Noel McGrath, ‘Good Faith: A Puzzle for the Commercial Lawyer’

To those educated in, or accustomed to the practice of, the common law system, good faith is a concept which is at once both familiar and alien. For most students, the first significant encounter with good faith occurs in the study of property law; as every second year law student knows, (or rather ought to know) the holder of an earlier equitable interest in real or personal property will, absent exceptional circumstances, lose priority to a subsequent purchaser of a competing legal interest if the latter is a bona fide purchaser for value of the legal estate without notice of the prior equity. In light of what follows it is interesting to note that in their discussion of this rule, the leading property law texts display a marked tendency to focus on the notice aspect of the rule and tend to devote merely the briefest of paragraphs to the question of what it means to be a good faith purchaser in this context. As the student moves on through his or her legal studies, the concept of good faith reappears in several contexts. Thus the company director, the trustee and other fiduciaries are required to exercise their powers in good faith – a concept variously associated with avoiding conflicts of interest, retaining a supervisory role with respect to delegated functions, refusing to improperly fetter one’s discretion and exercising powers purely for the purpose for which they were conferred. The student of commercial law, if sufficiently dedicated to immerse herself in the glorious mysteries of the law of negotiable instruments, will have further light thrown on the concept of good faith; section 29 of the Bills of Exchange Act 1882 prevents a purchaser of a bill of exchange from availing of the defences granted to a holder in due course unless “he took it in good faith and for value”. Section 30 of the Act goes on establish that such good faith is to be presumed in all cases, unless the transaction is “affected with fraud, duress, or force and fear, or illegality”. However, Sir Mackenzie Chalmers in drafting the 1882 Act, evidently did not think that the presence of fraud, duress and illegality are always inherently incompatible with the presence of good faith for section 30(2) leaves it open to a holder to defend a transaction so affected, by showing that it was involved value being given in good faith …

McGrath, Noel, Good Faith: A Puzzle for the Commercial Lawyer (June 5, 2014). UCD Working Papers in Law, Criminology & Socio-Legal Studies Research Paper, forthcoming.

First posted 2014-09-24 06:34:57

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