Good Faith: An “Omnipotent” Principle vs. a Reluctant Doctrine

Malaysian legal practice emphasises certainty. Contracts are drafted so that parties act at arm’s length and the written terms capture the entire agreement. Courts are cautious about imposing a universal duty of good faith, as this could invite judicial intervention and alter established agreements.

Malaysian courts apply the “business efficacy” and “officious bystander” tests to address contractual gaps. In Sababumi (Sandakan) Sdn Bhd v Datuk Yap Pak Leong [1998], the Federal Court held that a term is implied only if it is so obvious that it goes without saying. Syarikat Bekalan Air Selangor Sdn Bhd v Kerajaan Negeri Selangor [2021] reaffirmed the courts’ reluctance to imply a general duty of good faith unless it is essential for the contract’s commercial effectiveness.

Article 7 and the Chinese Golden Rule

The 2020 Chinese Civil Code takes a different approach. Good faith is considered the “Golden Rule” or “Omnipotent Principle” of the civil system. Article 7 requires all civil subjects to act in good faith and fulfil their obligations honestly.

Article 509 enforces this principle by requiring parties to perform their duties in line with the contract’s nature, purpose, and trade customs. In China, good faith applies at every stage of the contractual process, from negotiation to performance and after termination. This creates significant strategic differences for practitioners in both jurisdictions.

Pre-Contractual Liability and the Risk of Walking Away

In Malaysia, parties may withdraw from negotiations at any time before a formal contract is concluded. In contrast, Article 500 of the Chinese Civil Code imposes liability for damages if a party negotiates in bad faith, such as entering negotiations without the intent to reach an agreement or concealing material facts.

For Malaysian lawyers, withdrawing from negotiations may create legal risk if the other party has relied significantly on your client’s actions. The Chinese concept of culpa in contrahendo ensures that good faith governs parties’ conduct even before a contract is signed.

Ancillary Duties and the Post-Contractual Afterlife

Article 509 of the Civil Code specifies ancillary duties arising from the good faith principle, including notice, assistance, and confidentiality. While a Malaysian practitioner may argue that an unwritten administrative step does not constitute a breach, a Chinese court may find a breach based on the contract’s intent.

Article 558 introduces post-contractual duties, requiring parties to continue acting in good faith after a contract is completed or terminated, including obligations such as notice and assistance. In Malaysia, contractual relationships typically end unless survival clauses are included, but in China, these duties apply even if the contract is silent.

Conclusion: Shifting from Literalism to Transparency

Malaysian lawyers should not rely solely on the literal wording of contract clauses when dealing with contracts governed by Chinese law. The “Golden Rule” of good faith must be considered.

In Malaysia, we win cases by showing the court exactly what was written. In China, victory often depends on showing that your client acted as a reasonable and honest commercial actor. When the principle is omnipotent, your negotiation strategy must prioritise transparency and cooperation as much as technical drafting.

The article was first published on LinkedIn.