Every contract or duty within the Uniform Commercial Code [55-1-101 NMSA 1978] imposes an obligation of good faith in its performance and enforcement.

History: 1953 Comp., § 50A-1-203, enacted by Laws 1961, ch. 96, § 1-203 1978 Comp. §55-1-205; recompiled by compiler as 1978 Comp. § 55-1-303; Laws 2005, ch. 144, § 18.

OFFICIAL COMMENTS

UCC Official Comments by ALI & the NCCUSL. Reproduced with permission of the PEB for the UCC. All rights reserved.

Source. — Former Section 1-203 [55-1-203 NMSA 1978].

Changes from former law. — Except for changing the form of reference to the Uniform Commercial Code, this section is identical to former Section 1-203.

1. This section sets forth a basic principle running throughout the Uniform Commercial Code. The principle is that in commercial transactions good faith is required in the performance and enforcement of all agreements or duties. While this duty is explicitly stated in some provisions of the Uniform Commercial Code, the applicability of the duty is broader than merely these situations and applies generally, as stated in this section, to the performance or enforcement of every contract or duty within this Act. It is further implemented by Section 1-303 [55-1-303 NMSA 1978] on course of dealing, course of performance, and usage of trade. This section does not support an independent cause of action for failure to perform or enforce in good faith. Rather, this section means that a failure to perform or enforce, in good faith, a specific duty or obligation under the contract, constitutes a breach of that contract or makes unavailable, under the particular circumstances, a remedial right or power. This distinction makes it clear that the doctrine of good faith merely directs a court towards interpreting contracts within the commercial context in which they are created, performed, and enforced, and does not create a separate duty of fairness and reasonableness which can be independently breached.

2. "Performance and enforcement" of contracts and duties within the Uniform Commercial Code include the exercise of rights created by the Uniform Commercial Code.

Compiler's notes. — Laws 2005, ch. 144, § 18, effective January 1, 2006, enacted a new 55-1-304 NMSA 1978 relating to obligation of good faith, which is almost identical to former 55-1-203 NMSA 1978 relating to obligation of good faith, repealed by Laws 2005, ch. 144, § 11. For repeal and reenactment of a law that is not a new enactment, see 12-2A-14 NMSA 1978 . For provisions of former 55-1-203 NMSA 1978, see the 2004 NMSA 1978 on NMOneSource.com.

Reasonableness of guaranty contract. — An agreement by the guarantor of a note to waive any right to require the lending bank to proceed against the maker, exhaust any security, or pursue any other remedy, did not constitute waiver of the defenses of breach of duty of good faith and reasonableness. Cadle Co. v. Wallach Concrete, Inc., 1995-NMSC-039, 120 N.M. 56, 897 P.2d 1104.

Duty imposed on creditor under Subsection (1)(b) encompasses the good faith obligation to exercise reasonable means to protect the rights of guarantors, including timely perfecting of the security interest. American Bank of Commerce v. Covolo, 1975-NMSC-053, 88 N.M. 405, 540 P.2d 1294 (decided under prior law).

Negligence not deemed bad faith. — Although its omissions were negligent, creditor bank was not shown to have acted in bad faith where it believed, though mistakenly, that the security interest in the liquor license had been properly perfected when it was filed with the alcoholic beverage control department. American Bank of Commerce v. Covolo, 1975-NMSC-053, 88 N.M. 405, 540 P.2d 1294.

When motivation behind cancelling contract immaterial. — The motivation of a party in cancelling a contract which by its terms is terminable at will by either party is immaterial. Smith v. Price's Creameries, 1982-NMSC-102, 98 N.M. 541, 650 P.2d 825.