Good faith (law)

In U.S. law, the legal concept of implied covenant of good faith and fair dealing arose in the mid-19th century because contemporary legal interpretations of “the express contract language, interpreted strictly, appeared to grant unbridled discretion to one of the parties”.[2] In 1933, in the case of Kirke La Shelle Company v. The Paul Armstrong Company et al. 263 N.Y. 79; 188 N.E. 163; 1933 N.Y., the New York Court of Appeals said:

In every contract there is an implied covenant that neither party shall do anything, which will have the effect of destroying or injuring the right of the other party, to receive the fruits of the contract. In other words, every contract has an implied covenant of good faith and fair dealing.

Furthermore, the covenant was discussed in the First Restatement of Contracts by the American Law Institute, but before adoption of the Uniform Commercial Code in the 1950s, the common law of most states did not recognize an implied covenant of good faith and fair dealing in contracts.[2]. Certain states, such as Massachusetts, have stricter enforcement than others. For example, the Commonwealth of Massachusetts will assess punitive damages under Chapter 93A which governs Unfair and Deceptive Business Practices, and a party found to have violated the covenant of good faith and fair dealing under 93A may be liable for punitive damages, legal fees and treble damages. [3]

In the Indian Penal Code, "good faith" is defined under Section 52 as Nothing is said to be done or believed in "good faith" which is done or believed without due care and attention. [4] The Privy Council expanded on this meaning in the case of Muhammad Ishaq v. The Emperor (1914), in which it held that an action taken by the defendant based on a belief of having a decree passed in his favour, was illegal since he could have found out that he in fact did not enjoy any such favourable decree, if he had inquired with a little more care and attention.[5]

The implied covenant of good faith and fair dealing is especially important in U.S. law. It was incorporated into the Uniform Commercial Code (as part of Section 1-304), and was codified by the American Law Institute as Section 205 of the Restatement (Second) of Contracts.[2]

Most U.S. jurisdictions view the breach of the implied covenant of good faith and fair dealing solely as a variant of breach of contract, in which the implied covenant is merely a "gap-filler" that provides yet another contractual term, and breach thereof simply gives rise to ordinary contractual damages. Of course, this is not the most ideal rule for plaintiffs, since consequential damages for breach of contract are subject to certain limitations (see Hadley v. Baxendale).

In certain jurisdictions, breach of the implied covenant can also give rise to a tort action, e.g. A.C. Shaw Construction v. Washoe County, 105 Nevada 913, 915, 784 P.2d 9, 10 (1989).[6] This rule is most prevalent in insurance law, when the insurer's breach of the implied covenant may give rise to a tort action known as insurance bad faith. The advantage of tort liability is that it supports broader compensatory damages as well as the possibility of punitive damages.

Some plaintiffs have attempted to persuade courts to extend tort liability for breach of the implied covenant from insurers to other powerful defendants like employers and banks. However, most U.S. courts have followed the example of certain landmark decisions from California courts, which rejected such tort liability against employers in 1988[7] and against banks in 1989.[8]

The Canadian Supreme Court created a new common law duty of honest contractual performance in 2014 in its ruling on the case of Bhasin v. Hrynew [9]

The English private law has traditionally been averse to general clauses and has repeatedly rejected the adoption of good faith as a core concept of private law.[10] Over the past thirty years, EU law has injected the notion of "good faith" into confined areas of English private law.[11] The majority of these EU interventions have concerned the protection of consumers in their interactions with businesses.[12] Only Directive 86/653/EEC on the co-ordination of the laws of the Member States relating to self-employed commercial agents has brought "good faith" to English commercial law.[13]

On the European Continent, Good Faith often is strongly rooted in the legal framework. In the German speaking area, "Treu und Glauben"(Good faith) has a firm legal value, e.g. in Switzerland, where the Constitution's Art. 5[14] states that the state and private actors have to act in good faith. This leads to the assumption, e.g. in contracts, that all parties have signed in good faith and any missing or unclear aspect of a contract shall be interpreted based on the assumption of good faith of all parties.

The concept of good faith was established in the insurance industry following the events of Carter v Boehm (1766), and is enshrined in the Insurance Contracts Act 1984 (ICA).[15] The Act stipulates under Section 13 the obligations of all parties within the contract to act with utmost good faith.

• Yam Seng Pte Ltd v Int Trade Corp Ltd [2013] EWHC 111

• Legal dictionary definition
• Another dictionary definition
• Discussion of the covenant
• Law firm publications on the covenant