Good Faith: Commercial Reasonableness or Fairness?

At this point it has been established that the amended definition of good faith requires the observance of ‘reasonable commercial standards of fair dealing in the trade’ in addition to ‘honesty in fact’. Many have assumed that this requires that persons involved in UCC transactions act honestly and in a commercially reasonable manner.  As the court in the Any Kind Check Cashing case noted:

To the old, subjective good faith, "honesty in fact" standard, the legislature added an objective component—the "pure heart of the holder must now be accompanied by reasoning that assures conduct comporting with reasonable commercial standards of fair dealing." Maine Family Fed. Credit Union v. Sun Life Assurance Co. of Canada, 727 A.2d 335, 342 (Me.1999). No longer may a holder of an instrument act with "a pure heart and an empty head and still obtain holder in due course status. Any Kind Checks Inc. v Talcott 830 So. 2d 160 (4^th District Court of Appeals, FL, 2002).at 165

This post will examine the meaning of compliance with the ‘observance of reasonable commercial standards of fair dealing in the trade’.

            The basic question in this analysis is simple: Does the ‘observance of reasonable commercial standards of fair dealing in the trade’ require commercial reasonableness in the conduct involved?  A quick reading might indicate an affirmative answer to this question.  However, a detailed reading of this clause, coupled with the comments and the opinions of experts in the field, create the possibility that even under the amended definition a strong argument can be made that complying with the amended definition does not require that a party act in a commercially reasonable manner as regards to the substantive transaction, but simply that the person behave in a manner which would be considered to comply with a commercial standard of fairness.

 In other words, if someone is ‘honest’ and ‘fair’ in a commercially reasonable way, is the standard of good faith complied with even though the conduct as to the substance of the transaction was not commercially reasonable?   The comments to Section 1-201(b)(20) state:

Although “fair dealing” is a broad term that must be defined in context, it is clear that it is concerned with the fairness of the conduct rather than the care with which an act is performed.  This is an entirely different concept that whether a party exercised ordinary care in conducting a transaction.

The suggested analysis is supported by the text of the statute, and the comment, and also by Professors James White and Robert Summers in their excellent treatise on the Uniform Commercial Code,* in which the authors state:

Before one concludes that the banks described in the preceding paragraphs are not in good faith, return to the definition.  A bank that fails to follow commercial standards is not in good faith only if it deviates from commercial standards of “fair dealing”.  Deviating from such standards on the side of generosity and gullibility does not render one’s act in bad faith.  So beware, good faith does not require general conformity to “reasonable commercial standards” but only to “reasonable commercial standards of fair dealing.” [cite] The issue is one of “unfairness” not of “negligence”      White and Summers, Uniform Commercial Code, Hornbook Series 5^th Edition at 523 (2010)

The question arises therefore as to whether the amendment is meaningful as regards to the actual level of performance required on the issue of good faith.  It appears from the text, the comments and recognized UCC experts that commercial reasonableness in the conduct involved is not required.  Just fairness.  This challenges the statement in Any Kind Check Cashing noted earlier where the court stated:

 

No longer may a holder of an instrument act with "a pure heart and an empty head and still obtain holder in due course status. Any Kind Checks Inc. v Talcott 830 So. 2d 160 (4^th District Court of Appeals, FL, 2002).at 165

In fact, it appears as though a pure heart and empty head will fit the bill as long as the pure heart and empty headed person is commercially fair.

The conclusion that commercial reasonableness is not required is further supported by explicit reference in other Code sections to a requirement of commercial reasonableness. For example, when a secured creditor disposes of collateral under Section 9-610(b) there is a requirement that every aspect of the disposition must be ‘commercially reasonable’.  When a seller disposes of goods under Section 2-704, he or she is required to exercise ‘reasonable commercial judgment’.  Clearly, if the drafters were looking for commercial reasonableness, they would have explicitly said so.