![]() | The examples and perspective in this article deal primarily with English speaking countries and do not represent a worldwide view of the subject.(December 2024) |
Contract law |
---|
![]() |
Formation |
Defences |
Interpretation |
Dispute resolution |
Rights of third parties |
Breach of contract |
Remedies |
Quasi-contractual obligations |
Duties of parties |
|
Related areas of law |
By jurisdiction |
Other law areas |
Notes |
|
In contract law, the implied covenant of good faith and fair dealing is a general presumption that the parties to a contract will deal with each other honestly, fairly, and in good faith, so as to not destroy the right of the other party or parties to receive the benefits of the contract. It is implied in a number of contract types in order to reinforce the express covenants or promises of the contract.
A lawsuit (or a cause of action) based upon the breach of the covenant may arise when one party to the contract attempts to claim the benefit of a technical excuse for breaching the contract, or when he or she uses specific contractual terms in isolation in order to refuse to perform his or her contractual obligations, despite the general circumstances and understandings between the parties. When a court or trier of fact interprets a contract, there is always an "implied covenant of good faith and fair dealing" in every written agreement.
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”. [1] 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. [1] 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. [2]
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. [1]
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 expresses an unwritten contractual term that the parties would have included in their contract had they thought about it. [3] As a result, a breach of the implied covenant generally 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). [4] 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[ citation needed ] have followed the example of certain landmark decisions from California courts, which rejected such tort liability against employers in 1988 [5] [ better source needed ] and against banks in 1989. [6] [ better source needed ]
In Canadian contract law, there are two distinct duties requiring parties to act in good faith. The first, pertaining to pre-contractual relations, is a duty to negotiate in good faith, while the second is a duty to act honestly in the performance of contractual obligations. The two duties are equally relevant to both Québec's civil law and the other provinces' and territories' common law approaches to contract law, representing an attempt by the Supreme Court of Canada to extend the duties of good faith embedded in Québecois law to the jurisprudence of the country's common law jurisdictions. Additionally, in the common law provinces and territories, the doctrine of estoppel is another way in which the courts restrict the ability of parties in a contract to act in bad faith.
The duty to negotiate in good faith is enshrined in Québecois contract law by the broader obligation on individual's to exercise their civil rights in good faith and has been recognised in certain circumstances in the common law jurisdictions. In Québec, this right is grounded in section 1375 of the civil code, which provides that parties to a contract must act in good faith not only at the time an obligation is performed but also "at the time the obligation arises". [7] While English common law did not traditionally recognise a duty to negotiate in good faith, Canadian contract law recognises the duty where an imbalance in bargaining power exists between the parties to a contract. [8] Circumstances giving rise to this duty include: negotiations between franchisors and franchisees, insurers and insured parties, contracts pertaining to marriages and separation agreements, invitations to tender, and fiduciary relationships. [8] Courts may also recognise a duty to negotiate in good faith in situations involving a pre-existing relationship between the parties, particularly where the negotiation pertains to collateral terms in an otherwise complete contract, as well as in situations where parties to an oral contract have agreed to negotiate the terms to be recorded in a written contract. [8] In circumstances where one party has incurred expenses in anticipation of a contract and the other party withdraws, in bad faith, from negotiations; the violation of the duty to negotiate in good faith may entitle the aggrieved party to restitutionary damages. [8]
With regard to invitations to tender, this duty is applied in the form of the Contract A doctrine. A "process contract", referred to as "Contract A", [9] is formed between the owner (person, company or organisation tendering the project) and each bidder when a "request for proposal" is responded to in the form of a compliant bid, sometimes also known as submission of price. The owner must deal fairly and equally with all bidders, and must not show any favouritism or prejudice towards any bidder(s). In essence, this concept boils down to the right of an individual to have equal opportunity to be successful with their bid for work. A breach of Contract A may occur if the owner (or an owner's officer or representative, see vicarious liability), provides information, changes specification during the tendering process to unfairly benefit a particular bidder, enters into closed negotiations with an individual bidder in an effort to obtain more desirable contract conditions, etc. The most common situation in which an owner is accused of having breached Contract A occurs when a bidder is selected who is not the lowest bidder. This contravenes established custom and practice, which would normally dictate that the lowest bid be awarded the subsequent contract to perform the work, Contract B, but is not normally a source of a breach if handled properly. Successful suits for breach typically occur where the lowest bidder is excluded based on a clause or stipulation that is either not clearly outlined in the tender documents (such as preference for local bidders) or is deemed by the courts to be too broadly worded to have any meaning.
The duty of honest contractual performance (referred to in Québec as the doctrine of abuse of rights) is a contractual duty and implied term of a contract. In Québec, it is rooted in sections 6 and 7 of the civil code which provide that "every person is bound to exercise his civil rights in accordance with the requirements of good faith" [10] and that "no right may be exercised with the intent of injuring another or in an excessive and unreasonable manner, and therefore contrary to the requirements of good faith". [11] It was extended to Canada's common law provinces and territories as a result of the decision of the Supreme Court of Canada in the case of Bhasin v. Hrynew. In essence, this duty requires parties to a contract to act in good faith and with honesty in exercising their rights under a contract and in delivering their obligations under a contract. This duty prohibits parties to a contract from "[lying] or otherwise knowingly mislead[ing] each other about matters directly linked to the performance of the contract”. [12] While it is also currently an integral part of the jurisprudence of Canada's common law provinces and territories, the duty of honest contractual performance is rooted in the civil law doctrine of abuse of rights and the Supreme Court of Canada has established that precedent from Québecois contract law is applicable to interpreting this duty in cases arising in the country's common law jurisdictions and vice versa. [13] Consequently, in all Canadian jurisdictions, this duty is rooted in articles 6, 7, and 1375 of the Civil Code of Québec; with article 7 in particular providing that "no right may be exercised with the intent of injuring another or in an excessive and unreasonable manner". [14] While this duty does not serve to extinguish or negate a party's rights under a contract, it serves to limit the manner in which parties to a contract may exercise their rights [15] by mandating that parties must act in "good faith both at the time the obligation arises and at the time it is performed or extinguished". [7]
Estoppel is an equitable remedy whereby a contracting party may not rely on the terms of a contract if, "by its words or conduct", it led the other party to believe that certain terms in the contract will be ignored, interpreted in a particular way, or given a less strict construction. [16] One type of estoppel recognised in Canada's common law jurisdictions is estoppel by convention, which operates where three criteria are satisfied: 1) a "manifest representation" of a "shared assumption of fact or law" pertaining to the application or construction of a contractual term, 2) one party acts in reliance of the "shared assumption" in a manner that alters its legal position, 3) the party that acted in reliance shows that it did so reasonably and would be significantly harmed if the term is strictly enforced. [17] [18] The Ontario Court of Appeal has held that the "shared assumption" required to invoke estoppel by convention does not need to arise as a representation by the party seeking enforcement of the contractual term. [19] Two distinct but related types of estoppel recognised in Canada are promissory estoppel or estoppel by representation, which enables courts to enforce a promise or representation by one party to a contract stating that it will not invoke a particular term of a contract or rely upon a particular provision of law if the other party has acted to its own detriment in reliance on such a promise or representation. [20] In Canada's common law provinces and territories, these categories of estoppel serve to require parties to a contract to act in good faith in invoking contractual terms.
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. [21] Over the past thirty years, EU law has injected the notion of "good faith" into confined areas of English private law. [22] The majority of these EU interventions have concerned the protection of consumers in their interactions with businesses. [23] 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. [24]
On the European continent, good faith often is strongly rooted in the legal framework. In the German-speaking area, Treu und Glauben has a firm legal value—for instance in Switzerland, where Article 5(3) of the constitution [25] states that the state and private actors must act in good faith. This leads to the assumption, for example in contracts, that all parties have signed in good faith, so that any missing or unclear aspect of a contract is to be interpreted based on an assumption of the good faith of all parties. In the Netherlands, Dutch : redelijkheid en billijkheid (art. 6:248 BW) has significant legal value
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). [26] The act stipulates, in Section 13, obligations of all parties within a contract to act with utmost good faith. The New South Wales Court of Appeal case Burger King Corporation v Hungry Jack's Pty Ltd (2001) [27] was also concerned with good faith and referred to an earlier case, Renard Constructions v Minister for Public Works (1992). [28]
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." [29] 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 favor was illegal, since he could have found out that he did not enjoy any such favorable decree if he had inquired with a little more care and attention. [30]
In Walford v Miles (1992), the House of Lords ruled that an agreement to negotiate in good faith for an unspecified period is not enforceable, and a term to that effect cannot be implied into a lock-out agreement (an agreement not to negotiate with anyone except the opposite party) for an unspecified period, since the lock-out agreement did not oblige the vendor to conclude a contract with the intended purchaser. [31]
The court in Gold Group Properties v BDW Trading Ltd. in 2010 considered the nature and extent of an obligation "to act at all times in good faith", finding that this obligation does not impose a fiduciary duty whereby the party concerned would be required to abandon the pursuit of its own self-interest. A contractual commitment to act in good faith serves "to qualify self-interest, requiring that both parties act so as to allow both to enjoy the anticipated benefits of the contract". [32]
Punitive damages, or exemplary damages, are damages assessed in order to punish the defendant for outrageous conduct and/or to reform or deter the defendant and others from engaging in conduct similar to that which formed the basis of the lawsuit. Although the purpose of punitive damages is not to compensate the plaintiff, the plaintiff will receive all or some of the punitive damages in award.
The law of agency is an area of commercial law dealing with a set of contractual, quasi-contractual and non-contractual fiduciary relationships that involve a person, called the agent, who is authorized to act on behalf of another to create legal relations with a third party. It may be referred to as the equal relationship between a principal and an agent whereby the principal, expressly or implicitly, authorizes the agent to work under their control and on their behalf. The agent is, thus, required to negotiate on behalf of the principal or bring them and third parties into contractual relationship. This branch of law separates and regulates the relationships between:
A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties. Typically, a fiduciary prudently takes care of money or other assets for another person. One party, for example, a corporate trust company or the trust department of a bank, acts in a fiduciary capacity to another party, who, for example, has entrusted funds to the fiduciary for safekeeping or investment. Likewise, financial advisers, financial planners, and asset managers, including managers of pension plans, endowments, and other tax-exempt assets, are considered fiduciaries under applicable statutes and laws. In a fiduciary relationship, one person, in a position of vulnerability, justifiably vests confidence, good faith, reliance, and trust in another whose aid, advice, or protection is sought in some matter. In such a relation, good conscience requires the fiduciary to act at all times for the sole benefit and interest of the one who trusts.
A fiduciary is someone who has undertaken to act for and on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence.
Assignment is a legal term used in the context of the laws of contract and of property. In both instances, assignment is the process whereby a person, the assignor, transfers rights or benefits to another, the assignee. An assignment may not transfer a duty, burden or detriment without the express agreement of the assignee. The right or benefit being assigned may be a gift or it may be paid for with a contractual consideration such as money.
Anticipatory repudiation or anticipatory breach is a concept in the law of contracts which describes words or conduct by a contracting party that evinces an intention not to perform or not to be bound by provisions of the agreement that require performance in the future.
Canadian tort law is composed of two parallel systems: a common law framework outside Québec and a civil law framework within Québec, making the law system is bijural, as it is used throughout Canadian provinces except for Québec, which uses private law. In nine of Canada's ten provinces and three territories, tort law originally derives that of England and Wales but has developed distinctly since Canadian Confederation in 1867 and has been influenced by jurisprudence in other common law jurisdictions. As most aspects of tort law in Canada are the subject of provincial jurisdiction under the Canadian Constitution, tort law varies even between the country's common law provinces and territories.
Insurance bad faith is a tort unique to the law of the United States that an insurance company commits by violating the "implied covenant of good faith and fair dealing" which automatically exists by operation of law in every insurance contract.
Canadian contract law is composed of two parallel systems: a common law framework outside Québec and a civil law framework within Québec. Outside Québec, Canadian contract law is derived from English contract law, though it has developed distinctly since Canadian Confederation in 1867. While Québecois contract law was originally derived from that which existed in France at the time of Québec's annexation into the British Empire, it was overhauled and codified first in the Civil Code of Lower Canada and later in the current Civil Code of Quebec, which codifies most elements of contract law as part of its provisions on the broader law of obligations. Individual common law provinces have codified certain contractual rules in a Sale of Goods Act, resembling equivalent statutes elsewhere in the Commonwealth. As most aspects of contract law in Canada are the subject of provincial jurisdiction under the Canadian Constitution, contract law may differ even between the country's common law provinces and territories. Conversely; as the law regarding bills of exchange and promissory notes, trade and commerce, maritime law, and banking among other related areas is governed by federal law under Section 91 of the Constitution Act, 1867; aspects of contract law pertaining to these topics are harmonised between Québec and the common law provinces.
Consideration is a concept of English common law and is a necessity for simple contracts but not for special contracts. The concept has been adopted by other common law jurisdictions.
A contractual term is "any provision forming part of a contract". Each term gives rise to a contractual obligation, the breach of which may give rise to litigation. Not all terms are stated expressly and some terms carry less legal gravity as they are peripheral to the objectives of the contract.
English contract law is the body of law that regulates legally binding agreements in England and Wales. With its roots in the lex mercatoria and the activism of the judiciary during the Industrial Revolution, it shares a heritage with countries across the Commonwealth, from membership in the European Union, continuing membership in Unidroit, and to a lesser extent the United States. Any agreement that is enforceable in court is a contract. A contract is a voluntary obligation, contrasting to the duty to not violate others rights in tort or unjust enrichment. English law places a high value on ensuring people have truly consented to the deals that bind them in court, so long as they comply with statutory and human rights.
A contract is an agreement that specifies certain legally enforceable rights and obligations pertaining to two or more parties. A contract typically involves consent to transfer of goods, services, money, or promise to transfer any of those at a future date. The activities and intentions of the parties entering into a contract may be referred to as contracting. In the event of a breach of contract, the injured party may seek judicial remedies such as damages or equitable remedies such as specific performance or rescission. A binding agreement between actors in international law is known as a treaty.
Culpa in contrahendo is a Latin expression meaning "fault in conclusion of a contract". It is an important concept in contract law for many civil law countries, which recognize a clear duty to negotiate with care, and not to lead a negotiating partner to act to his detriment before a firm contract is concluded. In German contract law, § 311 II BGB lists a number of steps by which an obligation to pay damages may be created.
Contractual terms in English law is a topic which deals with four main issues.
Contract law regulates the obligations established by agreement, whether express or implied, between private parties in the United States. The law of contracts varies from state to state; there is nationwide federal contract law in certain areas, such as contracts entered into pursuant to Federal Reclamation Law.
South African contract law is "essentially a modernized version of the Roman-Dutch law of contract", and is rooted in canon and Roman laws. In the broadest definition, a contract is an agreement two or more parties enter into with the serious intention of creating a legal obligation. Contract law provides a legal framework within which persons can transact business and exchange resources, secure in the knowledge that the law will uphold their agreements and, if necessary, enforce them. The law of contract underpins private enterprise in South Africa and regulates it in the interest of fair dealing.
Bhasin v Hrynew, 2014 SCC 71 is a leading Canadian contract law case, concerning good faith as a basic organizing principle in contractual relations in Canada's common law jurisdictions.
Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] EWHC 111 is an English contract law case, concerning the principle of good faith. The case posited that English law should recognize a limited form of good faith as an implied contract term.
Commonwealth Bank of Australia v Barker is a leading Australian judgment of the High Court which unanimously and firmly rejected the proposition that contracts of employment in Australia should contain an implied term of mutual trust and confidence.
Scheck v. Burger King Corp. (756 F. Supp. 543 was a case of the United States District Court for the Southern District of Florida in which it considered motions for summary judgement brought by defendant Burger King Corporation concerning four counts raised by Plaintiff Scheck who alleged that defendant "breached an implied non-competition agreement, an implied covenant of good faith and fair dealing an implied contract created by promissory estoppel and the Massachusetts Consumer Protection Act" which plaintiff alleged incorporates the proceeding three claims. Burger King moved for summary judgement on the basis that Scheck's claims were insufficient "as a matter of law", were barred by the Massachusetts Statute of Frauds, or were released by the plaintiff as a direct result of two releases executed by Scheck in 1985 and 1986, respectively. The case invoked legal questions concerning the covenant of good faith and fair dealing related to legal protection of the territory rights of franchisees.
{{cite web}}
: CS1 maint: multiple names: authors list (link)