By: Lisa Sparks

“Good faith,” in the affirmative or as the absence of bad faith, has always been a challenge to define and judge as a matter of conduct, motive, or both.  Different tests apply a subjective standard, an objective standard, or even a combination of the two.  Some parties may be held to different expectations than others.  This determination of good faith has always been fact-driven and somewhat transcendental.  Until recently, however, the question invoked a construct of fairness, resting on a two-pronged metric, at least insofar as several key titles of the Maryland Uniform Commercial Code were concerned.  Since June 1, 2012, the various Maryland Uniform Commercial Code definitions of good faith have been stripped to the bare, subjective “honesty in fact.”[1]  The ramifications of this deviation from the Uniform Law Commission’s[2] promulgated Uniform Commercial Code (“UCC”) and decades of jurisprudence with consistency among most states have yet to unfold; the bench and bar are just discovering the change.  This comment explores how this occurred and what the potential consequences are and also recommends remediation of Maryland’s statutory language to conform to the UCC.

  1. A Historical Perspective

     The Maryland Uniform Commercial Code was enacted in 1963, with an effective date of February 1, 1964.[3]  It later became the nine leading titles of the Commercial Law Article, along with ten other non-uniform titles in the recompilation and reorganization of the Annotated Code of Maryland in 1975.[4]  Over time, the Commercial Law Article has expanded to 23 titles in all.[5]  Titles 1-10 are commonly referred to as the Maryland Uniform Commercial Code[6] (“MUCC”).  As is the case with most uniform codes and comprehensive statutory schemes, Title 1 provides general provisions, including definitions, governing the remaining titles.[7]  The definition of good faith in Title 1 was then, as it remains today, “honesty in fact in the conduct or transaction concerned.”[8]

As Maryland adopted the Uniform Law Commission’s additions and revisions to various articles, additional definitions for good faith emerged.  Titles 2 and 2A, governing the sales and leases of goods, added a separate provision for merchants: “good faith in the case of a merchant means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.”[9]  This notion of commercial standards spread to Titles 3 (Negotiable Instruments) and 4 (Bank Deposits and Collections) in 1996 following Maryland’s adoption of the 1990 UCC revisions, but covered all parties involved as opposed to just merchants.[10]  Official comment 4 to UCC section 3-103 explained the significance and intent surrounding the use of this expanded, two-part definition in the title governing negotiable instruments:

Subsection (a)(4) introduces a definition of good faith to apply to Titles 3 and 4.  Former Titles 3 and 4 used the definition in Section 1-201(19).  The definition in Subsection (a)(4) is consistent with the definitions of good faith applicable to Title 2, 2A, 4, and 4A.  The definition requires not only honesty in fact, but also “observance of reasonable commercial standards of fair dealing.”[11]

Title 4’s definition section was revised to simply relate back to the expanded definition in Title 3 so that the good faith considerations for negotiable instruments and check collection processes were consistent.[12]  Title 4A, regarding wire funds transfers, used the same language as Title 3.[13]  Title 8, governing investment securities, also picked up the two-pronged definition of good faith.[14]

In a provision of far narrower applicability, section 7-404 provides immunity for bailees who deliver or dispose of goods in accordance with a document of title so long as they acted “in good faith including observance of reasonable commercial standards.”[15]  According to this section’s official comment, “[t]he generalized test of good faith and observance of reasonable commercial standards is substituted for the attempt to particularize what constitutes good faith in the . . . old uniform acts.”[16]

The net effect of these scattered provisions was that all transactions governed by the MUCC were conducted under a general obligation of subjective good faith.[17]  For particular parties and transactions, an objective standard was overlaid, applying a rule-based measure of compliance.[18]  It is important to note that Maryland law does not recognize an independent cause of action for breach of the duty of good faith in the MUCC or otherwise.[19]  Instead, the prescribed duty of good faith applies in the context of the performance or enforcement of an obligation arising under the MUCC.[20]

Read the entire of the article here.

 

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