The Doctrine of Good Faith – Contract Law

INTRODUCTION

 

Should a merchant have to act in fairness and take into account the other party’s interest or can he/she follow his/her interests, even if it harms the other party? Modern laws that are based upon the Roman law answers to the question, which is obviously NO. The doctrine of good faith is one of the essential maxims underlying the contract in both of the legal systems, common and civil law. It is also possible to come across two kinds of good faith principles. Firstly, the subjective good faith, which has to do with knowledge and provides a person to acquire ownership even if a non-owner has transferred the property. Secondly, is the objective good faith which constitutes a standard of conduct which the behaviour of a party has to conform to and by which it may be judged.[1]

Many countries recognise to act in good faith when entering into a contract and also when executing it. Acting in good faith imposes the obligation on the parties to observe reasonable standards of fair dealing that is with accordance to the parties related to the agreement and also requires faithfulness to the agreed common purpose and consistency. Whereas according to  Escriche, good faith is “the sincere and just conduct with which one executes contracts, without trying to deceive the person with whom an agreement is reached”[2].

The Doctrine of good faith is a Common law principle which evolved in the mid-nineteenth century in the United States. The Latin term Uberrimae fidei means “of utmost good faith”, and this doctrine provides minimum legal obligation. This doctrine speaks about the act done with utmost honesty, good faith and care.

A contract is described as a legal agreement between two parties comprising of an offer and acceptance accompanied by a consideration that is valid. Under this doctrine, the parties must be transparent to one another in exchanging information. Although the term good faith is nowhere to be defined in the Indian Contracts Act of 1872[3], a definition is provided under Sec.3(22) of the General Clauses Act,1892[4] Almost all legal agreements cover this doctrine implicitly.  In the United Kingdoms’ Sales of Good Act, 1979[5] “good faith” is defined as a thing which is deemed to be done in good faith when it is done honestly, whether it is done negligently or not.

This doctrine is termed as a principle of fairness under the U.S Consitution. An Uberrimae fidei contract can legally be enforced or is legally enforceable, and it is considered to be a valid agreement. It is by the law of obligation that each party posses a personal duty to disclose the required information. This doctrine creates an expressed obligation on the parties to disclose all the necessary information required for a contract. Thus, it is the duty of the parties in the contract not to hide any material facts that are related to the contract. The material facts involve the subject matter of the said contract. Any violation in the doctrine of good faith makes the contract void. Thus, this doctrine can be invoked if it involves acts on the ground of misinterpretation, fraud and concealment of facts. By incorporating the doctrine, a contract imposes the obligation of good faith in its performance and enforcement with the scope of the contract.

EVOLUTION

 

This doctrine is said to have its origin in Rome. Good faith is a doctrine which is solely based on the relationship that arises out of trust. It was Cicero who left the complete definition of good faith. He said “These words, good faith, have a vast meaning. They express all the honest sentiments of a good conscience, without requiring scrupulousness which could turn selfless into sacrifice; the law banishes from contract ruses and clever manoeuvers, fraudulent calculations, dishonest dealings, dissimulations and perfidious simulations, and malice, which under the guise of prudence and skill, takes advantages of credulity, simplicity and ignorance”.[6]

One of the peculiarities of Roman procedures was the formulae system. The praetor gave his approval only to the requests that could be expressed in specific, pre-determined formulae. It was in 150 B.C, Rome was expanded into the entire Mediterranean basin. It was during this period that the procedure was modified, profoundly. It was believed that the peregrines[7], as outsiders to the city, could not use the ancient formulae and their rights would therefore not have been recognised. The peregrine praetor therefore settled disputes not by applying the law in force for the citizens, but by applying a law that they created.

It was in this context that bona fide judicia, the good faith rights of action were born. The lists of good faith rights to action varied based on the historical period and also the author. According to Ciceron, the list was filed in matters of guardianship, rental and sales contracts. In contrast, Justinian included pledges, claims to divide property and action praecriptis uerbis for exchanges and estimation contracts.

The practical use of the notion “good faith” in Roman law is often illustrated through the classic example of a contract of sale because of the importance attached to the seller’s duty to inform concerning the hidden defects guarantee and the guaranty against attacks on property rights.[8]

 

THE GENERAL CONCEPT OF GOOD FAITH

 

Good faith is deemed as a necessity in contracts. It is an essential element, and widely accepted also incorporated with many International agreements. Public International law recognises it, and United Nations Charted refers explicitly to it. The term good faith does not have a standard definition, it is because of its structure, it is used in different contexts, and its meaning depends on what the context is.[9]

Now for the meaning of modern good faith, one can find many definitions. It is nearly impossible to have a comprehensive, concrete general definition to good faith. Black law’s dictionary defines good faith as “an intangible and abstract quality with no technical meaning or statutory definition, and it encompasses among other things, an honest belief, the absence of malice and the absence of design to defraud or to seek an unconscionable advantage.” [10]

Furthermore, attempts have been made to define good faith by the notions like fairness, fair conduct, reasonable unconscionability standards of fair dealing, reasonableness, decency, decent behaviour, a spirit of solidarity, community standards of fairness, a common ethical sense and honesty.[11]  Professor Tetley defines good faith as “just and honest conduct, which should be expected of the parties in their dealings, one with another and even with the third parties, which may be implicated or subsequently involved. Good faith requires each party to be fair and honest in negotiations and, once the agreement has been reached, that the parties also perform their respective obligations and enforce their rights honestly and fairly.”[12] Whittaker and Zimmermann explain good faith meaning using ‘Treu and Glauben’ as “treu signifies faithfulness, loyalty, fidelity, reliability; Glaube means belief in the sense of faith hand reliance. The combination of ‘Treu and Glauben’ suggests a standard of honest, loyal and considerate behaviour, of acting with due regard for the interest of the other party, and it implies and comprises the protection of reasonable reliance.[13]

A “negative” definition[14] of good faith has been regarded as probably the easiest to describe. In other words, it is defined by what it is not rather than by what it is. Professor Summers suggests that a duty of good faith excludes certain types of conduct from what is considered acceptable good faith. These conducts that constitute bad faith are excluded from the concept of good faith.[15] Many authors have admitted this approach because it is a practical and easy way to define good faith. To define good faith, it comes to a conclusion on the definition of good faith as an expectation of each party to a contract that the other will honestly and fairly perform his duties under the contract in a manner that is acceptable in the trade community.[16]

As observed, all the definitions of good faith include reasonableness, honesty, fairness and the other party’s interests and expectations. Therefore, a simple explanation for good faith can be “ a principle that requires the parties of a contract to be reasonable, fair and honest and also observe the standard of fair dealing. A party should not purposely harm the interest of the other party. They should also act to reduce the damage that can occur to the other party.[17]

Good faith is criticised for being vague with respect to the fact that international contracts require certainty and predictability. The good faith refers to the behaviour of human beings in society, and the standards of conduct which can be identified as in good faith are settled down by time.

Moreover, criticisms that good faith is an obscure and uncertain concept is sometimes countered by the claim that, in substance, good faith is no more than an excluder of bad faith behaviour.[18] The meaning of good faith is determined by the general concept of the regulation, perception and structure of the society where the contract takes place and moral and ethical standard of the community. [19] Inevitably, it is applied by judges, and they may be tempted to impose their moral conceptions on the parties.[20] As mentioned in the introduction, reliance by courts upon their own legal and social understanding of the terms would result in the non-uniform interpretation of the provision.[21]

By the time, the interpretation will gain consistency in interpretation of good faith. After that, it works as a principle serving to provide more fair and decent behaviour in contracts.

As for the content of good faith, generally, the concept of good faith embraces at least three related notions; an obligation on the parties to cooperate in achieving the contractual objects (loyalty to the promise itself), compliance with moral standards of conduct, and compliance with the standards of conduct which are reasonable having regard to the interest of the parties.[22]

Moreover, the law of good faith can roughly be divided into three functions[23]:

(1) expansion and establishment of contractual duties (offi cium iudicis);

(2) limitation of contractual rights (praeter legem);

(3) transformation of contract (contra legem).

The most comprehensive concept of good faith requires parties to act in good faith in exercising of rights and breach of contract negotiations, the performance of the contract, moreover, in the interpretation of contracts.[24] The scope and degree of good faith required in contract differ from legislation to legislation. In addition to this concept, good faith has been used as a basis of many doctrines such as ‘doctrine of foundation of transaction’, ‘doctrine of improvisation’ and ‘clausula rebus sic stantibus’. These doctrines reflect the ‘transformation of the contract (contra legem)’ function of good faith. While ‘doctrine of improvisation’ is exclusive to French law and ‘doctrine of foundation of transaction’ is exclusive to German law, ‘clausula rebus sic stantibus’ is a doctrine which has been internationally recognised as an objective rule of law of nations.[25] Where there has been a fundamental change of circumstances which has occurred and which was not foreseen by the parties at the time of concluding their agreement, it is regarded to force the parties to obey the clauses of the contract as contrary to good faith.

It is possible to distinguish two functions and two meanings of good faith. In the subjective case, good faith aims to protect the mistaken belief of one contracting party and to give effect to appearances. In the objective case, good faith is perceived as being the method used to temper the inequalities that could result from the doctrine of the autonomy theory and to moralise contractual relationships.[26]

Even if the objective or subjective dichotomy is found in a number of legal systems, this first rationalisation effort was insufficient to dispel the multiple uncertainties surrounding the notion and the functions of good faith.[27] The primary cause of the uncertainty even remains today; this is because of the absence of general definition[28]. The concept of good faith generates more interest based on its function than on its definition.[29]  Therefore usually good faith is said to be an open norm, but a norm which depends on the circumstances of the case in which it must be applied but with a content of which cannot be established in an abstract way. Therefore in a system where good faith plays an important role, most of the lawyers will agree that the differences in this theoretical conception do not matter very much. What actually matters is the way in which the courts apply good faith, and the character of good faith is only best shown by the way in which it operates.[30]

However, good faith is used as a standard more than a rule[31], a general principle according to some[32], or a norm, a rule, a maxim, a duty, an obligation according to others[33]. This conceptual and terminological inconsistency for a large part can be explained by the anarchic and frequent use of good faith in different international laws and in national laws. However, this imprecision does not only result in disadvantages. In fact, a substantive analysis reveals that good faith is an open norm the content of which cannot, nor should not, be determined in an abstract manner so that it can to adapt to the particular circumstances which surround it.[34] Is that to say that the determination of the content of good faith depends solely on the personality of the judge settling the litigation?[35] Not necessarily. It seems possible to objectives the notion of good faith, by providing judges with guidelines, without freezing the notion and detracting from its essential characteristic: adaptability.

 

The landmark case in English Contract law for the doctrine of good faith was established in Carter v. Boehm[36] by Lord Mansfield. In this case, it was held by the court that Carter failed to disclose the material facts. Lord Mansfield stated it:

Insurance is a contract based upon speculation. Good faith forbids either party by concealing what he privately knows, to draw the other into a bargain from his ignorance of that fact, and believing the contrary. Thus, in the contract of Insurance, there is a requirement of Uberimma Fides meaning, good faith on the part of the insured and there is no difference between a contract of Insurance and any other contract. [37]

Also, in cases involving life insurance contracts, it is the duty of the assured to disclose to the insured, all the relevant facts. The duty to disclose all the material facts continues to till the end of the contract. It also implies that any material alteration in the character of the risk, which may take place between the acceptance and its proposal. Any misstatement or suppression of material facts will lead to the termination of the policy.

In the case LIC v. G.M.[38] the same has been observed by Channabasemma, it was stated that:

The onus of proof lies on the insured to prove beyond reasonable doubts that there was false representation and suppressed material facts. Caveat Emptor or purchaser beware the general rule unless the contract is one of “Uberrimae Fidei” like a contract of Insurance, in which the utmost good faith is required.

The doctrine of good faith – India

 

Countries like Italy and France follow their Civil Codes for contracts involving good faith. In India, the rule for the doctrine of good faith does not have a written in the law of contracts. In Sec.52 of Indian Penal Code[39], good faith is defined as “nothing is said to be done or believed in good faith which is done or believed without due care and attention.”[40]

The doctrine of good faith is one of the fundamental principles followed under the Indian Contracts Act.1872. All sections of the Act do not explicitly state the phrase “good faith”, but they are self-explanatory. This doctrine provides greater accessibility to a distinct type of contracts.

However, non- disclosure in certain circumstances would deprive the contract. Good faith is a fundamental principle in Public International Law. An insurance contract is one amongst the contract which employs the doctrine of utmost good faith. For example: In a life insurance contracts, the assured states that he is not suffering from any disease, while unknown to him that he was infected, the insurance contract is liable to be set aside.

As mentioned earlier, the doctrine of good faith is not explicitly mentioned in the Indian Contract Act, 1872. However, specific provisions impose an obligation on parties to act in good faith. For example, suppose one person employs another to do an act, and the agent does the Act in good faith. In that case, When an employer employs a person to do an act, and the agent does this Act n good faith, the employer is liable to assure the agent against the consequences of the Act. Even though it may cause injury to the rights of another party, thus, mere silence to the facts might affect the willingness of a person, but this cannot be said to have committed an act of mistake, fraud, concealment of facts or misinterpretation.

Contracts that are related to life insurances incorporate this principle explicitly. It is upon the insured the onus of proof, to prove beyond a reasonable doubt that there is a non-disclosure of material facts in an insurance contract. Even in family settlements, the good faith principle is included. The properties that are distributed among the family members should be fair and equitable, and it can only be enforced if they are performed under good faith. Contracts involving allotment of shares in companies specify detailed prospectus and are required to full disclosure of material facts. The disclosure of material facts is one of the conditions that have to be satisfied by the seller to create awareness to the buyer under the Transfer of Property Act 1882[41]. Hence, good faith is a fundamental Doctrine which is inbuilt in any contracts.

 

At the outset, it is important to take notice of the observation of the Delhi High Court in Association of unified telecom service providers of India v UOI[42] :

‘Every contract contains an implied covenant of good faith and fair dealing, obligating the contracting parties to refrain from doing anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract’.

Hence, the Indian Contract regime, as per the above observation, is not restricted to a particular field of law, but rather it is wide enough to include every contract under its ambit. However, can the same also be said in the context of the legal provision is something which will now figure out.

There are some provisions in the Act which explicitly deals with Good faith and fair dealing, for example, Sec. 166, Sec. 178, Sec. 178-A, Sec. 223 of the Act. Nevertheless, they lack the gravity of law.

It would be appropriate to say that an express recognition has not been given to the principle of Good Faith and fair dealing under the Act. Although under Sec. 178 of the Act, good faith works as an essential requirement[43]. Also, Sec. 223 imposes an obligation on parties to act in good faith, but it could hardly be considered as a fundamental principle of the Act. Another area of the Act where we can say that the concept of Good faith could have found an important place is Sec. 14[44] of the Act which defines “free consent”. Sec. 3(22) of General Clauses Act 1897 defines good faith as, “a thing shall be deemed to be done in good faith where it is done honestly, whether it is done negligently or not.” Meaning thereby, anything which is done honestly may come under the purview of Good Faith even if done negligently.

After scrutinising Sec. 14 of the Act, it could be said that at least four exceptions of coercion, undue influence, fraud, and misrepresentation, as mentioned under Sec. 14, could be covered under the concept of Good faith.

There is an element of dishonesty involved in all these exceptions. Also, the definition of Free Consent as defined under Sec. 14 is exhaustive and restrictive; there is significantly less or rather no room at all for the judicial interpretation. If the legislatures could successfully add Good Faith and fair dealing in this section, then the judiciary would be able to interpret the law following the concept of good faith which would provide us with an inclusive definition of free consent ‟ which will protect the party whose contractual rights are infringed.

Interestingly, as of now, there is no statutory obligation under Indian laws to use good faith while negotiating or entering into a contract, the mere mentioning of good faith under specific provisions does not make the concept of good faith and fair dealing a mandate.

ANALYSIS AND CONCLUSION

 

The aim of this doctrine is that the injured must be compensated due to the damages suffered by him from unjust rights that rose out of the agreement. This is because; there must be a balance between both the parties. Thus any imbalance in the contract will lead to the breach of good faith resulting in breach of contract between the parties. This imbalance can be avoided by disclosing the sufficient data. Another imbalance can be related to the rights and obligations of the parties. This can be removed by focusing in the interests of the counterparty. In addition to these, there is no clear definition for “good faith” and the judges are the discretion to choose whichever definitions is suitable.

Good faith is a phrase which has no general meaning or meaning of its own. Another misunderstanding is the doctrine of good faith is considered to be a special principle in the law of contracts. This doctrine is different from others in the arrangement and consideration of the rules. A weakness of this principle is the court look into the doctrine when all other judicial proceedings and principles are exhausted. Thus, there are chances of misuse of the doctrine by the Judge by promoting ill views about law thus resulting in faithlessness in the justice system.

Good faith is mostly used as an instrument for interpretation. This principle of good faith and fair dealing go handy while assessing a contract. But there are chances of misuse of the powers by the Judges when applying this doctrine since there is no specific definition for this term. In the case Burger King Corporation v. Weaver[45], the scope of good faith was limited by looking at the express terms as the source of obligation. The issues of good faith in most of the cases are subjective. Moreover good faith will not trump an absolute contractual right. Thus proper application of the doctrine will benefit to the contracting parties by building them a wall of trust and also helps in maintaining a fiduciary long term relationship.

 

1Berger, K., 2020. Zimmermann, Reinhard/ Whittaker, Simon, Good Faith In European Contract Law, Cambridge 2000. [online] Trans-lex.org. Available at: <https://www.trans-lex.org/132600/_/zimmermann-reinhard-whittaker-simon-good-faith-in-european-contract-law-cambridge-2000/> [Accessed 11 October 2020].

[2] Franz Wieacker, The General Principle of Good Faith, R.D.C.O., 652 (2d ed. 1986).

[3] Indian Contract Act, 1872, Act No. 9 of 1872.

[4] The General Clauses Act, 1897, Act No. 10 OF 1897.

[5] The Sale of Goods Act 1979, 1979 c 54 (Foreign).

[6] De Off, 3, 17. quoted by R.-M. RAMPELBERG, op.cit. p. 44-45.

[7] Responsible for disputes among foreigners (non-citizens).

[8] A Legal Chameleon: An Examination of the Doctrine of Good Faith in Chinese and American Contract Law, 25 CONN. J. INT’l L. 305 (2010).

[9] Raphael Hui, The Doctrine of Good Faith in Contract: Greater Acknowledgment in Hong Kong: A Comparative Study, 5 CITY U. H.K. L. REV. 85 (2014-2015).

[10] Black’s Law Dictionary 693 (6th ed. 1990)

[11] Troy Keily, ‘Good Faith And The Vienna Convention On Contracts For The International Sale Of Goods (CISG)’ (1999) 3 Vindobona Journal of Commercial Law and Arbitration Issue 1 15-40

[12] William Tetley, ‘Lack Of Good Faith As A Hindrance To Effective

[13] Simon Whittaker and Reinhard Zimmermann, ‘Good Faith In European Contract Law: Surveying The Legal Landscape’ in Good Faith In European Contract Law ed. Reinhard Zimmermann and Simon Whittaker (Cambridge: Cambridge University Press, 2000) 24

[14] 2005 UTAH L. REV. 1 (2005).

[15] (1982) 67 Cornell L. Rev. 810

[16] (1999) 18 Journal of Law and Commerce, 333-353, 333

[17] 88 CORNELL L. REV. 1025 (2003).

[18] A F Mason, ,Contract, Good Faith And Equitable Standards In Fair Dealing’ (2000) 116 (Jan) Law Quarterly Review 66-94, 69

[19] Matthias E. Storme, ‘The Validity And The Content Of Contracts’ in Towards a European Civil Law (Ars Aequi Libri-Nijmegen-Martinus Nijhoff Publishers- Dordrecht/Boston/London, (1994) 185

[20] Disa Sim, ‘The Scope and Application of Good Faith in the Vienna Convention on Contracts for the International Sale of Goods’

[21] Diane Madeline Goderre, ‘International Negotiations Gone Sour: Precontractual Liability under the United Nations Convention’ (1997) 66 U. Cincinnati Law Review, 258-281, 264

[22] A F Mason, ‘Contract, Good Faith And Equitable Standards In Fair Dealing’ (2000) 116 (Jan) Law Quarterly Review 66-94, 69

[23] Gunther Teubner, ‘Legal Irritants: Good Faith In British Law Or How Unifying Law Ends Up In New Divergences’ (1998) 61 The Modern Law Review 11, 20

[24] Daniel Markovit ,Good Faith as Contract’s Core Value

[25] Alberto M. Musy, THE GOOD FAITH PRINCIPLE IN CONTRACT LAW AND THE PRECONTRACTUAL DUTY TO DISCLOSE: COMPARATIVE ANALYSIS OF NEW DIFFERENCES IN LEGAL CULTURES

[26] 63 YALE L.J. 1057 (1954).

[27] Joseph M. Perillo, Unidroit Principles of International Commercial Contracts: The Black Letter Text and a Review, 63 Fordham L. Rev. 281 (1994).

[28] Dr Avtar Singh, Law of Contract and specific relief (ed 9, Eastern Book Company, 2006)

[29] Ibid.

[30]  M. W. HESSELINK, « The concept of good faith », in Towards a European Civil Code, Kluwer Law International, Third fully Revised and Expanded edition, 2004, p.474

[31] Ph. JACQUES, op. cit , n°160

[32]  General Clauses and Standards in European Contract Law. Comparative Law, EC Law and Contract Law Codification, S. GRUNDMANN, D. MAZEAUD eds., Kluwer Law International, 2006, p. 23.

[33]  M.W. HESSELINK, op. cit. p. 473, notes 12-20.

[34] J. WIGHTMAN, « Good Faith and Pluralism in the Law of Contract

[35]  M.W. HESSELINK, op. cit., p. 486

[36] Carter v Boehm (1766) 3 Burr 1905.

[37] Ibid.

[38] LIC v. G.M ,1991 ACJ 303.

[39]  The Indian Penal Code 1860, Act No. 45 Of 1860.

[40] Ibid.

[41] The Transfer Of Property Act 1882, Act No. 4 Of 1882

[42] Association of unified telecom service providers of India v UOI WP(C) NO. 3673/2010

[43] Dr Avtar Singh, Law of Contract and specific relief (ed 9, Eastern Book Company, 2006)

[44] Indian Contract Act 1872, Sec 14: Consent is said to be free when it is not caused by: coercion, undue influence, fraud, misrepresentation, and mistake

 

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