“Contracting Around” The Good Faith Covenant To Avoid Lender Liability

Tuesday, January 1st, 1991 at 12:00 am by Corey R. Chivers
Corey R. Chivers, “Contracting Around” The Good Faith Covenant To Avoid Lender Liability, 1991 Colum. Bus. L. Rev. 359

The covenant of good faith and fair dealing is implied by law in most American jurisdictions. However, agreement that the covenant is to be implied is more easily obtained than agreement as to its fundamental conceptualization and particular applications. Disagreement over the good faith covenant has focused, perhaps more than in any other area, on the field of commercial lending, where courts have used it as a new source of lender liability. The willingness of some courts to use the covenant to, in effect, modify contractual provisions in lending agreements has attracted the attention of both the practicing attorney and the commentator. Some criticize these developments, arguing that when courts prevent parties from enforcing bargained-for terms, they not only deprive the parties of their particular allocation of risks and benefits, but they also increase the probability of an inefficient allocation of risks and benefits in future contracts. This, they say, forces otherwise avoidable costs upon any future lender-borrower relationship. In contrast, others praise these developments as an appropriate protection of the parties’ reasonable expectations.

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