
and fair dealing in its performance and its enforcement” (§ 205).27
22 H Collins, The Law of Contract, 3rd edn (London, 1997) chs 10 and 15 (prefers to speak of duty to
negotiate with care, and of implied terms about co-operation).
23 See his “Does Anglo-Canadian contract law need a doctrine of good faith?”, (1984) 9 Canadian Business
Law Journal 385; “Good faith in commercial contracts”, in Good Faith in Contract Law (Aldershot,
24 An early proponent was R Powell, “Good faith in contracts”, (1956) 9 Current Legal Problems 16. More
recently, see O’Connor, Good Faith, ch 3; J N Adams and R Brownsword, Key Issues in Contract (London,
1995), pp. 198-254. Brownsword has taken his arguments further in “ ‘Good faith in contracts’ revisited”,
(1996) 49(2) Current Legal Problems 111, and “Contract law, co-operation and good faith: the movement
from static to dynamic market-individualism”, in S Deakin and J Michie (eds), Contracts, Co-operation and
Competition (Oxford, 1997).
25 B J Reiter, “Good faith in contracts”, (1983) 17 Valparaiso University Law Review 705. More cautious is S
M Waddams: see his “Good faith, unconscionability and reasonable expectations”, (1995) 9 Journal of
Contract Law 55.
26 See H N Lücke, “Good faith and contractual performance”, in P D Finn (ed), Essays in Contract (Sydney,
1987); P D Finn, “Commerce, the common law and morality”, (1989) 17 Melbourne University Law Review 87;
idem, “Australian developments in common and commercial law”, (1990) Journal of Business Law 265.
Priestly JA of the New South Wales Court of Appeal has argued in favour of a good faith standard
judicially and extra-judicially: see his “A guide to a comparison of Australian and United States contract
law”, (1989) 4 University of New South Wales Law Journal 4; Renard Construction v Minister of Public Works (1992)
26 NSWLR 234.
27 The limitations to “performance and enforcement” however make this significantly narrower than the
good faith of Continental Europe: see H O Hunter, “The duty of good faith and security of performance”,
(1995) 8 Journal of Contract Law 19. On the debate about good faith in US contract law see the surveys of E
A Farnsworth, The Concept of Good Faith in American Law, Centro di studi e richerche di diritto comparato e
A distinguished protagonist for recognition of a good faith principle is the
Australian judge, Paul Finn. While accepting that contracts are about the pursuit of self-
interest, he argues that the law also requires a contracting party to take the other party’s
interests into account in varying degrees. In this, good faith occupies the middle ground
between the principle of unconscionability and fiduciary obligations:
“Unconscionability” accepts that one party is entitled as of course to act self-interestedly
in his actions towards the other. Yet in deference to that other’s interests, it then
proscribes excessively self-interested or exploitative conduct. “Good faith”, while
permitting a party to act self-interestedly, nonetheless qualifies this by positively requiring
that party, in his decision and action, to have regard to the legitimate interests therein of
the other. The “fiduciary” standard for its part enjoins one party to act in the interests of
the other—to act selflessly and with undivided loyalty. There is, in other words, a
progression from the first to the third: from selfish behaviour to selfless behaviour.28
Finn is thus able to see good faith as operative in the commercial context, since it
does not deny, but only confines, the legitimacy of the pursuit of self-interest.
Nevertheless it is probably fair to say that many other proponents of a good faith
principle have seen it as an instrument of social welfare in contract law as against the
market and commercial orientation of its critics.29 It is striking that in the United
Kingdom good faith has emerged most strongly in the interventionist and paternalist
contexts of consumer protection and (in the guise of the obligations of “mutual trust and
confidence” between employer and employee) labour law.30
What then of Scots law? Whatever may have been the position before the middle of the
nineteenth century (a question into which I have deliberately conducted no substantial
research for this paper31), there can be no doubt that, if there is a general principle of
straniero, Saggi, conferenze e seminari 10, (Rome, 1993), and in Beatson and Friedmann (eds), Good Faith
and Fault, pp. 153-70.
28 P D Finn, “The fiduciary principle”, in T G Youdan (ed), Equity, Fiduciaries and Trusts (Toronto, Calgary,
Vancouver, 1989) 1, at p. 4.
29 See in particular R Brownsword, G Howells and T Wilhelmsson, Welfarism in Contract Law (Aldershot,
1994); C Willett (ed), Aspects of Fairness in Contracts (London, 1997).
30 The Unfair Terms Directive is plainly a measure of consumer protection. The Commercial Agents
Directive protects the self-employed commercial agent. For labour law generally see two articles by J D
Brodie: “The heart of the matter: mutual trust and confidence”, (1996) 25 Industrial Law Journal 121;
“Beyond exchange: the new contract of employment”, (1998) 27 Industrial Law Journal 79. The leading case
on mutual trust and confidence is now Malik v BCCI  AC 20. For explicit recognition in Scotland of
mutual trust and confidence as good faith see e.g. Taylor v Confederation Management Ltd, Perth Sheriff Court,
2 December 1997; Hill v General Accident Fire and Life Assurance Corporation plc 1998 GWD 31-1622 (Lord
31 It does however appear to me that the only “institutional” writer to deal with the subject in anything like
the way we are now discussing it is Kames, Principles of Equity, 3rd edn (Edinburgh, 1778) pp. 194-338: see
in particular his reference to “contracts bonae fidei, that is, contracts in which equity may interpose to
correct inequalities and to adjust all matters according to the plain intention of the parties” (pp. 199-200).
Under this rubric he discusses the following nine topics:
• where will is imperfectly expressed in the writing;
• implied will;
• whether an omission in a deed or covenant can be supplied;
• a deed or covenant that tends not to bring about the end for which it was made;
• equity with respect to a deed providing for an event that now can never happen;
• errors in deeds and covenants;
good faith in Scots contract law, it has been mostly latent and inarticulate until now.
Indeed, as Professor Thomson’s contribution to this volume shows, there are judicial
dicta against such a principle, at least insofar as it might connote a duty to take another’s
interests into account, or a power to strike down a bargain as unfair.32 Interestingly,
more or less the same can be said of the world’s principal other uncodified mixed
jurisdiction, South Africa.33 It would seem that in both systems the way in which the
principle has been expressed is through particular rules, and that the influence of the
Common Law approach has here greatly outweighed anything that might have come
from Roman or Civilian roots.
Nonetheless, and even setting aside the recent Directives which apply as much in
Scotland as in England and Ireland,34 rules and cases from Scots contract law which
could be said to stem from or relate to good faith can be identified without too much
difficulty. In our forthcoming text on contract law, Professor Thomson and I will argue
that much of our law can be characterised by the high value which it places upon
compelling performance. This can readily be seen as reflecting the requirements of good
faith. As Professor MacCormick has commented,
Conventional obligations can themselves be considered as exigible simply on grounds of
the requirements of good faith. Each party to a contract necessarily engages the trust of
the other, hence no action by each other which defeats the expectations in good faith
formed by the other is a fair or reasonable action.35
This is not just a matter of the availability of the remedy of specific implement as of
right,36 but can also be seen in the importance of the Scottish version of the exceptio non
adimpleti contractus, the principle of mutuality and the right of retention, as a means of
pressuring a contract-breaker into proper performance.37 Even when damages are
awarded for breach of contract rather than an order for implement, the amount is
• relief in relation to deeds or covenants void at common law as ultra vires;
• failure in performance; and
• indirect means employed to evade performance.
None of Stair, Erskine or Hume discuss bona fides in their accounts of conventional obligations. Bankton
does have the following, slightly ambiguous, passage: “Contracts, among the Romans, and the actions
thereon, were either bonae fidei, or stricti juris; the first are these in which the judge had a liberty, upon the
mutual obligations of parties, from the nature of the contract, according to their presumed will, as in Sale,
Mandate, Location and others enumerated by the Emperor: the other, were these wherein the judge was
tied down to the express covenant or words of the parties, as in Stipulation, and Loan of Money. We have
little use for this distinction; only Loan and Promises are strictly interpreted” (Institutes, I.11.65). Cf Stair,
Institutions, I.11.6. Bell, Principles, § 474, talks of insurance as a “contract of good faith”.
32 J M Thomson, “Good faith in contracting: a sceptical view”, in this volume.
33 See R Zimmermann, “Good faith and equity”, in R Zimmermann and D Visser (eds), Southern Cross:
Civil Law and Common Law in South Africa (Cape Town, 1996), pp. 217-60, especially at pp. 239-55.
34 See for further comment on the Unfair Terms Directive and good faith in Scotland I Macneil, “Good
faith and the control of contract terms: the EC directive on unfair terms in consumer contracts”, 1995
Juridical Review 147.
35 SME, vol 11, para 1129.
36 As to which see W W McBryde, “Remedies for breach of contract”, (1996) 1 Edinburgh Law Review 43 at
pp 48-54, and, most recently, Retail Parks Investment v Bank of Scotland (No 2) 1996 SC 227.
37 See McBryde, “Remedies”, at pp 64-69; H L MacQueen, “Remedies for breach of contract: the future
development of Scots law in its European and international context”, (1997) 1 Edinburgh Law Review 200 at
pp. 207-9; and, most recently, Bank of East Asia v Scottish Enterprise 1997 SLT 1213 (HL), commented upon
by W W McBryde, “Mutuality retained”, (1996) 1 Edinburgh Law Review 135.
commonly based on the expectation or, as it is perhaps better expressed, the
The argument that good faith underpins the requirement that contracts be
performed may seem startling at first sight: surely at this point the principle is being used
to explain too much to be useful? The answer to this, however, lies in the history of the
law rather than in current application. Whereas in the modern law agreements giving rise
to reasonable expectations of performance will generally be contracts, it has not always
been so. The rise of the consensual (or formless) contract to become the typical
contract, so that “every paction produceth action”, was one of the achievements of the
principle of good faith as identified and elaborated by the canon lawyers of the middle
ages.39 Scots law has gone even further, in upholding not just bilateral agreements but
also unilateral promises.40 The rules by which the few contracts requiring formal writing
in Scots law may nonetheless come into existence as a result of informal agreement plus
conduct by the parties also seem to hold them to expectations and reliance engendered in
If we now group some other rules of Scottish contract law under the headings of
the three major functions of good faith in contract identified by Martijn Hesselink—
interpretation, supplementation and correction42—the extent to which these rules are
imbued, or at least are consistent, with the requirements of good faith becomes even
The fundamental doctrine of contract interpretation, namely the objective approach of
determining, not the actual intentions of the parties, but rather what each was reasonably
entitled to conclude from the attitude of the other, reflects the requirements of good
faith inasmuch as contracting parties are thereby protected from unfair surprise. Until a
statutory remedy of rectification was introduced in 1985,43 these principles also allowed
the court to correct obvious errors of expression in contractual documents.44 If the
proposals of the Scottish Law Commission about contractual interpretation are
implemented, however, the law will move a little further along the good faith route,
because the courts will then be able to give effect to the particular sense in which one
party used an expression if the other party knew or could not have been unaware of that
Although there is no general duty of disclosure in the Scots law of contract, there are at
least some cases where a party who knows of and takes advantage of another party’s
38 See L J Macgregor, “The expectation, reliance and restitution interests in contract damages”, 1996
Juridical Review 227.
39 See e.g. F Wieacker, A History of Private Law in Europe, trans T Weir, (Oxford, 1995), p. 52; H J Berman,
Law and Revolution: the Formation of the Western Legal Tradition (Cambridge, Mass., 1983), pp. 245-50; O F
Robinson, T D Fergus and W M Gordon, European Legal History, 2nd edn (London, 1994), pp. 88-9. The
quotation, from Stair, Institutions, I.10.7, is the institutist’s version of the canonist pacta servanda sunt.
40 W W McBryde, “Promises in Scots law”, (1993) 42 International and Comparative Law Quarterly 48.
41 For the current rule see Requirements of Writing (Scotland) Act 1995 s 1(3); for the previous law, see
McBryde, Contract, pp. 647-54.
42 See above, pp. 00-00.
43 Law Reform (Miscellaneous Provisions) (Scotland) Act 1985 ss 8 and 9.
44 For the previous common law see McBryde, Contract, pp. 434-5.
45 Report on Interpretation in Private Law (Scot Law Com No 160, October 1997).
error in forming a contract with that party has not been allowed to enforce the contract
even when there has been no misrepresentation.46
The doctrine of terms implied in law includes some which may be implied in
contracts generally and which look very like expressions of good faith:47 thus parties may
be compelled to co-operate to ensure that the contract is carried out,48 to perform within
a reasonable time,49 to exercise discretionary powers under the contract reasonably,50 and
not to prevent another party from performing or to do anything else to derogate from
The nineteenth-century development of doctrines such as undue influence and facility
and circumvention alongside the classical grounds of invalidity (error, fraud and force)
can also be seen as essentially based on good faith.52 But, despite a hint once thrown out
by Lord President Cooper,53 modern Scots contract law has never developed a general
doctrine permitting the challenge of “leonine”, extortionate or unfair bargains as such;54
statutory intervention has been required to achieve that, at least in part.55 At common
law, however, penalty clauses and the oppressive use of irritancies in leases are subject to
Remedies are also subject to controls which may be seen as brakes upon the
abuse of rights. Thus specific implement, although a right, is nonetheless subject to the
discretion of the court, which has been shaped to some extent into a set of rules as to
when the remedy will not be granted.57 Again, in the absence of specific contractual
provision, termination is only available on material breach; that is to say, the response
must be commensurate with the wrong.58 The recent suggestions that in at least some
circumstances a party should give a contract-breaker a second chance to perform before
terminating might also be consistent with an approach based fundamentally on good
46 Steuarts Trs v Hart (1875) 3 R 192; Angus v Bryden 1992 SLT 884; Security Pacific Finance Ltd v T & I Filshie’s
Tr 1994 SCLR 1100; 1995 SCLR 1171; SME, vol 15, para 694.
47 The difference may be that as implied terms these obligations can be excluded by express provision,
whereas the legal obligation of good faith will usually over-ride the contract.
48 Mackay v Dick and Stevenson (1881) 8 R (HL) 37 per Lord Blackburn at p. 40.
49 McBryde, Contract, para 6-21.
50 SME, vol 15, para 861 note 2; cf Gloag, Contract, pp. 302-8. The decision of the First Division in Glasgow
West Housing Association Ltd v Siddique 1998 SLT 1081 that an absolute discretion conferred contractually
could not be qualified by an implied term of reasonableness was not based upon a review of any relevant
authority, and it is anyway stated that an action might have been brought if the holder of a discretion failed
to exercise it or acted in a wholly unreasonable way. See further Bradford & Bingley Building Society v
Thorntons plc 1998 GWD 40-2071.
51 Barr v Lions Ltd 1956 SC 59.
52 On these doctrines see McBryde, Contract, chs 9-12; SME, vol 11, paras 701-742; vol 15, paras 670-94.
53 McKay v Scottish Airways 1948 SC 254 at p. 263.
54 McBryde, Contract, pp. 255-8; SME, vol 15, para 677.
55 e.g. Consumer Credit Act 1974, s 137; Unfair Contract Terms Act 1977, Part II; Unfair Terms in
Consumer Contracts Regulations 1994.
56 The rules on irritancies were so little used, however, that statutory intervention was deemed necessary in
1985 (Law Reform (Miscellaneous Provisions) (Scotland) Act 1985 ss. 4 and 5). The law of both penalties
and irritancies is now under review once more: see Scottish Law Commission Discussion Paper No 103 on
Penalty Clauses (December 1997).
57 McBryde, Contract, pp. 511-13.
58 McBryde, “Remedies”, at pp. 58-64.
faith.59 In the law of damages, the rule that the claimant should act to mitigate or
minimise loss looks very much like a good faith requirement, as might any rules which
may exist on contributory negligence.60
The utility of recognising a good faith principle
As Michael Bridge has remarked, however, it is relatively easy to proceed through a
system of rules like Scots contract law, as we have just done, and to pick out those parts
of it which seem to reflect the requirements and values of good faith as it has been
understood in Europe in modern times. It would be surprising to find rules which
encouraged or allowed bad faith; but not so for rules embodying requirements of good
faith. The real question is, what difference does it make to the system to declare now
that there is a general principle of good faith holding it all together? Given that the rules
are expressions of good faith, why do they need to be reinforced by a generalisation?
What function that is not currently performed by the system would such a generalisation
The answer would seem to be that the articulation of the general principle
enables the identification and solution of problems which the existing rules do not, or
seem unable to reach. The history of the good faith doctrine in Germany illustrates this
very well. The celebrated § 242 of the BGB enabled the German courts to develop its
doctrines of culpa in contrahendo, change in circumstances, contracts with protective effects
vis-a-vis third parties, positive breach of contract, abuse of contractual rights and
termination of long-term contracts without any other support from the code. Problems
arose for which no direct codal provision appeared to exist, or which existed as the result
of what the code said; § 242 enabled the court to overcome these obstacles without
incurring the reproach of pure judicial law-making.61
Smith v Bank of Scotland may be a domestic example of the same phenomenon.
The general principle of good faith enabled the House of Lords to deal with a problem
for which there was thought to be no satisfactory answer in the existing specific rules of
Scots law. An apparent gap was filled, and a new rule came into being.62 It is exactly the
same as recognising a general duty of care in negligence,63 or a principle against
unjustified enrichment;64 the law can move on, and new rules develop. As a result, the
principle may remain relatively latent, or continue to be stated in extremely general terms,
59 Lindley Catering Investments v Hibernian FC 1975 SLT (Notes) 56; Strathclyde Regional Council v Border
Engineering Contractors Ltd 1998 SLT 175; McBryde, Contract, p. 329. For discussion of the utility of this
approach in the context of software contracts, see H L MacQueen, M Hogg and P Hood, “Muddling
through? Legal responses to E-commerce from the perspective of a mixed system”, Molengrafica,
60 SME, vol 15, paras 925-9; see also on contributory negligence Concrete Products (Kirkcaldy) Ltd v Menzies
and Anderson 1996 SLT 587.
61 See W F Ebke and B M Steinhauer, “The doctrine of good faith in German contract law”, in Beatson
and Friedmann (eds), Good Faith and Fault, pp. 171-90; B S Markesinis et al, The German Law of Obligations
Volume I: The Law of Contracts and Restitution: a comparative introduction (Oxford, 1997), ch 7.
62 Commentators are at one in seeing Smith as judicial innovation: G L Gretton, “Sexually transmitted
debt”, 1997 SLT (News) 195; J M Thomson, “Misplaced concern?”, (1997) 65 Scottish Law Gazette 124; R
Dunlop, “Spouses, caution and the banks”, (1997) 42 Journal of the Law Society of Scotland 446; L J
Macgregor, “The House of Lords ‘applies’ O’Brien north of the border”, (1998) 2 Edinburgh Law Review 90;
S F Dickson, “Good faith in contract, spousal guarantees and Smith v Bank of Scotland”, 1998 SLT (News)
63 As in Donoghue v Stevenson 1932 SC (HL) 31.
64 As may have happened in Shilliday v Smith 1998 SC 725 and Dollar Land (Cumbernauld) Ltd v CIN Properties
Ltd 1998 SLT 992 (HL).