Good Faith and Loyalty: Reimagining Contracts from a Fiduciary Law Perspective

It is not farfetched to say that one of the most important episodes in the history of corporate bankruptcy in the United States is the collapse of General Motors and Chrysler in 2009. The auto industry has since recovered, thanks to billions of dollars provided by the government. But thousands of dealerships were not so lucky, as the automakers cut them off from their franchises. These events gave rise to extensive litigation throughout the US. And though now largely forgotten, one of the claims raised in these cases was quite creative: that the automakers breached their contractual duty of good faith and fair dealing. This claim was emphatically denied by the court. But why? It had previously been argued that the duty of good faith aims to ensure fairness and the ethical behavior of contractual parties. However, the dominant position of the US courts is that the duty does not prohibit self-centered behavior. As Judge Richard Posner remarked, it would be “quixotic as well as presumptuous” for judges to use contract law to “raise the ethical standards of the nation’s business-people.”

The Article critically reviews the story of one of those dealerships to illustrate that the debate over US good faith needs a fresh perspective. Analyzing hundreds of clauses that sought to delineate the content of good faith in continental Europe, the Article demonstrates that there are clear connections between the common law fiduciary duty of loyalty and the civilian contractual duty of good faith. It illustrates how and when these duties play a similar role in tackling various challenges governed by private law, such as the need to prevent information gaps or deter exploitation. Shedding light on the similarities between these duties provides two notable contributions. First, it clarifies the value of formulating loyalty as an independent legal term and accordingly calls to reimagine civilian contractual relationships from a fiduciary-law perspective. But, and importantly, this understanding provides unexplored justifications for adopting also in common law jurisdictions a more comprehensive concept of good faith, one that does not see contracts only as an egocentric, self-regarding legal tool. Revealing these connections therefore has the potential of changing how good faith is perceived in the US, and accordingly to lead to more coherent and just rulings.