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OPERATIONS PAYMENT IN GOOD FAITH | CASE LAWS ON RESPONSIBILITY OF PAYING BANK | LRAB EXAMS 2022

OPERATIONS PAYMENT IN GOOD FAITH | CASE LAWS ON RESPONSIBILITY OF PAYING BANK 

This post is about the concept of Good faith as discussed in contact law, one important topic from LRAB Syllabus 2022.

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Now that you know what to do if you want to cover your Junior Associate of the Indian Institute of Bankers Syllabus for NOV 2022 Exams, we can move to our today’s article on Doctrine of Good Faith in Contracts, an important subject matter for the law paper.

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HOW THIS DOCTRINE STARTED: The Duty To Act In Good Faith

Many countries do recognize the duty to act in good faith & acting in good faith imposes a duty on the parties to observe reasonable commercial standards of fair dealing and also requires fidelity to the agreed common purpose and consistency. Thus, the doctrine of good faith implies acting truly, honestly and adhering to reasonable commercial standards of fair dealing. By incorporating the doctrine of good faith, a contract imposes a duty of good faith in its performance and enforcement to the extent of such contract.

Doctrine of good faith is in place in various jurisdictions:

  • USA: The principle of good faith is established in their Uniform Commercial Code
  • France: Its Civil Code, states that agreements must be made in good faith.
  • Germany: The German Civil Code establishes a general obligation to conclude contracts in good faith.
  • The Netherlands: The Dutch Civil Code states that “the relationship between the parties to the agreement is also governed by the principles of reasonableness and fairness

DOCTRINE OF GOOD FAITH IN INDIA

The doctrine of good faith is not expressly provided for in the Indian Contract Act, 1872 (“the Act”). However, some provisions impose an obligation on the parties to act in good faith. 

Example: If 1 person employs another person to act, and the agent acts in good faith, the employer is bound to indemnify the agent for the consequences of such an act, although it may cause injury to the rights of third parties.

Insurance contracts are also governed by the doctrine of “Uberrima Fidei”, i.e. “utmost good faith“. The doctrine of good faith is essential in an insurance contract because in such contracts the parties are required to affirm a higher degree of good faith. The insurance contract is a contract in the highest good faith and the contracting parties are obliged to disclose all material information at the time of concluding the contract.

CASES WHERE GOOD FAITH IS ESPECIALLY APPLIED

Surety not liable for delivering to executor without title:

In case – the bailee has no title to the goods and the executor in good faith delivers them back to the executor or according to his instructions, then the executor is not liable for such delivery to the owner.

Agent’s lien:

If the agent has, with the consent of the owner of the goods, or proof of title to the goods, any lien made by him while acting in the ordinary course of the agent’s business – it shall be as valid as if he had been expressly authorized by the owner of the goods; provided that the mortgagor acts in good faith and did not discover at the time of the pledge that the pledgor was not authorized to pledge. 

Note: Here, the expressions “dealer” and “documents of title” have the meanings assigned to them in the Indian Sale of Goods Act, 1930 (3 of 1930).

Lien by a person who is in possession by virtue of a canceled contract:

When the pledgor acquires possession of goods which he has pledged under a contract which is void under section 19 or section 19A, but the contract has not been rescinded at the time of the pledge, the pledgor acquires a good title to the goods, provided he acts in good faith and without notice of defect in the mortgagor’s title.

The representative is to be compensated for the consequences of actions taken in good faith:

If one person employs another person to act, and the agent acts in good faith, the employer is obliged to indemnify the agent for the consequences of such action, even if it may cause injury to the rights of third parties. 

“If one person employs another person to act, and the agent acts in good faith, the employer is bound to indemnify the agent for the consequences of such an act, although it may cause injury to the rights of third parties.” To be specific.

So, the obligation to act in good faith enters commercial contracts both through its inclusion as an explicit term and also implicitly. The duty of good faith promotes: 

  • honesty and 
  • fair dealing between parties to commercial contracts. 

However, the parties may decide to choose – either to exclude or to define the duty to act in good faith. Parties may also carefully design to incorporate the doctrine of good faith into contracts.

So, I hope, you now understand how the concept of Good Faith works in Indian contracts & what are the impacts & expectations. If you would like to read more notes or articles free on Legal & Regulatory Aspects of Banking Paper, then you can visit our website & search them up to prepare for your upcoming law paper of JAIIB 2022.

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