Opinion ID: 1859381
Heading Depth: 1
Heading Rank: 2

Heading: mincoduty of good faith

Text: Because the issue of whether one has a duty to act in good faith is a question of law, our review is de novo. [5] The general rule is that, absent a special relationship, there is no duty between parties to a contract to act in good faith. [6] Here, the parties do not contend that a common law duty of good faith exists. Rather, they disagree over whether the UCC's statutory duty of good faith and fair dealing in the performance, enforcement and modification of a commercial contract applies to a final release of liability. [7] Minco asserts that the UCC's duty to act in good faith applies to all the parties' agreements, including the final termination letter. Specifically, Minco contends that El Paso violated the UCC's good faith duty of honesty in fact in the conduct or transaction concerned. [8] It further asserts that both UCC section 1.203's requirement that [e]very contract or duty within this title imposes an obligation of good faith in its performance or enforcement and UCC section 2.209's requirement that modifications meet the test of good faith impose a duty of good faith to all the parties' agreements, including the release. El Paso, by contrast, contends that the court of appeals erred by applying the UCC's obligation of good faith to the formation or procurement of the final release. El Paso asserts that the UCC's duty of good faith applies to the enforcement and performance of contracts, including modifications of those contracts, but does not apply to the formation of contracts. Thus, El Paso reasons that because a final release of liability constitutes neither the enforcement and performance of a contract for sale of goods nor a modification of an agreement, but rather is the formation of a separate contract releasing the parties' obligations to each other, the UCC's duty of good faith does not apply. We agree. Buying and selling oil and gas pursuant to take-or-pay gas purchase agreements is a transaction involving goods within the meaning of the UCC's good faith provisions. [9] Accordingly, El Paso has a statutory obligation to act in good faith in the performance, enforcement and modification of these agreements. [10] But that does not mean that El Paso is under a statutory good faith obligation when it procures or forms those contracts. The court of appeals concluded that the good faith obligation in sections 1.203 and 2.209, as defined in section 2.103, imposed a duty of good faith in procuring the final termination letter on El Paso. True, section 1.203 states that [e]very contract or duty within this title imposes an obligation of good faith in its performance or enforcement. [11] And section 2.103 further defines good faith in the case of a merchant as honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade. [12] But this duty of good faith does not extend to the formation of a contract. [13] And that includes releases because releases are contracts. [14] Indeed, a final release is a contract by which the parties agree that there are no longer any duties to perform or enforce under the original contract. [15] And it acts as a voluntary settlement of the claims relating to each party's performance or non-performance of the original contract. Because section 1.203 applies to the performance and enforcement of an existing contract and not forming or procuring a contract, including a mutual release of liability, section 1.203 imposes no good faith duty on El Paso. Similarly, section 2.209 does not impose a duty of good faith on forming a final release. Subsection 2.209(a) states that [a]n agreement modifying a contract within this chapter needs no consideration to be binding. [16] The court of appeals concluded that this subsection imposes a duty of good faith upon seeking a release. [17] Referring to section 2.209 comment 2, the court of appeals held that the UCC's good faith duties apply not only to the performance of the contract but also to the formation and modification of those agreements. [18] But comment 2 does not mention forming an agreement; it refers only to modifications. The comment states that modifications made under subsection 2.209(a): [m]ust meet the test of good faith imposed by this Act. The effective use of bad faith to escape performance on the original contract terms is barred, and the extortion of a modification without legitimate commercial reason is ineffective as a violation of the duty of good faith. [19] It further states that: [t]he test of good faith between merchants or as against merchants includes observance of reasonable commercial standards of fair dealing in the trade (Section 2-103), and may in some situations require an objectively demonstrable reason for seeking a modification. [20] Neither section 2.209 nor the comments refer to a duty of good faith in the formation of a contract. Rather, the express language of section 2.209(a) and the comments establish that this subsection's duty of good faith applies only to contract modifications. And as discussed above, a release of liability is not an agreement to modify a contract but is an agreement to completely relinquish the parties' performance obligations to each other. This is not to say that there are no constraints on a party's behavior in the negotiation and formation of a contract. The UCC's doctrine of unconscionability, for example, is intended to apply to the formation of contracts. [21] Further, subsections 2.209(b) and (d) apply to any modification or rescission of a contract. [22] But subsection 2.209(a) and corresponding comment 2's good faith obligation are limited to modifications only. [23] Because the court of appeals' only basis for holding the Minco final termination letter unenforceable was its bad faith determination, and because we conclude that the UCC does not impose a good faith obligation on the formation of a final release, the Minco termination letter releases El Paso from the Agreement's take-or-pay obligations. We therefore reverse the court of appeals' judgment as to Minco and render judgment that Minco take nothing.