Business law (Doctrain of good faith)

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A. Introduction
The duty of good faith and fair dealing is the fiduciary duty owed between those in
special relationships. It is the duty owed by one partner to another. The duty of a
corporation's officers to the corporation. The duty owed by a lawyer to a client and the
duty owed by a Trustee to the beneficiaries of a trust.
The doctrine of good faith and fair dealing is like the concept of reasonableness -- easy
to articulate but difficult to apply with precision. Most lawyers know the doctrine in the
context of personal property sales because the Uniform Commercial Code is clear on
that issue. The doctrine is often murky, however, when applied to real estate
transactions.
B. What is Good-Faith?
Good faith is an abstract and comprehensive term that encompasses a sincere belief or
motive without any malice or the desire to defraudothers. It derives from the translation
of the Latin term bona fide, and courts use the two terms interchangeably.
The term good faith is used in many areas of the law but has special significance in Co
mmercial Law. A good faith purchaser for value is protected by the Uniform Commercial
Code, which every state has adopted under sections 1201(9) and 2403 of the code
C. OVERVIEW: The Legal Status, Contours and
Normative Justification of the Duty of Good Faith
A. Legal Status
The duty of good faith is well established in corporate law. To begin with, the duty has
long been established in statutes. Many or most corporate statutes explicitly impose the
duty of good faith on directors, officers, or both, and all or virtually all statutes implicitly
impose the duty of good faith under a variety of provisions, such as those concerning
indemnification. The duty of good faith also has long been implicitly recognized in law.
B. Contours
The duty of good faith in corporate law is comprised of a general baseline conception
and specific obligations that instantiate that conception. The baseline conception
consists of four elements: subjective honesty, or sincerity; non violation of generally
accepted standards of decency applicable to the conduct of business; non violation of
generally accepted basic corporate norms; and fidelity to office

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C. Normative Justifications
The duty of good faith in corporate law is supported by four normative justifications:
First, the traditional duties of care and loyalty do not cover all types of improper
managerial conduct.
Second, various rules limit a manager's accountability under the duties of care and
loyalty
Third, the duties of care and loyalty characteristically (although not invariably) function
as platforms for liability rules.
Fourth, the duty of good faith provides the courts with a principled basis for articulating
new specific fiduciary obligations that come to be seen as appropriate in response to
changes in social and business norms, and in the general understanding of efficiency
and other policy considerations, but that cannot be easily accommodated within the
duties of care and loyalty
D. The Application of Good Faith
1) The formation and performance of the contract
The principle of good faith should apply not only at the formation of a contract, i.e.
during negotiations, but during the performance. Good faith is also necessary during
enforcement of a contract, if proceedings are necessary to enforce it.
2) Non-contractual good faith
Pre-contractual good faith and non-contractual good faith tend to become
indistinguishable in the common law. Juenger points out that the concept of good faith
in law tends to blur the distinction between contractual and non contractual obligations
and that “the idea of a pre contractual duty to bargain in good faith.
3) Where no contract is ever formulated
Where the question of a pre-contractual obligation of good faith arises, however, a
distinction must be made between where there is an enforceable contract or agreement
and where there is no enforceable contract or agreement. In the absence of an
enforceable contract or agreement, bad faith may actually give rise to remedies in tort,
but not in contract, because the liability arises from an extra-contractual obligation.

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E. Duty to act in good faith implied into
commercial contracts
Businesses entering into commercial contracts should consider whether terms, such as
a duty to act in good faith, might unexpectedly be later implied into them because the
parties shared an expectation that certain values and norms would apply.
A distributor was granted the right to sell a supplier's perfume. The relationship soured
and the distributor terminated the agreement claiming the supplier breached the
agreement by shipping perfume late, undercutting it and giving false information.
1. Leases
In a recent case, the Supreme Court of New Mexico drew a distinction between a
party‟s latitude in granting consent as opposed to agreeing to a contract modification.
In Cafeteria Operators, a lease severely limited the physical structure and layout of a shopping center. The
landlord sought to construct a new building in the shopping center that would require that the tenant
consent and the lease be modified. The tenant agreed to consider a proposed lease modification. As plans
for the construction progressed, the tenant declined to agree to modify the lease and sued to enjoin the
landlord from beginning construction in violation of the lease. In a separate settlement agreement, the
tenant agreed to modify the lease only if certain conditions were met. The landlord completed the building
and the tenant sued for breach of the lease. The trial court found that the landlord failed to establish its
legal right to construct the building and ordered the landlord to demolish the building.
On appeal, the landlord argued that the tenant breached its obligation of good faith and fair dealing when it
declined to negotiate the lease modification. The appellate court explained that New Mexico recognizes a
duty of good faith and fair dealing in every contract but that that duty does not permit a court to override
express contractual terms. court explained that it is one thing to say that where a lease expressly
contemplates certain actions that can be taken only with the consent of the other party, then that consent
cannot be unreasonably withheld. It is quite another to impose on a party an obligation to negotiate
reasonably and in good faith with respect to any change that the other party wishes to make in the contract.
We will not make the leap from the first proposition to the second.”55 The court affirmed the order requiring
the landlord to tear down the building.
Reversing the trial court, the California Supreme Court held that the termination clause expressly permitted
the landlord to act in the manner that it did. The court explained that the duty of good faith is imposed in
every contract, and it is not necessary that a party breach a specific provision of the contract to have
breached the implied duty of good faith. The duty can be breached by dishonest conduct or by honest but
objectively unreasonable conduct. The duty of good faith is imposed “to protect the express covenants and
promises, not to protect some general public policy interest not generally tied to the contract’s purpose.”68
The greatest challenge is to determine whether the conduct at issue, although not prohibited by the lease,
is contrary to the justifiable expectations of the parties when they entered the contract.
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2. Purchase and Sale Agreement:
The sales contract can outline performance standards for the seller and the buyer that
are consistent with the parties‟ obligations to act in good faith. As long as these
standards are reasonable in light of what is normal for the transaction and industry
customs, the good faith requirement is met. Both the seller and the buyer must
cooperate and establish the terms of the sales contract with the intent to reach an
agreement and subsequently allow each party to complete the obligations under the
contract.
The contract should expressly state what constitutes full performance for the seller and
the buyer. In general, a business that contracts with a buyer to sell goods must transfer
the items in a manner that complies with the contract terms and during a reasonable
time or during the time frame that‟s required by the contract. The seller must complete
performance in good faith by delivering conforming goods that are acceptable under the
contract. The buyer has the basic obligation to pay for and accept items that conform to
the requirements of the sales contract.
Either the seller or the buyer can sue for damages, if the other party fails to act in good
faith and perform according to the sales agreement. Court will apply the Uniform
Commercial Code standards of good faith and reasonable performance with sales
contracts
An example of Good Faith in the Termination of Sales Contracts Courts in several cases
addressed claims for breach of contract based on a party’s failure to act in good faith. In the following case,
the court did a nice job of tying an arbitration panel's implication of a reasonability requirement in the
application of a termination provision in an agreement with the obligation of good faith.
In Burton Corp. v. Shanghai Viquest Precesion Industries Co., Ltd., No. 10 Civ. 3163(DLC), 2010 WL
3024319 (S.D.N.Y. August 03, 2010), the court affirmed an arbitration award in favor of Shanghai Viquest
Precesion Industries Co., Ltd. (“Viquest”) to recover for unpaid shipments of snowboard bindings made to
Burton Corp. (“Burton”) for use in its snowboards and for wrongful termination of the sales agreement. The
agreement permitted Burton to terminate if Viquest’s “financial position pose[d] a risk to Burton's business.”
Additionally, the agreement provided that Viquest would, upon request, return Burton’s molds upon
termination for any reason. During the term of the agreement and while Burton owed Viquest $1.8 million
for unpaid shipments, Burton terminated, claiming financial concerns, and requested return of the molds.
When Viquest did not return the molds, Burton had to replace the molds and filed an arbitration to recover
its cost of replacement as the agreement provided for arbitration of disputes. Viquest counterclaimed for its
lost profits due to the early termination. The arbitration panel concluded that Burton could only terminate
under the financial clause if it reasonably believed that Viquest’s financial position threatened its prospects,
which Burton did not prove. Accordingly, the arbitration panel awarded Viquest its lost profits for the early
termination and denied Burton’s request for the cost of replacing the molds as Burton was not itself in
conformance with the agreement and owed Viquest substantial sums.

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The District Court for the Southern District of New York denied Burton’s request to vacate the arbitration
award against it, confirming the award in full. The court treated the reasonableness as derived from the
covenant of good faith and fair dealing, citing to the U.C.C. section 1-304 obligation of good faith contained
in every contract. The court observed that the obligation of good faith required Burton to have a reasonable
basis for terminating the agreement. Moreover, Burton’s failure to pay Viquest for outstanding invoices put
pressure on Viquest’s financial condition.
2.1 Purchase and Sale Agreements of Real Estate
Agreements for the purchase and sale of the real estate are often contingent on the
occurrence of certain events. The duty of good faith and fair dealing can play a
significant role in determining the consequences of the non occurrence of a contractual
condition precedent. Generally, if a party‟s obligation is subject to a condition precedent,
that party need not perform unless either the condition has been satisfied or waived. If
the party whose performance is subject to a condition precedent controls the events that
will lead to the occurrence or non occurrence of that condition, then that party must act
consistently with the duty of good faith and fair dealing.
2.2 Installment Land Sales Contracts
A buyer under an installment land sale contract can be exposed to substantial risks of
losing the property under contract as well as losing all of the payments it has made to
the date of the forfeiture. The duty of good faith and fair dealing is one theory that has
been used to protect the buyer‟s interest in these transactions. When the purchaser
under an installment land sales contract is seeking partners to enter a joint venture, the
duty of good faith requires the seller to cooperate with the purchaser‟s efforts to recruit
partners.
3. Brokerage Agreements
A broker‟s right to receive its commission is also protected by the doctrine of good faith
and fair dealing
4. Good Faith In Insurance Law
A contract of insurance is a contract unberrimae fidei (i.e. one based on good faith).It is
the duty of the insured person to disclose all material facts concerning the subject
matter of the insurance for example marine insurance, life insurance, fire insurance.
What will be the material fact depends on the circumstances of the case .The disclosure
must be full and fair. If a material fact is not disclosed or if there is misrepresentation or
fraud the insurer can avoid the contract means the disclosure of facts must be
substantially accurate. Misleading statements amount to a breach of duty. But
unimportant misstatements my be excused.
example : The application for an insurance policy was asked whether he had applied to
any other company for insurance and whether such application has been accepted. He
answered that he was insured with two companies but failed to disclose that his
application was rejected by several other companies. It was held that there was material
concealment and policy was set aside London Assurance Co, v Mansel

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5. In partnership law
There is an implied duty of good faith and honesty between partners. It does not matter
whether or not there is a written partnership agreement or if there is what that
agreement provides, as there will be an implied duty of good faith and honesty – a
„fiduciary duty‟ – owed between the partners. This duty is placed within a partnership by
the Partnership Act 1890 (the “Act”).Section 30 of the Act, for example, places a duty on
partners not to compete with the business of the partnership and in the event that a
partner makes a profit from a competing business, sec 30 states that such profits are to
be paid to the partnership.
These duties – which are found in common law and in the Partnership Act of 1890
include:
1. To act in the utmost good faith to the partnership and the other partners.
2. Not to make a personal profit from the trust placed in them.
3. Not to place themselves in a position where their own interests conflict with their duty.
4. To account to the partnership for any benefit derived without consent of the other
partners, from any transaction which involves the partnership or any use by the partner
of the partnership property, name or business connection.
5. To account for and pay to the firm any profits made in any business which competes
with the business of the partnership, without consent of the partnership.
6. To render true and accurate accounts and full information of all matters relevant to
the partnership, to the other partners or their representatives.
7. Not to place themselves in a situation where their and/or another‟s interest would or
may conflict with duties owed to the partnership or the other partners.
6. Banking
There is also an implied duty of good faith in banking law from both parties‟ means from
customer as well as from bank also. For example in case of applying for a loan a customer have
to disclose about his financial status and bank has also a duty to disclose about their interest ,
procedure or any extra charges.
7. Arbitration
Arbitration of disputes is a widespread alternative to lawsuits filed in court. Arbitration is

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common in many commercial transactions such as loans, credit card agreements,
stockbroker agreements and construction contracts. Arbitration is contractual, that is, it
occurs only when the parties agree to do it. Arbitration clauses appear in many standard
business contracts, and most parties never give a thought to them, until there is an
actual dispute.
Like any contract, a successful arbitration depends on the good faith of the parties. If
arbitration is to achieve its goals, all parties must respect the process and cooperate.
Just as one should not even enter into a routine contract with an untrustworthy party,
one should not freely agree to arbitrate a dispute with an adversary who cannot be
trusted to proceed in good faith.
8. Employment Law
Establishing and maintaining good faith relationships is the basis of the employment
relations system in for both collective and individual arrangements.
Good faith generally involves using practical common sense and treating others in the
way you would like to be treated. This means dealing with each other honestly, openly
and with mutual respect. Acting in good faith reduces the risk of conflict and problems. It
is also a requirement of the Employment Relations Act.
There isn‟t a single set of requirements, because every workplace is different. However,
there are some key expectations of a good faith relationship:
› Employers, employees and unions should be responsive and communicative with
each other.
› The employee‟s employment agreement should reflect genuine discussion and
negotiation.
› The employee should have access to appropriate information when the employer is
making decisions that may affect his/her job.
› Problems that arise should be dealt with in a manner that is consistent with what a
reasonable person would do.
Employers should have good processes and procedures for dealing with issues and
should make sure that employees are aware of them. Making sure that everyone in the
workplace understands what to expect is a good start. The employer and employee
must bargain in a fair way and act in good faith with each other

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F. Law of good faith
according to different countries
EUROPEAN APPROACH
In European countries like Germany, France and Italy, a duty to act in good faith is
imposed upon parties negotiating a commercial contract. In other words, it‟s about
playing fair by being honest and reasonable in negotiations before entering into the
contract. While parties in a contract are free to pursue their own self-interest, good faith
should limit any exploitive underhand dealing. If one party does not act in good faith
then the contract may be set aside or amended in the other party‟s favor.
BRAZILIAN LAW
The principle of good faith is alive and pulsing on the Brazilian legal system. It can be
found all over the Brazilian Civil Code, disciplining the civil and commercial
relationships, especially the contracts .Since it is an open rule, the application of the
principle of good faith has to be shaped by the judges, in a case by case basis There
are three functions by which the principle of good faith implements its powers, that
being interpretation, creation of collateral duties and restriction of the free exercise of
rights. These functions are of utmost help in covering the widest portion as possible of
the legal relationships with the protection „blanket‟ of the general principle of good faith.
IN ENHLISH LAW
Historically, the English courts have tended to be hostile to the concept of good faith.
However, a duty of good faith has long been implied into contracts of partnership,
agency and other agreements involving fiduciary obligations.
More recently, the English courts have shown themselves willing to give effect to
express obligations to act in good faith in a wider range of commercial contracts . In
some instances, they may even be prepared to imply such a duty.
For example, in Yam Seng v International Trade Corporation (2013), the judge
suggested that, in some cases, a duty of good faith might need to be implied into other
commercial contracts, such as franchise, joint venture and long term distribution
agreements where “a high degree of communication [and] co-operation” is required to
make the relationship work.
Recent case law Yam Seng – February 2013
In Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB), the parties entered into
a contract under the terms of which ITC granted Yam Seng an exclusive agreement in respect of the
distribution of fragrances bearing the name "Manchester United". The relationship between the parties
broke down and proceedings were brought by Yam Seng for breach of contract and misrepresentation.

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Yam Seng asserted that it was an implied term of the contract that the parties would deal with each other in
good faith. Specifically, Yam Seng argued that ITC had (i) failed to act with an implied obligation of good
faith by prejudicing Yam Seng's sales by offering the same products for domestic sale below the duty free
prices that Yam Seng was permitted to offer; (ii) instructed or encouraged Yam Seng to incur marketing
expenses for products that ITC was unable or unwilling to supply; and (iii) offered false information upon
which Yam Seng relied to its detriment. There were no express terms of the contract covering any of these
points.
On the facts, only two obligations were implied. Firstly, the court found there was an obligation not to
undercut duty free prices, and secondly, there was an obligation not to knowingly provide false information,
and a duty of good faith was implied in both these respects. The first obligation was contrary to usual
standards of commercial dealing and the second was implied into the agreement between the parties as a
matter of fact.
The judge, Leggatt J, had various reasons why he saw fit to imply these two terms. In the main, it was
necessary for terms to be implied because the contract was skeletal in form, it had not been professionally
drafted and it did not take into account an important industry assumption that duty free prices would be
lower than domestic retail prices, which was common ground between the parties at trial.
Leggatt J also commented obiter that the contract was a long-term distributorship agreement which
required the parties to communicate effectively and cooperate with each other in its performance.
Accordingly, there would probably have been an implied obligation upon ITC to keep Yam Seng informed of
ITC's best estimate of when products would be available for sale and to inform Yam Seng of any material
change in this information without Yam Seng having to ask.
In the United States, this principle is enshrined in the Uniform Commercial Code which provides that "every
contract or duty within this Act imposes an obligation of good faith in its performance or enforcement".
INDIAN LAW
Indiana does not recognize an implied duty of good faith in contracts other than
insurance contracts, contracts involving a fiduciary duty and employment contracts.
BANGLADESH LAW
Good faith,” in a commercial law term that refers to the implied covenant of fair dealing
that is a part of every agreement. A party acts in good faith when they are honest, fair
and don‟t seek to improperly deprive a party to an agreement of the benefits thereof.
Good faith is also an important concept in the Universal Commercial Code , which has
been adopted in various forms in jurisdictions in the Bangladesh. Most notable is the
concept of the “good faith purchaser” of goods. This states that if a party purchases
goods in the ordinary course of business, without knowledge of their origin, they may
retain such goods with clean title thereto, whether or not the seller actually was able to
transfer clean title in the eyes of the law. Most of these principles are indeed derived
from customary international law or accepted as a general principle of law

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G. CONLUSION
A complete, universally applicable description of the implied duty of good faith and fair
dealing is impossible. One reason is that the duty varies depending on the context and
the status of the parties. Cases which discuss the duty approach it very differently.
Some courts view the duty as a catch-all obligation to keep contracting parties fair and
honest in their dealings. Other courts take a narrower approach. Courts have also
demonstrated a reluctance to overrule jury verdicts. As shown, the duty of good faith
continues to have viability and can be a powerful weapon in a wronged party's arsenal
of legal theories.
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