The Implied Obligation of Good Faith in Contract Law: Is it Time to Write its Obituary?
Texas Tech Law Review, Forthcoming
21 Pages Posted: 7 Aug 2009
Date Written: August 4, 2009
The concept of good faith has existed for thousands of years in Western civilization. Indeed, it has been asserted that the concept is “one of the bases of our civilized society.” The ancient Greeks recognized something similar to the notion of bona fides as “a universal social norm governing the relationships of its citizens.” For their part, the Romans converted the notion into a basis for legal action; Roman jurists incorporated the notion into the essence of “a number of legal rules defining the obligations in . . . normal commercial transactions . . . .” The notion played an especially important role in the enforcement of informal consensual contracts in classical Roman law.
The concept has also found its way into American commercial law. A majority of our jurisdictions recognize the concept as a matter of case law. Likewise, the American Law Institute included the doctrine in the Restatement (Second) of Contracts. The concept has a prominent role in the Uniform Commercial Code. Fifty of the 400 Code provisions expressly mention good faith. Article 2 of the Code, devoted to sales, includes 13 sections explicitly using good faith standards. The Code’s general good faith provision, § 1-304, announces: “Every contract or duty within the Uniform Commercial Code imposes an obligation of good faith in its performance and enforcement.” Moreover, if one can take the broad language in some of the judicial opinions at face value, the obligation has meaningful substantive content; many opinions contain sweeping language to the effect that the obligation precludes a contracting party from taking any action that would destroy or impair the other party’s contractual rights or benefits. If anything, the obligation appears to be growing stronger. As originally adopted in 1952, the Code’s general definition of good faith required only “honesty in fact.” However, in 2003 that definition was amended to mandate “the observance of reasonable commercial standards of fair dealing” as well as honesty in fact.
However, the thesis of this short article is that the Code’s endorsement of good faith has not had the desired effect. The first part of the article describes the Code’s initial adoption of good faith standards and the early, high hopes raised by that adoption. The second part details the controversy over good faith that arose shortly after the Code’s adoption. This part reviews the debate that ensued over the meaning of “good faith” in contract enforcement. The third part surveys the modern case law on good faith. This part demonstrates that although there is a split of authority over the approach to good faith under the Code, the majority of jurisdictions have embraced a cautious, restrictive interpretation of “good faith.” The fourth part explores the most plausible explanations for the courts’ unwillingness to expansively construe good faith. The final part discusses the implications for transactional attorneys and counsel litigating cases under the Code.
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