Executive Summary

Every contract is subject to an implied duty of good faith and fair dealing pursuant to principles established under common law, state statutes, and, with respect to certain contracts, including fund finance credit documentation, the Uniform Commercial Code (“UCC”). While lenders and borrowers are permitted to pursue their respective interests, they are obligated to act in good faith. In practical terms, this duty becomes relevant when fund finance lenders exercise discretion over such matters as borrowing base calculations, investor exclusions, valuations, and default remedies.

Background: Sources and Scope of the Good Faith Obligation

All contracts carry an implied duty of good faith and fair dealing, with its source determined by the applicable law:

UCC: With respect to contracts governed by the Uniform Commercial Code (including fund finance credit documentation), UCC § 1-304 explicitly mandates good faith in both contract performance and enforcement. UCC § 1-201 defines good faith as requiring honesty in fact, as well as adherence to reasonable commercial standards of fair dealing.

State Law: Most states recognize this obligation as inherent to every contract. Spring Creek Expl. & Prod. Co., LLC v. Hess Bakken Inv., II, LLC, 887 F.3d 1003, 1019 (10th Cir. 2018), as revised (Apr. 13, 2018).

Common Law: The Restatement (Second) of Contracts § 205 articulates that “[e]very contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.” While the Restatement does not constitute binding authority, courts frequently reference it as persuasive precedent.

In fund finance transactions, which combine secured obligations governed by the UCC with extensive contractual provisions, the duty of good faith and fair dealing is a fundamental principle governing interactions between lenders and borrowers throughout the transaction.

The Limits of Contractual Discretion

The UCC does not allow parties...