The Economic Function of Good Faith in European Contract Law

Abstract

Among legal scholars and practitioners, ‘good faith’ is often referred to as a fundamental principle, placed at the heart of the law and of all human interactions. It is usually intended as to include duties of fairness, honesty, loyalty, disclosure of information and cooperation with contractual counterparties. However, the precise definition of good faith as well as its practical role in solving disputes is anything but uniform and uncontroversial. Different jurisdictions have showed different attitudes to such principle and currently there seems to be no generally accepted approach. Against this background, stand the efforts of the groups in charge of drafting the Common Frame of Reference (CFR) for European Contract Law which is set to include also a common approach to the duty of good faith. Although, the role of good faith as such has not been very often under the lenses of the law and economic scholarship, contact law and economics can provide guidance as to the function of such fundamental legal principle and shed some light on its role in the context of a common European Contract Law. The goal of this paper is to show how economic analysis and the use of the economic method can contribute to this task, by providing some insights into the function of the principle of good faith in European Contract Law, as well as the design of legal rules implementing this principle. This paper analyses the rules referring to good faith contained in the Draft Common Frame of Reference to be submitted to the European Commission for use in the future drafting of European rules on contract law.