A Universal Duty of Good Faith: An Economic Perspective

The liberal political environment of the nineteenth century and a belief in the economic model of the free market is still strongly reflected in modern contract law doctrine, including those doctrines relating to the implication of terms. Contract law rules were designed to provide incentives to rational, self-interested contracting parties to perform obligations they had voluntarily and expressly consented to. The strict enforcement of express contractual promises has traditionally been seen as the best way to provide these incentives and the recognition of an implied duty of good faith has been seen as unnecessary and undesirable judicial intervention. However, the assumption of self-interest that underpins the economic model of the free market has come under increasing attack from the 'second wave of law and economics'. Empirical studies suggest that preferences are in fact heterogenous; some individuals are self-interested whilst others have a preference for reciprocal fairness. This article considers various economic studies and theories from the 'second wave'. It argues that if courts enforce express promises in a literal manner, self-interested norms will crowd out the preference for reciprocal fairness and that the recognition of a universal duty of good faith would overcome these crowding effects.