Good Faith Theory

The principle of “good faith” in contract law has been inserted with the intention of encouraging parties to a contract to deal with each other in a just and sincere manner. The implied concept of “good faith” turns up not only in the countries having civil law systems but also in the countries with common law systems. The key difference between the application of “good faith” in common law countries and civil law countries is that under the common law, the principle of good faith is applied only at the time of performance and enforcement of contracts, whereas in several civil law systems the principle of “good faith” is applied with respect not only to performance of obligations, but also to pre-contractual bargaining, the formation and interpretation

National Bank of Canada applied the doctrine of abuse of contractual rights and decided on various factors that may lead to the abuse of contractual rights and obligations. The court was of the opinion that an abuse of contractual rights may occur when the contractual rights are not exercised in a reasonable manner i.e. in accordance with the rules of equity and good faith. Even though the bank in this case acted well within its rights under the contract, the question raised by the court was whether it executed its rights in just and equitable manner. In other words, the appellant did not commit anything wrong by recalling the loan and liquidating company’s assets but, the issue was whether the appellant acted in good faith while doing so? The company and the bank had been doing business for past 50 years and still the bank did not give any notice of such action to the company. Although the bank was not obliged to give notice but it abused its contractual rights by acting in bad faith and not giving reasonable time to the company to fulfill its obligations under the

There have been several similar cases where the Bundesgerichtshof (The Federal court of Justice of Germany) has accepted principle of equity and good faith as an overriding principle. It has been held that noncompliance with a formality cannot be pleaded by a party who has enjoyed the benefits of a transaction but claiming invalidity of the contract to avoid his part of the bargain. The doctrine of culpa in contrahendo (fault in the conclusion of contract) has also been applied by the federal court in various cases which operates to cure the formally invalid contract, thus giving the innocent party greater protection than his reliance