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Doctrine of good under Indian corporate law

By

Sakshi Shairwal

Sarthak Sharma


The concept of Good Faith has been evolved through the past and has several interpretations in different laws. It is a notion that good faith often applies only to contract law as the doctrine is majorly applied in it, but it is relevant to several other private laws such as property law, family law and laws related to the affair of inheritance and gifts. Since it is a vague notion and never been defined by any of the laws, it has been difficult to precisely define the concept of good faith. Several countries have defined it differently under different laws. Such as in Netherland, the doctrine of good faith holds value and relevance in international laws, company law, bankruptcy law and inheritance law. Thus all laws related to private matters in Netherland envisage the doctrine of good faith. The German law goes a step ahead and circumscribes every civil and criminal law under the principle of good faith. Additional to this, every European law related to community, national or international importance epitomizes the doctrine of good faith. The origin of good faith can be divided under three heads- historical aspect, medieval aspect and during the nineteenth century.


1.) Historical Aspect


The doctrine originates from the Greeks where the valuable inputs of Pythagoras, Stoics and Zeno laid the foundation stone of it. While the basis of the principle were justice and equity, it was stated that, “This new concept opens the contractual system to the ethics of what is just and equitable, the latter, according to CICERO’s dream, linking all men, citizens or pagans, in a universal society of boni viri, of good men”. It is the roman statesman Marcus Tullius Cicero who coined the perfect and complete definition of good faith, “These words, good faith, have a very broad meaning. They express all the honest sentiments of a good conscience, without requiring a scrupulousness which would turn selflessness into sacrifice; the law banishes from contracts ruses and clever maneuvers, dishonest dealings, fraudulent calculations, dissimulations and perfidious simulations, and malice, which under the guise of prudence and skill, takes advantage of credulity, simplicity and ignorance.”


The Roman procedure followed the formulae system while dispensing justice. It operated through praetors who hold the authority similar to the magistrate whose duty was to receive the citizens, address their pleadings and lay down a certain plan to execute the proceeding before the judge. The number of prevalent rights was correlated to the number of formulae. Since there were limited rights available, thus the formulae were also limited. The praetor ensured that the smooth functioning of formulae system until the 150 BC where due to expansion of Rome into other countries such as Mediterranean region induced the change in it. As wider area was under the control of Roman Empire, a new post named peregrine praetor was created that dealt with disputes among non citizens or foreigners. As the peregrine dealt with cases related to outsiders, thus it was believed that the old formulae system could not have been applied. Hence a new law was framed specially related to the disputes arising out of the foreigners.


It was in that era of peregrine, where the concept of good faith of action or bona fide action was born. Several roman scholars on the basis of different historical timeline vary the listing of action of the following principle. Roman statesman Ciceron, lists the bona fide judicia in issues related to fiduciary duty, guardianship duty, in matters related to agency and contracts related to rents and sales. It was two hundred years later where roman jurist Gaius added nogotiorum gestorum, societas and l’action rei uxoriae. Years later, Justinian added the claims to divide a property, pledges and action praecriptis uerbis. As the old laws lacked these lists of actions, the urban praetor introduced this list of action into the civil law towards the end of the second century BC. Thus, it seems evident that the correlation of right of action of good faith with contract law commenced during this period of time. It further gave the judges the right to intervene in a legal relation based upon the following principle, where damages can be curtailed by applying the principle of good faith.


Further, the contract in which the following principle was applied were different to formal contracts since the former were based on consensual basis, but the interpretation or difference between the two was adjudged by the discretion of the judge. Thus, the judge has a broad power of interpretation of the contracts. The doctrine of bona fide also led to the formation of the fundamental principle of contract law, that is, consensualism. It was from that period of time that consensual contracts were enacted and executed differently from the contract formed under natural or pure law related to ius civile, that is, civil law. But above all, the power to determine the action of good faith was bequeathed upon the judge who determined whether a party’s action led to good faith or not. As the interpretation of the judge supersedes the principle of good faith, the intentions of the party are restricted to three factors-


I.) Essentiality: If the action was so essential that the act could not exist.

II.) Naturalia, that is included in the contract unless expressly excluded.

III.) Accidentalia, which are only included in the contract by virtue of an express clause.


Major application of the principle of good faith was in the contract of a buyer and a seller, as a seller is duty bound to disclose all the relevant facts related to the product. Also, other application of included in the doctrine of abuse of rights and the prevalence of the principle of rebus sic stantibus. Thus the principle was widely used in contemporary laws till the fifth century AD where a split in the theory of bona fidei contractus jolted the doctrine. Thus, the principle of good faith was divided into two parts- one related to common law, while the other related to aequitas.


2.) In Medieval Law


Till the 12th century, the doctrine of good faith gained pace in the roman government and the contracts totally shifted and were drafted on the principle of good faith. Unlike before the 12th century where contracts formulated upon consensualism was an exception, rather, during the medieval period contracts based upon consensualism were recognized widely. Not only in the Roman Empire, was the doctrine of good faith recognized in the field of commerce both at the national and the international level. It was also during this period where the concept of exception doli arose, which laid the foundation for principle of abuse of right.


Eventually during the medieval period a conflict arose between the principle of bona fides and aequitas. The Romans and the Germans adopted different approach while dealing with the two principles. Before adjudicating the two principles as same by the Byzantine period (476-1453), the Germans considered it as different. But, the Romans had a different ideology regarding the doctrine where good faith was considered an adaptation of the aequitas. Later the great roman ruler Constantine went a step ahead to declare the principle of good faith as an intrinsic part of the roman legal system. But as the law was applied, the extensive use of principles unfortunately induced the two notions to overlap are created a commotion in the legal system.


Thus this distinction in the doctrine of good faith by the two factions gives an understanding about different interpretations and application of the doctrine of good faith by several countries.


3.) In the Nineteenth Century


It is hardly known about the adaptation and codification of the doctrine in the nineteenth century, but the enactment of the laws during the Napoleon era provided significant systemization of the notion. Yet among all the uncertainty and unpredictability, the doctrine germinated from the natural law. But the insertion of good faith in natural law was undermined by several historians and positivists during the nineteenth century. It was due to distinctive and contradictive theories by Emanual Kant, Friedrich von Savigny and many other positivists that good faith lost its original connotation and modern theories turned out to be relevant.


Despite the school of positivists and Savigny insisted bequeathing more powers upon the judge with respect to the interpretation of the doctrine, contrary to it, the school of Begriffsjurisprudenz asserted that detailed definition of the doctrine should be formulated to avoid any conflict of interest of the party. This conflict between the two schools was quintessential in the evolution of the principle of good faith as several queries and interpretations regarding the same were addressed. Thus the rule of good faith was finally written in several legal systems of the nations. Though it received any strict definition, yet it gained tremendous growth during the nineteenth century.


GOOD FAITH IN INTERNATIONAL LAW


Good faith is a fundamental principle in public international law. Article 26 of the Vienna Convention mentions the doctrine of good faith by stating that every nation being a part of the treaty shall follow the treaty with good faith. Further, article 31 clarifies about the term good faith and states that the term good faith should be followed and interpreted in parallel to the objective and purpose of the treaty. This following interpretation of the term is also replicated in article 5 of the EEC treaty, which later turned into article 10 of the treaty of the European Union. The term “good faith” does not appear as such in the text. However, it is generally admitted that this text can be read as the transposition into the Community legal order of the directive laid down by the Vienna Convention. From this point of view, the text serves the purpose of “strengthening a pre-existing obligation” and is a “method of systematic interpretation” of Community legislation. Here again its role goes beyond a mere norm of interpretation.


GOOD FAITH IN DIFFERENT LAW


The principle of good faith holds greater significance in the Indian Contract Law. Though the doctrine is not expressly mentioned in the act but the spirit of the doctrine can be interpreted through different sections. Different propositions of the contracts such as- “An employer employing a person to do an act, and the agent does the act in good faith; the employer is liable to indemnify the agent against the consequences of that act, though it may cause an injury to the rights of the third party” and “Mere silence to the facts might likely affect to the willingness of a person but this cannot be said to have committed an act of fraud, misrepresentation, mistake or concealment of facts” propels the concept of good faith. Besides law of contract, good faith also finds its significance in insurance law. But in insurance law, the burden of the proof lies upon the insurer to prove the fraud committed beyond reasonable doubts. Not only insurance law, but laws related to allotment of shares and transfer of property also binds the principle of good faith.


CONCLUSION


The principle of good faith is widely applicable through its different interpretations. The principle is not even restricted to contract but finds its root in every other law whether the person has to be indemnified. Like every other principle the concept has evolved through the time by the invaluable inputs of the historians and legal scholars. But, after critical scrutiny of the principle it is needless to state that the principle is left to interpretation by the people. The same principle has different connotation in Dutch, German and French laws but every principle is evolved from the same Roman institution.


The doctrine also holds ground in the Indian law in every other aspect. Either contract law or insurance law, the doctrine is embedded deeply in the Indian legal system. But as the principle is not yet strictly defined and left to the interpretation of the judiciary, it can be misused and squandered by the arbitrary powers of the judge. Thus, the doctrine of good faith should be applied appropriately and interpreted rightly while adjudicating the facts of the case.


REFERENCES


I.) India: Doctrine of Good Faith

II.) Good Faith In International Trade

III.) Principle of Good Faith In India

IV.) History of Good Faith

V.) Good Faith in Constitutional Values




The article first published on Lexology.com and the same can be accessed here.



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