Obligation of Good Faith

Updated October 22, 2026

Acting in Good Faith: A Legal Requirement Under NY UCC

Good faith isn't just good business practice; under the New York UCC, it's a legal obligation for all parties involved in commercial transactions.

Understanding UCC §1-304: Obligation of Good Faith

• Definition of Good Faith:

  
  

  • For merchants, good faith means honesty in fact and the observance of reasonable commercial standards of fair dealing.

• Universal Application:

  
  

  • The obligation of good faith applies to the performance and enforcement of every contract or duty within the UCC. But it does not create new duties that the Code itself does not impose. In Fleet Factors Corp. v. Bandolene Industries Corp., 86 N.Y.2d 519 (N.Y. 1995), New York's highest court refused to use the good-faith rule (then found in section 1-203) to add a filing duty that Article 9 does not require. The court warned that a generalized duty "not fairly precisely fixed in a particular section of the Uniform Commercial Code, would upset the preference for definiteness, regularity and predictability in commercial dealings."

    
    

Implications for Merchants:

• Performance of Contracts:

  
  

  • Parties must act honestly and not undermine the contract's purpose.

• Enforcement of Rights:

  
  

  • Cannot exercise contractual rights in a way that is dishonest or commercially unreasonable. For example, in Components Direct, Inc. v. European American Bank & Trust Co., 175 A.D.2d 227 (2d Dep't 1991), a bank had an absolute right under its loan agreement to end a credit line. The court held that, absent valid business reasons preventing it, the good-faith obligation could still require a period of notice so the borrower had a reasonable opportunity to find other credit.

    
    

Examples of Good Faith Obligations:

• Fair Negotiations:

  
  

  • Avoid misrepresentations or deceptive practices.

    
    

• Fulfilling Promises:

  
  

  • Delivering goods or payments as agreed without hidden agendas.

    
    

• Transparent Communication:

  
  

  • Informing the other party of issues that may affect the contract.

    
    

Consequences of Bad Faith:

• Legal Action:

  
  

  • Breach of the good faith obligation can lead to legal disputes and damages. In New York, though, bad faith is raised as part of a breach of contract claim, not as a separate claim. As one appellate court put it, a plaintiff "may allege bad faith as part of its breach of contract claim, but bad faith does not provide an independent basis for recovery." Quail Ridge Associates v. Chemical Bank, 162 A.D.2d 917 (2d Dep't 1990).

    
    

• Reputation Damage:

  
  

  • Acting in bad faith can harm business relationships and reputation.

In our practice, we remind business owners that commercial litigation is expensive. As a rough rule of thumb, unless about $100,000 or more is at stake, we usually recommend pushing hard for a negotiated resolution before suing. Every situation is different, but the economics matter.

Key Takeaways:

• Good faith is a legal requirement, not just a moral one.

  
  

• Honest and fair dealings promote trust and successful business relationships.

  
  

• Understanding this obligation helps prevent legal issues and fosters a positive business environment.

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Disclaimer:

This article is for informational purposes only and does not constitute legal advice. Although I am an attorney, I am not your attorney, and reading this article does not create an attorney-client relationship. For advice pertaining to your specific situation, please consult a qualified attorney licensed in your area.