Good Faith and Insurance Contracts

Peter MacDonald Eggers and Sir Simon Picken

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CHAPTER 2 Other contracts of the utmost good faith

2.01 It is instructive to consider other contracts that have been marked with the brand of uberrima fides, either with a view to discovering the essence or purpose of the duty as applied to insurance contracts or to provide a source for comparison as we analyse insurance law in this respect. While the purpose of the duty is fairly settled, albeit not universally convincing with respect to all shades of the duty, it is difficult to find a single thread that runs its way through all the other contracts of the same ilk. It seems that the various contracts that we shall discuss have developed the notion of the utmost good faith for their own purposes and not with any adherence to a grander design.1

Ordinary contracts and contracts uberrimae fidei compared

2.02 This work is dedicated to a discussion of the effect of the duty of good faith on the relationship created during the negotiations leading to and by the issuance of an insurance policy. The duty in this context has received substantial judicial attention and, consequently, the law surrounding the obligation to employ good faith has developed to an extent achieving some sophistication. This is particularly so in recent years, where the circulation of information has been increased exponentially by the improvement in and innovation of computer and electronic exchange systems. 2.03 However, one should not neglect the fact that the notion of good faith is relevant, to some degree or other, to all contracts; at the very least, the parties will be obliged to refrain from fraudulent conduct. However, it is now well established that parties cannot bind themselves with an obligation to negotiate a contract in good faith in general terms,2 except by entering into a contract of the utmost good faith or by contractually assuming an obligation of disclosure. There are other classes of contracts where the duty of good faith, or at least manifestations of it (notably, the duty of full disclosure), is applicable, moulded to fit the circumstances of the relationship created by the contract.3 2.04 Good faith insists on fair and open dealing between all contracting parties. As misrepresentation is proscribed in relation to all contracts, it is not surprising that the issue of uberrima fides most commonly arises in connection with mere lapses in disclosure by one of the parties to a contract. If a contract can be said to be one of the utmost good faith, the

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law will demand a higher degree of candour for such a contract than an ordinary commercial contract. Conventional contracts4 will respect the principle of caveat emptor, whereby each party may negotiate with one another and may play their cards5 close to their chest by carefully selecting what is and what is not revealed to his counterpart.6 That is, there is no general duty of disclosure shouldered by a contracting party, even though holding back the ace may seem to be morally blameworthy.7 However, when a card is played, it should be openly played for all at the table to see. No part of the card should be concealed or used to misrepresent the hand. It is at this point that the divisions of the law become blurred, when even in the realm of ordinary commercial contracts, the concealment of a fact coupled with a positive representation or misleading conduct may give rise to an actionable misrepresentation.8 Similarly, a representation that is true at the time of its utterance may cease to be true; the failure to disclose this change may give rise to a misrepresentation.9 It is an open question whether there is a cause of action, where a party is aware that the other party is labouring under a misapprehension as to a material fact.10 It appears that, under an ordinary contract, a party will comply with his duty merely by not being dishonest, as opposed to being open and candid. 2.05 Contracts of the utmost good faith, on the other hand, require honesty and full disclosure. Relief is obtainable from the courts in the event of a non-disclosure occasioned by fraud, negligence or ordinarily excusable absent-mindedness. It is therefore important to be able to classify a contract as one of the utmost good faith or at least

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displaying some attributes of such a contract.11 Whether the contract in question may be so classified depends upon the “substantial character” of the contract and “how it came to be effected”.12 2.06 The rationale of the duty of the utmost good faith in insurance contracts will be discussed presently.13 For present purposes, it is sufficient to note that the traditionally acknowledged inequality of the knowledge of the assured and the insurer justified the introduction of the duty of full disclosure.14 In Re Denton’s Estate,15 the court looked at the sources of information concerning the contractual risk available to both parties to decide that the contract before it was not one of insurance, but rather a guarantee. However, such an approach ignores that there have been other bases for imposing a duty of disclosure on the parties to a particular contract. For example, the law requires full disclosure from persons who are in a position of trust or in a fiduciary relationship vis-à-vis another person, such as partners or trustees or solicitors.16 Further, an obligation of disclosure may arise when the circumstances are such that the presumed or expected basis of the relationship or contract does not exist or is altered.17 2.07 These have been the principles underlying the imposition of a duty of disclosure in particular instances of unfairness and the law has responded accordingly but has not overstretched itself to introduce any all-embracing principle calling for “fair and open dealing”.18 There has recently been a flicker of judicial interest in developing a broader, more universal duty of good faith in connection with all contracts, not just insurance contracts.19 This is especially evident in the recent judgments of Leggatt J. In particular, in Yam Seng

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Pte Ltd v International Trade Corp Ltd,20 the court explored the possibility of a wider duty of good faith which may be implied or implicit in all contracts, and not just those considered in this chapter. In that case, Leggatt J said:

“In recent years the concept has been gaining ground in other common law jurisdictions… . Under English law a duty of good faith is implied by law as an incident of certain categories of contract, for example contracts of employment and contracts between partners or others whose relationship is characterised as a fiduciary one. I doubt that English law has reached the stage, however, where it is ready to recognise a requirement of good faith as a duty implied by law, even as a default rule, into all commercial contracts. Nevertheless, there seems to me to be no difficulty, following the established methodology of English law for the implication of terms in fact, in implying such a duty in any ordinary commercial contract based on the presumed intention of the parties … What good faith requires is sensitive to context. That includes the core value of honesty. In any situation it is dishonest to deceive another person by making a statement of fact intending that other person to rely on it while knowing the statement to be untrue. Frequently, however, the requirements of honesty go further.”

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