Good Faith and Fair Dealing: The K.M.C. Case, Discretionary Loans, and Demand Notes

Freedom to contract is a fundamental part of our country's trade and commerce, as is freedom not to contract. In K.M.C. Co. Inc. versus Irving Trust Co., the parties involved had entered into a demand/discretionary lending arrangement under which the lender could make loans to the borrower, but...

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Bibliographic Details
Published in:Commercial lending review 1988-12, Vol.4 (1), p.3
Main Author: Hanson, Ronald W
Format: Article
Language:English
Subjects:
Contract law
Federal court decisions
Lending institutions
Litigation
State court decisions
Uniform Commercial Code-US
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Summary:Freedom to contract is a fundamental part of our country's trade and commerce, as is freedom not to contract. In K.M.C. Co. Inc. versus Irving Trust Co., the parties involved had entered into a demand/discretionary lending arrangement under which the lender could make loans to the borrower, but did not commit itself to do so. However, the court created an implied duty of good faith and completely changed the risks obligations to which the borrower and lender had agreed in their contract. The court imposed new duties on the bank and restricted its rights, without any compensation to the lender for the additional risks and duties and at no cost to the borrower. The doctrine of good faith, as interpreted by the court, is inconsistent with the definition of good faith found in the Uniform Commercial Code. This ruling has raised many questions about a lender's ability to enforce contractual rights. Several courts have subsequently rejected the K.M.C. doctrine and reimposed traditional notions of freedom of contract.
ISSN:0886-8204