Good Faith and Fair Dealing in Contracts

Good Faith Fair Dealing ContractsGood Faith and Fair Dealing in Contracts

The Restatement (Second) of Contracts, section 205, adopted by the American Law Institute in 1979 and published in 1981, states that “every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.”

The first Restatement of Contracts, dated 1932, included some provisions for purchasers and assignees, but it did not include a universal obligation of good faith in contract performance or enforcement. It was added in 1979 based on the common law of many court cases and in the interest of fairness, gap filling, and justice.

Roman Statesman Cicero

Cicero statueThe origins of the good faith principle can be found in De Officiis (On Duties) 3.17, 44 BC, by Cicero, a famous statesman and writer in ancient Rome, written shortly after Caesar’s assassination. Book 3 discusses the conflict between morality and expediency. Cicero states that citizens have a duty to act in an honest, moral, ethical, fair, respectful, and honorable manner when dealing with others.

Roman law recognized the concept of bona fides meaning fidelity to promise.  The covenant is included in civil law legal systems but was not historically a part of English common law until recently.

Law and justice are not limited to written civil laws. They arise from reason and rational principles, inherent in nature as natural law, and are unchanging and eternal.

Uniform Commercial Code

In the United States, the obligation to perform a contract in good faith started at the turn of the twentieth century in scattered cases, mostly in New York.

In the Uniform Commercial Code (UCC), promulgated in 1951, and now widely adopted by most states, in section 1-201(19) good faith is defined as “honesty in fact in the conduct or transaction concerned.”

Section 1-203 states “every contract or duty within the UCC imposes an obligation of good faith in its performance or enforcement.”

For a merchant, UCC section 2-103(1)(b) states that it means “honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.”

International Law

The United Nations Convention on Contracts for the International Sale of Goods (CISG), and the International Institute for the Unification of Private Law (UNIDROIT), both mandate that parties contract in good faith.

Breach of Contract

breach of contractThe covenant of good faith and fair dealing cannot be waived by the parties.

While an implied duty of good faith and fair dealing is inherent in every contract, the parties to a contract may also include an express covenant of good faith and fair dealing as a contract term.

The covenant is limited to assuring compliance with the express terms of the contract. It may not be extended to create additional, ideal, or utopian obligations that are not included in the actual contract.

It is particularly applicable when one party has discretionary power affecting the other party’s rights.

The covenant of good faith refers to the party’s attitude, conduct, and cooperation in fulfilling the scope, purpose, and terms of the contract. A party cannot omit, commit, or hinder an act that unfairly interferes with the intended purpose or reasonably expected rights and benefits of the contract.

Fair dealing may require more than honesty. It generally requires that a party cannot act contrary to the spirit and intent of the contract, even if you give the other party advance notice. Fair dealing means equitable or unbiased provisions or decisions.

The duty of good faith and fair dealing in enforcement applies to the assertion, settlement, and litigation of contract claims and defenses.

Good faith excludes conduct characterized as bad faith, which violates community standards of decency, fairness, or reasonableness.

A violation of the duty of good faith and fair dealing will be considered a breach of contract. The breaching party can be held liable for damages that occur due to the breach.

Bad Faith

Bad faith may be overt or may consist of inaction.

Courts have recognized the following types of behavior to be acts of bad faith:
breach of contract torn pageevasion of the spirit of the bargain
lack of diligence and slacking off
willful rendering of imperfect performance
abuse of a power to specify terms
interference with or failure to cooperate in the other party’s performance
harassing demands for assurances of performance
rejection of performance for unstated reasons
willful failure to mitigate damages
abuse of a power to determine compliance or to terminate the contract

Bad faith in enforcement includes dishonest conduct, fabricating a pretended dispute, asserting an interpretation contrary to one’s own understanding, or falsification of facts.

Good Faith Under Islamic Law of Contracts

1. The contract should be by free mutual consent.
2. Goods may not be resold before receipt by the first buyer.
3. Before resale, purchased goods must be delivered to the buyer, and may not be resold from the previous seller’s location.
4. No interest may be charged.
5. The contract may not include unharvested crops or fruits.
6. Buying or selling may not include loan terms.
7. Defects in sold items should not be hidden.
8. Measurements and quantities must be accurate.
9. False claims and oaths by the seller are prohibited.
10. Be gentle in attitude, accommodate buyer’s remorse.
11. It is prohibited to buy/sell or interfere with items that are already bound by another buyer/seller.
12. A contract of debt for a fixed period should be written.

Smart Contracts and Electronic Agents

It is easier to write software for blockchain smart contracts and electronic agents where there are easily determined, measurable, true/false, or yes/no inputs or conditions.

Current generation software cannot make decisions based on unwritten social customs, ethics, and moral values of right and wrong, implied reasonable expectations, or unforeseen circumstances when discretionary choices must be made in good faith in compliance with the spirit and intent of the contract.

So, a smart contract may need to be linked to a traditional contract or addendum to handle special circumstances beyond the capabilities of current generation software.

To avoid problems, when executing a contract, both parties should be prepared to fulfill the terms and conditions in good faith.

References
1. Colorado Supreme Court, Colorado jury instructions on contract law civil disputes including court case citations.
2. Judicial Council of California, California jury instructions on contract law civil disputes including court case citations.
3. Towards A Better Understanding of Good Faith Concept in Islamic Contract Law, research paper, International Journal of Engineering and Technology (IJET), Sep 2018, CC BY 3.0,

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