August 15, 2014
Paul MacMahon on Good Faith and Fair Dealing
Posted by Gordon Smith

In Good Faith and Fair Dealing as an Underenforced Legal Norm, Paul MacMahon of the London School of Economics explores the divide between "the rhetoric of good faith and fair dealing and the reality of judicial enforcement." MacMahon relies in part on Meir Dan-Cohen’s distinction between conduct rules and decision rules, which corporate law scholars should recognize from discussions of the business judgment rule by Mel Eisenberg, Julian Velasco, and others. MacMahon also references the substantial literature on underenforcement in constitutional law. And, of course, the vast discussion of the duty of good faith and faith dealing, which contract scholars know well. The thesis is elegant: "the underenforcement idea allows courts to lend their expressive support to the broader norm while avoiding the negative side effects that attempted full enforcement would entail."

This is a great paper, but the most intriguing comes near the end and I hope MacMahon plans to develop this idea in a future paper. The idea emanates from a fairly simple extension of the idea of underenforcement: if underenforcement of the legal norm of good faith and fair dealing is the right strategy, what is the optimal level of enforcement? To MacMahon's credit, he recognizes that the optimal level may vary by circumstance: 

There is no a priori reason why the choice of decision rule should be made at the wholesale level. In different contexts, the relative strengths of judicial enforcement and alternative mechanisms for inducing compliance with good faith and fair dealing will wax and wane. Accordingly, it probably makes sense for scholars and courts to develop differing levels of scrutiny for good faith and fair dealing claims. A single doctrinal test has the merit of simplicity, but a one-size-fits-all approach is unlikely to be optimal.

My sense is that Delaware courts are doing something like this with fiduciary law (indeed, I am writing a paper on this topic), and I suspect that other common law courts are calibrating the duty of good faith and fair dealing.

This is a well-researched, well-written, thought-provoking article, and I recommend it highly.

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