Law Essays – Good Faith and Contract Law
Good Faith & Contract Law
“the governing principle … applicable to all contracts and dealings “.
This statement was made by Lord Mansfield in 1766 and was an (unsuccessful) attempt to raise good faith to the level of a general principle, the common law as it subsequently developed rejected his initiative. The traditional law of contract, as it became established in England in the second half of the nineteenth century, did not impose or recognise a general duty of good faith.
The notion of good faith undoubtedly pervades English law, but there is no single recognised doctrine of general application. The law is generally ready to strike against instances of bad faith: for example where lies are told in pre-contractual negotiations and where the weak are exploited or pressurised the application of concepts of contract law will make such contracts void or voidable,. However, no liability or remedy is to be had against the party who, acting in his own best interests, disengages from the negotiations. Moreover, the traditional view of the law is that during the performance of a contract one party’s motivation is not relevant to define contractual rights, nor may (“bad”) motives increase the scope of express obligations. Aside from specific types of contracts, insurance being the notable example, there is no recognised extra-contractual duty on one party to disclose facts that may turn out to be of importance to another . This can be contrasted with the position in other countries including Australia and Northern Ireland where the notion of good faith is more readily accepted.
Steyn J who foresaw a future for good faith doctrine in English law however such a future has sadly not developed, or if indeed it has developed it has so in a piecemeal fashion. Bingham L.J’s perception has proven to be closer to reality, he stated when speaking with reference to the incorporation of conditions in contracts:
“The tendency of the English authorities has … been to look at the nature of the transaction … and the character of the parties to it; to consider what notice the party … was given of the particular condition …; and to resolve whether in all the circumstances it is fair to hold him bound by the condition. This may yield a result not very different from the civil law principle of good faith, at any rate so far as the formation of contract is concerned .”
The classical theory of contract appeared to be hostile to the emergence of a general doctrine of good faith. Sir George Jessel M.R. emphasised that their was a strong public interest in maintaining the notion of freedom of contract which would necessarily exclude the notion of good faith :
“If there is one thing which more than another public policy requires it is that men of full and competent understanding shall have the utmost liberty of contracting, and that their contracts when entered into freely and voluntarily shall be held sacred and shall be enforced by Courts of justice. Therefore you have this paramount public policy to consider that you are not lightly to interfere with this freedom of contract.”
A party to a contract could therefore expect that the contract would be enforced according to its terms even if the terms were unfair.
Despite these early reluctances to include good faith as part of contract law, it emerged as an important and necessary role in some aspects of contract law. The modern law of contract places more emphasis on conduct which takes account of the interests of the other party to the contract . Some of these specific circumstances will now be considered,
The common law imposes a duty of good faith in insurance contracts. The requirement of utmost good faith in insurance contracts requires disclosure by the insured of any fact material to the risk and abstention from misrepresentation. The justification for the creation of the duty is that only the insured knows the material facts and the insurer has no reasonable means of discovering them, although this same argument could be advanced in respect of general contract law.
Another aspect of good faith arising out of insurance contracts is the rule that an insurer settling claims under a limited liability policy must act in good faith towards the insured and must have regard to his or her interests both in the defence of actions against the insured and in their settlement .
The Supreme Court of Ireland have taken a very different view to the principle of good faith in insurance law and this is best highlighted by the case of Aro Road and Land Vehicles Ltd v Insurance Corporation of Ireland in this case the assured wished to send goods by road via a carrier. At the carrier’s instigation they effected insurance, the carriers acting as the insurer’s agents for this purpose. They were asked only for the details of the journey and the value of the goods, and did not volunteer any further information. The lorry carrying the goods was hijacked and set on fire, but the insurers refused to pay out on the policy, pleading that the assured had failed to disclose that their managing director had, some 20 years previously, been convicted of a number of offences of receiving stolen motor vehicles, for which he had served a sentence of 21 months imprisonment. The decision in this case was in summation that this was not reason enough for the insurance policy to be invalidated and the reasoning was that there is no breach of utmost good faith if the proposer has genuinely forgotten a material fact, at least where there is nothing (eg a proposal form) to jog his memory. Utmost good faith, they say, requires a genuine effort at accuracy, but does not require the proposer absolutely to guarantee the accuracy (and by implication the completeness) of his disclosure. This shows an inherent flexibility in the courts of Ireland to utilise and dismiss the notion of good faith in a sensible manner and this is evident in the general application of good faith in Ireland.
Again in Contracts for the sale of land the vendor of land is under a duty to disclose material matters relating to the title which are known to the vendor but which the purchaser has no means of discovering . The duty of good faith also exists in the following situations, the mortgagee’s exercise of a power of sale, in relation to the principles of equity governing fiduciaries, undue influence and unconscionable conduct and estoppel, including promissory estoppel and in the duty to refrain from making misrepresentations.
More importantly it is suggested that in certain situations there exists a common law duty on the parties to a contract to co-operate in achieving the objects of the contract. Where the parties have agreed that something shall be done which cannot effectively be done unless both parties agree in doing it, there is an implied obligation on each party to do all that is necessary to be done on his or her part for the carrying out of the thing . This can be seen specifically in the case of Meehan v. Jones where performance of the contract was conditional on the purchaser receiving approval for finance on satisfactory terms. Wilson J considered that there was an obligation on the purchaser to make reasonable efforts to obtain finance on such terms, though we doubted that the purchaser was required to do more than act honestly in deciding whether to accept or reject an offer of finance. That approach to the situation gave effect to the expectations of the parties and achieved a fair and sensible balance of their interests.
Another important element of the concept of good faith is that that can be seen in the notion of fiduciary relationships. The principles of a fiduciary relationship require the disclosure of material matters and require the fiduciary to subordinate his or her interests to the legitimate interests of another by reason of the relationship which subsists between the two parties. It can of course be argued that the fiduciary principle is stronger than the good faith doctrine in that it gives primacy to the interests of the party to whom the fiduciary obligation is owed. The good faith doctrine is concerned with those who contract and are on an equal footing.
The principle of good faith also finds ground in the doctrine of “unconscionable bargaining”, this is the situation where relief is granted when a transaction, is so unconscionable that it cannot be allowed to stand. The requirement is thus that there exists an unconscientious taking advantage of the serious disability or disadvantage of the person in the inferior bargaining position by procuring or retaining the benefit in question in a way that is both unreasonable and oppressive .
In Australia, unconscionability has been relied upon as a ground in relieving a purchaser from forfeiture of his equitable interest under a contract of sale pursuant to a notice making time of the essence of the contract leading to rescission of the contract . Once relief against forfeiture was available specific performance of the contract could be ordered. The purchaser had gone into possession under the contract and erected a house on the land but was unable to pay the balance of the purchase price on the due date. This approach was taken further in the case of an instalment contract for the sale of land under which the purchasers had been let into possession, though they were not entitled to possession until completion, and had built a house on the land . Again, the contract had been rescinded, this time for non-payment of an instalment. In this instance the majority likened a terms contract to a mortgage, the forfeiture provision being by way of security for the payment of the purchase price so that there was no need to establish unconscionable behaviour of an exceptional kind. In Australia, the emergence from the shadows of this ground of equitable relief has relegated the doctrine of undue influence to a position of relative unimportance. Unconscionability and undue influence overlap, the latter being more limited in scope, concerned as it is with the exercise by the contracting party of an independent and voluntary will.
Perhaps the most important notion of good faith can be found in the law of restitution which transcends the traditional common law causes of action and equitable grounds for relief. General principles are being articulated and refined which may apply indifferently, whether the basis of the claim has its origins at common law or in equity. In Lipkin Gorman v. Karpnale Ltd , it was acknowledged that the underlying principle governing the recovery of money had and received at common law in restitution is unjust enrichment. Here again unconscionability underlies the claim for unjust enrichment and imports into contract law the notion of good faith.
Good faith and fair dealing concepts are already substantially in place under English law, though not in contract negotiation. In that area, the application of specific good faith and fair dealing duties, based on the reasonable expectations of the parties, might advance the interests of justice. Furthermore, recognition of good faith and fair dealing concepts would bring greater coherence and unity to the varied array of principles which are presently available in the area of contract performance. Finally as Mason points out “the criticism of those doctrines may be no more than the reluctance to accept unconscionability as a basis for relief; in other words, the reluctance is in truth an objection to the application by courts of generalised concepts and standards instead of rigid rules” . As to whether or not there exists a future in English Law for the principle of good faith remains to be seen. There are underlying notions of the principle of good faith and it would seem that the sensible notion would be to codify this principle and make it generally applicable to all contractual dealings; it seems unlikely however that English Law is willing to accept such a principle.
Aro Road and Land Vehicles Ltd v Insurance Corporation of Ireland  IR 403
Bridgewater v. Leahy (1998) 194 C.L.R. 457
Carlish v. Salt  1 Ch. 335
Carter v. Boehm (1766) 3 Burr. 1905
Devonport Borough Council v. Robbins  1 N.Z.L.R. 1
Distillers Co. Bio-Chemicals (Aust) Pty. Ltd v. Ajax Insurance Co. Ltd (1974) 130 C.L.R. 1
Interfoto Picture Library Ltd v. Stiletto Visual Programmes Ltd  Q.B. 433
Louth v. Diprose(1992) 175 C.L.R. 621
Mackay v. Dick (1881) 6 App. Cas. 251
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Printing and Numerical Registering Co. v. Sampson (1875) L.R. 19 Eq. 462
Stern v. McArthur (1988) 165 C.L.R. 489.
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