Elements in a Contract 19

There are certain contracts which are known as contracts of good faith and the most common example of these type of contracts would be insurance policies whereby the party taking out or purchasing the policy is required to divulge personal details without concealing or hiding any facts. Failure to divulge the necessary information will allow the other party to rescind the contract without recourse to damages. The principle in Latin is called “Uberrimae Fidei”.

In Carter v Boehm (1766) the governor of Fort Marlborough in Sumatra took out an insurance policy with Boehm in the eventuality that the fort was attacked. The fort was built by the British East India Co. At the time the policy was taken out there was a possibility that the fort may be attacked on two fronts – by the inhabitants of the island and the French who were keen to exert their authority in the area.

Both conflicts revolved around different issues. The locals were trying to take back what was rightfully theirs and the French were trying to gain access to lucrative trading routes. The matter before the courts was to decide whether the second risk i.e. the risk of a French invasion was insured or if both risks were insured?

The court decided that in contracts of good faith the following details must be disclosed, prior to entering into the contract: -

i) All material facts must be disclosed

ii) Material facts are facts that would influence the decision of the insurers as to whether the insurers will underwrite the risk or otherwise

iii) Facts that that the underwriter ought to know need not be disclosed

iv) Facts that the person applying for insurance did not know or that he or she wasn’t aware of, need not be disclosed.

In summary, contracts of good faith require the disclosure of all the facts as they were known to the parties at the time the contract was entered into. The principle not only includes personal insurance but all other types of insurance including many modern-day financial instruments like the underwriting of letters of credits.

In International Management Group UK Ltd v Simmonds (2003) – IMG intended to acquire the rights to televise the annual Sahara Cup tournament held between India and Pakistan. In 1999 because of the Kargil conflict the Indian government refused to allow the Indian team to participate. IMG who had acquired the televised rights for 2000 fearing another cancellation insured the contract. During the negotiations IMG failed to inform the insurers that there were rumors that India might pull out of the tournament. India subsequently pulled out of the tournament and IMG made a claim. The insurers argued that IMG was aware that there was a possibility that India might pull out and they did not inform the insurers of this and therefore IMG had not acted in good faith. The insurers were successful. It was held that in contracts of good faith the party seeking coverage was under a duty to disclose all material facts.

In Street v Derbyshire Unemployed Workers Centre (2004) an employee was caught making damaging disclosures about her manager. She later refused to cooperate with an independent investigator and was subsequently dismissed. The employee claimed that her disclosures were made in good faith and brought the matter before the Employment Appeal Tribunal (EAT) that dismissed her claim and concluded that her disclosures were motivated by personal antagonism. She appealed and the court agreed with the EAT and concluded that a disclosure cannot be made in good faith if there was an ulterior motive to the disclosure.

A statement may be true at the time it was made but may later turn out to be false due to a change in circumstances. In With v O'Flanagan (1936) a doctor was selling his practice and at the time of sale he informed the purchaser that the practice raked in £200 per annum. The statement was true at the time the contract of sale was negotiated but the doctor subsequently fell ill and as a result was unable to conduct clinic and the number of patients dwindled. The purchaser realizing that the practice was not making as much as he’d been told sued on the grounds of misrepresentation.

It was held that when a statement is true at the time it was made but a subsequent change in circumstances renders it untrue, than keeping silent about the change in circumstances, will amount to a misrepresentation.

There are also occasions that the party intending to sell or dispose of an item or a property may only reveal half the facts. Under normal circumstances the rule in Dimmock v Hallett (1866) will apply and these partial disclosures are treated as flourishing descriptions or mere puffs or sales talk.

 

Copyright © 2019 by Dyarne Ward and Kathiresan Ramachanderam