Good Faith Obligations: An Implied Term or an Express Clause?

Introduction

The concept of Good Faith acts as a cornerstone principle of Contract Law. It aims to ensure that parties engaging in contract should play their role with honesty, fairness and in a justified manner. The concept of good faith differs in different laws. Somewhere it is in explicit form, on the other hand it acts as an implied term.

Definition and Meaning

Good faith refers to the duty to act honestly, fairly and lawfully implying the absence of an intention to deceive, defraud or take undue advantage of another party.  In our daily life we enter into a lot of agreements knowingly or unknowingly. In those agreements there is a common understanding that parties would act in such a manner that doesn’t include bad intention.

The term has originated from the Latin term “Bona Fide” which generally means that a party to enter into a contract should act honestly in such a manner that is based on mutual trust and understanding.

The principle of good faith is deep rooted. It is not a new concept. There are various interpretations of good faith in different laws but there is not any specific definition in contract law. Good faith is dominantly used in Insurance laws. It is not an easy task to provide any legal definition of Good faith, especially in case of contracts.

Good Faith in Contract Law

The term Good Faith is not expressly defined under Indian Contract Act,1872 but there are different cases where the Supreme Court has talked about it.

In Association of Unified Telecom Services vs Union of India and Ors, the court has stated that good faith is an essential part of contracts. Parties have to act honestly, reasonably and fairly according to the expectations of the other party. The court in this judgement has also explained that good faith is not only applicable in performance of contract but also covers the scope of termination, formations and negotiations.

Good Faith plays a pivotal role in contract law because it ensures that performance of contracts should be fair, just and in an equitable manner. It also encourages and promotes trust and cooperation between parties.

Good faith is not necessarily always absolute. It depends on parties’ actions, sometimes it may be absolutely reasonable even without matching the highest standard of good faith.

It is a flexible concept. It means it can be applied to different aspects of contracts and it would be the discretion of the court on what extent it should be interpreted.

A good faith is not based on belief. A party cannot say that it acted in good faith if it knows that the action of the party is dishonest.

Good Faith interpretation across different Laws

It is codified in the civil law systems of France, Germany and other European countries. It is explicitly codified as a fundamental principle of Civil Law. Article 1104, paragraph 3 of the French Civil Law has the provisions of Good Faith, it has remained unchanged since 1804.

In German Contract Law, good faith is enshrined in Section 242 of German Civil Code.  

In English Law too, good faith is not specifically defined, it is the only principle that applies on Insurance Laws. In Carter vs Bohem, the landmark case of Good faith applied the concept of good faith for the first time in insurance contracts. The judgment pronounced by Lord Mansfield laid the principle of good faith in insurance contracts. According to him, insurance contracts are mostly based on utmost good faith and the insured must disclose all the possible circumstances whether it is visible or not. 

The Uniform Commercial Code of USA imposes duty of good faith where it is interpreted as “honesty in fact and observance of reasonable commercial standard of fair dealings.

In Australian Laws good faith is not expressly mentioned and does not have a specific mention. It is a very old concept but got recognised in 1992 in the case of Renard Constructions Pte Ltd vs Minister of Public Works. In this judgement the court tried to apply the concept of good faith as contractual obligations.

In India it is not specifically implied in Indian Contract Act but there are numerous precedents given by courts. Although it is mentioned in the General Clauses Act,1897. According to section-3(22) of the Act, good faith means “a thing shall to be deemed in good faith where it is in fact done honestly, where it is done negligently or not.” Indian courts have created a hybrid model of interpretation of good faith based on precedents and statutory mentions.

Elements of Good Faith

There are different elements of good faith which include honesty, mutual cooperation, fair dealings. The key components of good faith are

Honesty and Fairness- Parties must avoid deceptive, misleading and unfair practices.

Duty to Cooperate- Parties must cooperate with each other to achieve objectives of contract.

Duty to Disclose- Parties should not conceal or misrepresent any relevant information for their personal advantages.

Good Faith: Implied or Expressive Clause

Good faith in implied terms refers where the Court would assume that the party should have done so in an honest and fair manner, even if there is no express mention in the contract. The rationale behind that should be mutual cooperation and respect from parties towards each other. It is not expressly mentioned in the contract but parties are expected to act in good faith.

For example, when you booked an auto for a specific destination, the auto rider should use the shortest route to drop you, as it would save your time. It is not an expressive condition to use shortest route but it is expected to use shorter route. The expectation of using a short route by an auto driver is considered as implied good faith from the driver`s side.

When the clause of good faith is specifically mentioned in the agreement then it is an expressive clause. Parties have to mandatorily act in good faith. In implied terms it is not compulsory for the parties to act in good but if it is expressive, it becomes compulsory.

For example, referring to the above stated example when it is clearly stated by the customer to use a shorter route, the driver is compelled to follow the instructions of the customer.

Good faith: Mandatory to be expressive?

According to most of the legal system, good faith is generally implied and it is expected that the parties should act in an honest manner. The court presumes the existence of duty of good faith in contract even if there is no express mention of good faith in contract.

While an expressive clause of good faith is not mandatory, some parties include an express clause of good faith in the contract because it helps in better enforcement of the contract. It also made it easier in termination, performance of specific duty of contract.

There are different advantages of expressing a good faith clause. Some of are mentioned below-

●        It clearly defines the duties of parties, without any ambiguity.

●        It also sets the procedure for standard dispute resolution.

Conclusion

It is a fundamental principle of Contract Law which upholds the concept of honesty, fair practices and mutual cooperation. However, it is not easy to define good faith from any statutory definitions of Indian Contract Law,1872 but it plays a pivotal role in contracts. There are both merits and demerits of good faith, as the interpretation of good faith is a complex task. However, it also provides practical benefits such as clarifying and reducing legal risks. Ultimately the principle not only reflects legal aspect but also promotes the ethical and moral values.

Author: Sahil Srivastava, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.

References

https://www.indiacode.nic.in/bitstream/123456789/15374/1/the_general_clauses_act%2C_1897.pdf

https://indiacorplaw.in/2018/12/06/doctrine-good-faith-fair-dealing-lacuna-indian-contract-law/#:~:text=Doctrine%20of%20Good%20Faith%20and%20Fair%20Dealing%3A%20Lacuna%20in%20Indian%20Contract%20Law,-By%20Guest&text=Parties%20enjoying%20ample%20discretion%20to,the%20realm%20of%20contract%20law

https://blog.ipleaders.in/good-faith-and-fair-dealing-in-contracts/

https://incometaxindia.gov.in/Pages/income-tax-dictionary.aspx?key=B

https://indiankanoon.org/doc/503377/