Table of contents

Introduction

 Meaning of the term company.

 Meaning of the term director
 Meaning of the term good faith
 Position of a director in a company

Main body

 Duties of a director to act in a good faith

 Liability of a director to act in a good faith

Conclusion

 Summarization on how to minimize the impact of good faith

INTRODUCTION

Meaning of the term Company

The term “Company” has been defined under Section 2 of The Companies Act Number 12 of
2002 as, “A Company formed and registered under the Companies Act or an existing Company”.
This definition under the Companies Act is not exhaustive and does not give a clear definition of
the term Company or what the Company is. However the term company can be defined as an
association of many persons who contribute money and employ it for common purposes.

Meaning of the term Director

The term “Director” defined under Section 2 of The Companies 1 as “Any person occupying the
position of director by whatever name called”. Also in Case of Abadin Railway Co V Black
Bros 2 tries to make clarification and actual meaning of directors by simply defines “Directors
are a body to whom is delegated a duty of managing general affairs of a Company”.

Position of a director in a company

Directors are regarded as agents or trustees of the company, however it cannot be stated that they
are nothing more than agents or trustees of the company because they have some independent
powers they are not bound to consult the shareholders in the most matters.

Good faith is an abstract and comprehensive term that encompasses the sincere, belief or motive
without any malice or the desire to defraud others. The word good faith is derived from Latin
word Bona fide and they are used interchangeably.3

MAINBODY

Director has a duty to act in good faith in the interest of the Company. Thus their power should
direct towards performing duties which are honestly believed to be for the best interest of the
Company.

The following includes the areas where a duty of good faith can be implied into a contract:
Under English law whilst a duty of good faith may be implied in certain types of contract, (for
example employment contracts or partnership agreements or insurance contracts)
To the extent any terms of good faith are implied into a contract by the court, this will only be
done to give effect to the presumed intention of the parties. Therefore, the parties are free to
modify or exclude any such implied terms expressly in the agreement.
For example, in TSG Building Services plc v South Anglia Housing Ltd) 4, the High Court
ruled that there was no implied term of good faith because the contract stated expressly that the
parties would act reasonably and work together in a “spirit of trust, fairness and mutual co-
operation”. The judge held that the contract expressly and exhaustively defined the scope of the
parties’ reciprocal obligations to co-operate and, therefore, no further obligations could be
implied.

1
Act No 12 of 2002
2
(1854)
3
Http/Www. legal dictionary/good faith/.com
4
(2013)
Directors must have a regard to the interest of employees
The duty of a director to act in a good faith cut across to the employees of the company. When a
director of a company is required to make decision on exercising his duties, directors are
required to consider also the interest of the employees of the company and not only the interests
of the members/shareholders.

According to Section 183(1)5.The matters to which the directors of the company are to have
regard in the performance of their functions include, in addition to the interests of the members,
the interests of the company's employees. (2) The duty imposed by this section on the directors is
owed by them to the company (and the company alone) and is enforceable in the same way as
any other fiduciary duty owed to a company by its directors.

Director’s decision must have good impact to the community and environment

The duty of a director to act in a good faith also can be traced in involvement of a company in
promoting the community welfare. Always image of a company perceived by the community
members depend on how the decision of the company impact the community, company decision
must be directed to the benefits of the community. For instances, a company can decide to
engage in promoting and giving education to the community on how to employ themselves rather
than depending to be employed, through this the company finances the community.

Directors have to maintain reputation on the company

The director towards his act in good faith he or she has to maintain the production of the quality
product con currently to the reputation on high standard of products with respect to adherence to
spirit of contracts. This involves producing goods and services of high standard which will insure
the sustainability market on the product of a Company and leads good image of the company to
the community. That approach was followed in CPC Group Limited v Qatari Diar Real
Estate Investment Company 6where the obligation was to adhere to the spirit of the contract,
and/or the agreed common purpose, rather than relying on a strict interpretation of rights and
obligations.

Directors have to promote success of the company

As the director one must act in good faith for the success of the company and benefit of the share
holders having regarding to the likely of any decision long term. According to Lord Goldsmith,
“success means long term increase in value of the company”, but the company’s constitution and
decisions made under it may also lay down the appropriate success model for the company.
Directors’ decisions have to be directed on success of the company so as to meet short term and
long term plans of the company. This will consider the interest of employees, business
relationship with suppliers, consumers and others. We might look to Berkley Community
Village Ltd v Pullen7 where good faith imposed an obligation “to observe reasonable

5
companies Act No 12 of 2002
6
(2010)
7
(2007)s
commercial standards of fair dealing”.
Directors should not have a conflict of interest

Being a director of a company is like an agent or a trustee, whenever the director of a company
enter in a contract with a third party has to save the interest of the company. Director of a
company is bound to act upon the direction of his principle and not for the collateral matters or
benefiting himself. If the director has personal interest on a contract, the director has to disclose
interest on it at the general meeting of the company as provided under section 209(1) 8 which
state that,” It shall be the duty of a director of a company where he or any connected person is in
any way, whether directly or indirectly, interested in a contract or proposed contract with the
company to declare the nature of that interest at a meeting of the directors of the company”

Directors required to resolving a dispute by friendly discussions

Where the obligation relates to resolving a dispute by friendly discussions, Director obliged to
enter into fair honest and genuine discussions aimed at resolving a dispute between individuals in
an organization or between company and surrounding communities or between co-partners of the
business cornered. Refers The Case of (Emirates Trading Agency LLC v Prime Minerals
Exports Private Ltd9

Directors may not be obliged to accept or negotiate variations to the payment terms

Any ordinary commercial contracts, Director may not be obliged to accept or negotiate variations
to the payment terms. He or she may required to use the established methodology by
implications terms what would contract read as whole against relevant background (includes
shared values and norms of behavior such as honest and good faith between the parties who
entering the commercial contracts (Gold Group Properties Ltd v BDW Trading Ltd) 10

Liabilities of a the director to act in a good faith for best interest of a Company

Breach of the duty of good faith

If an obligation (express or implied) to act in good faith is breached, it may be held to be a
repudiators breach, entitling the innocent party to terminate the contract and claim damages.
However, breach still needs to be proved and in the most recent case where good faith was held
to be implied, on the facts there was no breach of duty.
The Case of Emirates Trading Agency LLC v Prime Minerals Exports Private Ltd 11
revolved around a clause in a long term purchase contract which provided that in the event of
dispute the parties should first seek to resolve the dispute by friendly discussion and if no
solution could be found then the dispute could be referred to arbitration. The Commercial Court
held that the clause "must import an obligation to seek to do so in good faith". Such an obligation
went without saying and was necessary to give business efficacy to the contract. Although it
might be difficult to prove a breach of such an obligation, this should not be confused with a
suggestion that the clause lacked certainty. On the facts of this case the judge found that
8
Companies Act No 12 of 2002
9
(2014)
10
(2010)
11
( May 2014)
"friendly discussions" had taken place and consequently the condition precedent to arbitration
was satisfied.

Conclusion
Where a proposed contract might be classed as a “relational” one, it may be advisable to
expressly deal with good faith, to avoid the duty being implied as well as where an express term
is included, it should as far as possible be precisely defined example by giving examples of its
meaning, to reduce uncertainly
Make it clear whether an obligation to act in good faith applies to particular obligations or to the
whole contract. The former are more likely to be enforced. To minimize the impact of any
implied good faith obligation, make sure the contract is sufficiently detailed, so that there is no
need for the courts to imply such a duty in order to "fill in the gaps"

REFERENCES
CASES

U.K Practical Law

STATUTES

THE COMPANIES ACT NO 12, 2002

BOOKS

Ombella,J.S and Massawe,M.P,(2011),Elementary Company Law in Tanzania: A Student’s

Hand Book, Karljamer Print Technology, Dar s salaam

Kapoor, N.D (1994) Elements of Company Law (21st Ed),Sultan Chand and Sons Publishers,
New Delhi

ONLINE WEBSITE

Http/www.legal dictionary.com

Http/www.hfw.com