Eisenberg, Foundational Principles of Contract Law, 2018, at p. 707

707

The Principle of Good Faith in Contract Law

IT IS A SETTLED PRINCIPLE OF CONTRACT LAW THAT A CONTRACTING party must perform his or her contractual duties in good faith.1 So, for example, Restatement Second Section 205 provides that "Every contract imposes upon each party a duty of good faith and fair dealing in its performance and it enforcement:' Comparably, UCC Section 1-304 provides that "Every contract or duty within the Uniform Commercial Code imposes an obligation ofgood faith in its performance and enforcement:'
The meaning of the duty of good faith is complex. At a minimum, a party must have acted in a way that he believed was proper, which is a subjective test. However, this subjective test is overlaid with several objective tests. First, it is not enough that an actor actually believed that her conduct was proper; her belief must be honest in the sense that it has some basis in social or critical morality. Next, although an actor's belief need not be reasonable to be in good faith, it must at least be rational. Judge Friendly described this element in Sam Wong & Son v. New York Mercantile Exchange,2 where he stated that good faith presupposed "a minimal requirement of some basis in reason-[although] not a showing that the ... action constituted the optimal response. Absent some basis in reason, action could hardly be in good faith even apart from ulterior motive."3 Finally, the duty of good faith should include or be accompanied by the observance of reasonable commercial standards of fair dealing-another objective test.4

[...]

1Mark P. Gergen is the coauthor ofthis chapter.
2735 F.2d 653 (2d Cir. 1984).
3Id. at 678 n.32.
4Under UCC § 1-201(20) good faith means "honesty in fact and the observance of reasonable commercial standards of fair dealing?"