Law of Contract: Doctrine of Good Faith

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Doctrine of good faith is a Common law principle evolved in the mid nineteenth century in the United States. Uberrimae fidei is a Latin term meaning “of utmost good faith” and this doctrine provides minimum legal obligation. This doctrine speaks about the act done with utmost care, honesty and good faith. A contract is described as a legal agreement between two parties comprising of an offer and acceptance accompanied with a valid consideration. Under this doctrine, the parties must be transparent to one another in exchanging information. Although the doctrine of good faith is nowhere mentioned in the Indian Contracts Act of 1872, almost all legal agreements cover this doctrine implicitly. In the United Kingdoms’ Sale of Goods Act, 1979 defines good faith 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 of good faith is termed as a principle of fairness under the U.S. Constitution. An Uberrimae fidei contract can be legally enforceable and it is considered to be a valid agreement. It is by the law of obligation each party possess a personal duty to disclose the required information. This doctrine creates an express obligation on the parties to disclose all the necessary information required for a contract. It is the duty of the contracting parties not to hide any material facts relating to the contract. Material fact involves the subject matter of the contract. Any violation in doctrine of good faith makes the contract void. This doctrine can be invoked if it involves acts on the ground of fraud, misrepresentation and concealment of facts.

Evolution:

This doctrine is said to have a Roman origin dated back to 150 BC. Uberrimae fidei is applied on a long term basis which relies on frequent communication and co-ordination between the parties. All the more, good faith is a doctrine which is based on the relationship arising out of trust. Countries like Germany, Italy and France follow their Civil Codes for contracts involving good faith. In addition to that, the U.S. Constitution established the principle of fairness under sections 1- 203 of Uniform Commercial Code which explicitly laid down duty by stating that “Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement”. Unlike other countries, India does not have a written rule for the doctrine of good faith in law of contracts. Section 52 of Indian Penal Code defines good faith as “Nothing is said to be done or believed in “good faith” which is done or believed without due care and attention.” Lately this principle has been comprehensively used in commercial and insurance contracts by expressly including a clause in a contract and also by implication.

Salient features:

Doctrine of good faith is one of the most basic principles followed under the Indian Contracts Act, 1872. Not all sections of the act, explicitly state the phrase “good faith” but they are self- explanatory. This doctrine provides greater accessibility to distinct types of contracts. An employer employing a person to do an act, and the agent does the act in good faith; the employer is liable to indemnify the agent against the consequences of that act, though it may cause an injury to the rights of the third party. Mere silence to the facts might likely affect to the willingness of a person but this cannot be said to have committed an act of fraud, misrepresentation, mistake or concealment of facts.

However, non- disclosure in certain circumstances would vitiate the contract. In Public International Law, good faith is a fundamental principle. Further article 31 of the Vienna Convention on the law of Treaties clarified that “A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the Treaty in their context and in light of its object and purpose”. The principle of good faith can be used for interpretation in International Treaties. Insurance contract is one among the contracts which employs the doctrine of utmost good faith. For example: In a life insurance contract, the assured states that he is not suffering from any disease, while unknown to him that he was actually infected, the insurance contract is liable to be set aside.

Contracts relating to life insurances explicitly incorporate this principle. Moreover, in an insurance contract, the onus of proof is upon the insured to prove beyond reasonable doubts that there is a non-disclosure of material facts. Good faith is engaged in cases of family settlements too. The property distributed amongst the family members must be fair and equitable and can be enforced only if they are executed under good faith. Also contracts involving allotment of shares in a company specifies certain prospectus and those require full disclosure of material facts. Furthermore, disclosure of material facts is one of the requisites that must be satisfied by the seller to create awareness to the buyer under the Transfer of Property Act, 1882. Hence, good faith is a fundamental doctrine which is inbuilt in any types of contracts.

Landmark judgements:

The landmark English Contract law case for the doctrine of utmost good faith was established by Lord Mansfield in Carter v. Boehm. In the said case, it was held that Carter failed to disclose the material facts. Further Lord Mansfield stated “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”. In a contract of insurance, there is requirement of Uberimma Fides i.e. good faith on the part of the insured and there is no difference between a contract of insurance and any other contract.

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

The same has been observed in the case of LIC v. G.M. Channabasemma and further 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 is the general rule, unless the contract be one of “Uberrimae Fidei” like a contract of insurance, in which the utmost good faith is required.

Critical analysis:

The aim of the doctrine is that the injured must be indemnified due to the damages suffered by him from unjust rights arising out of the agreement. There must be a balance between the parties. Any imbalance in the contract might lead to breach of good faith between the parties. By context, the imbalance can take place when there is a disparity of awareness between the parties. This imbalance can get better by disclosing the sufficient data. Another imbalance is related to the rights and obligations of the parties. By focusing the interests of the counterparty this imbalance can be removed. In addition to these imbalances, there is no clear definition for “good faith” and the Judges are at the option to choose whichever definition is suitable.

Summers defined good faith as “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. But the doctrine is distinct from others in the arrangement and consideration of the rules. A drawback of this principle is the court looks into the doctrine when all other judicial proceedings and principles are exhausted. 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.

Conclusion:

Good faith is used as an instrument for interpretation. The principle of good faith and fair dealing go handy while assessing a contract. There is a chance of misuse of powers by the Judges while applying the general definition of the term “good faith”. But in the case of Burger King Corporation v. Weaver, the scope of good faith was limited by looking at the express terms as the source of the obligation. The issue of fair dealing and good faith in most of the cases are subjective. On the more, 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.

Author: Abinaya Sankaran from School of Law, Sastra Deemed to be University, Thanjavur.

Editor: Anmol Mathur from Symbiosis Law School, NOIDA.

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