TITLE 11 COMMERCIAL CODE

Section 1. General Provisions, 11-1-101 through 11-1-209.

ARTICLE 1 GENERAL PROVISIONS

11-1-203. Lease distinguished from security interest.

Whether a transaction in the form of a lease creates a security interest is determined by the facts of each case.
A transaction in the form of a lease creates a security interest if the consideration that the lessee is to pay to the lessor for the right to possession and use of the goods is an obligation for the term of the lease and is not subject to termination by the lessee, and:
1. The original term of the lease is equal to or greater than the remaining economic life of the goods;
2. The lessee is bound to renew the lease for the remaining economic life of the goods or is bound to become the owner of the goods;
3. The lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or nominal additional consideration upon compliance with the lease agreement; or
4. The lessee has an option to become the owner of the goods for no additional consideration or nominal additional consideration upon compliance with the lease agreement.
A transaction in the form of a lease does not create a security interest merely because:
1. The present value of the consideration the lessee is obligated to pay the lessor for the right to possession and use of the goods is substantially equal to or is greater than the fair market value of the goods at the time the lease is entered into;
2. The lessee assumes risk of loss of the goods;
3. The lessee agrees to pay, with respect to the goods, taxes, insurance, filing, recording, or registration fees, or service or maintenance costs;
4. The lessee has an option to renew the lease or to become the owner of the goods;
5. The lessee has an option to renew the lease for a fixed rent that is equal to or greater than the reasonably predictable fair market rent for the use of the goods for the term of the renewal at the time the option is to be performed; or
6. The lessee has an option to become the owner of the goods for a fixed price that is equal to or greater than the reasonably predictable fair market value of the goods at the time the option is to be performed.
Additional consideration is nominal if it is less than the lessee's reasonably predictable cost of performing under the lease agreement if the option is not exercised. Additional consideration is not nominal if:
1. When the option to renew the lease is granted to the lessee, the rent is stated to be the fair market rent for the use of the goods for the term of the renewal determined at the time the option is to be performed; or
2. When the option to become the owner of the goods is granted to the lessee, the price is stated to be the fair market value of the goods determined at the time the option is to be performed.
The "remaining economic life of the goods" and "reasonably predictable" fair market rent, fair market value, or cost of performing under the lease agreement must be determined with reference to the facts and circumstances at the time the transaction is entered into.

(Code 1933, § 109A-1 - 203, enacted by Ga. L. 1962, p. 156, § 1; Ga. L. 2015, p. 996, § 3A-1/SB 65.)

The 2015 amendment, effective January 1, 2016, substituted the present provisions of this Code section for the former provisions, which read: "Every contract or duty within this title imposes an obligation of good faith in its performance or enforcement."

Law reviews.

- For survey article on contracts - employment at will, see 34 Mercer L. Rev. 86 (1982). For article, "Baseline Questions in Legal Reasoning: The Example of Property in Jobs," see 23 Ga. L. Rev. 911 (1989). For annual survey article discussing the obligation of good faith, see 46 Mercer L. Rev. 95 (1994). For article, "Common Fact Patterns of Stock Broker Fraud and Misconduct," see 7 Ga. St. B.J. 14 (2002). For note, "The Growth of Lender Liability: An Economic Perspective," see 21 Ga. L. Rev. 723 (1987). For comment, "Lender Liability for Breach of the Obligation of Good Faith Performance," see 36 Emory L.J. 917 (1987).

JUDICIAL DECISIONS

Section construed.

- O.C.G.A. § 11-1-203 in effect states that what is not regulated by contract should be done in such a way as to show good faith in carrying out of what is expressed. Fulton Nat'l Bank v. Willis Denney Ford, Inc., 154 Ga. App. 846, 269 S.E.2d 916 (1980).

O.C.G.A. § 11-1-203 does not state a cause of action for which a claim of relief may be granted. Management Assistance, Inc. v. Computer Dimensions, Inc., 546 F. Supp. 666 (N.D. Ga. 1982), aff'd sub nom. Computer Dimensions v. Basic Four, 747 F.2d 708 (11th Cir. 1984).

No independent cause of action created by O.C.G.A. § 11-1-203. - Inasmuch as a borrower could not prevail on its breach of contract claim against a lender, it could not prevail on a cause of action based on the failure to act in good faith in performing the contract because there was no independent cause of action for breach of duty of good faith in performing a contract governed by the Uniform Commercial Code. Heritage Creek Dev. Corp. v. Colonial Bank, 268 Ga. App. 369, 601 S.E.2d 842 (2004).

Inapplicable in financing of residential lots.

- The implied covenant of good faith under the Uniform Commercial Code was inapplicable to a case involving the financing of residential lots, rather than the sale of goods. Lake Tightsqueeze, Inc. v. Chrysler First Fin. Servs. Corp., 210 Ga. App. 178, 435 S.E.2d 486 (1993).

Good faith required in foreclosing on security deed.

- Homeowner stated a claim for breach of contract and breach of the duty of good faith and fair dealing against the homeowner's mortgage lender based on the lender's legal duty in the security agreement to conduct the foreclosure of the property fairly, acting as the owner's agent. Stewart v. SunTrust Mortg., Inc., 331 Ga. App. 635, 770 S.E.2d 892 (2015).

Inapplicable to franchise agreement.

- Because a franchise agreement primarily governed issues regarding the proper operation of a franchise restaurant, advertising, the use of trademarks, trade names, and service marks, and the provisions regarding goods were incidental at best, the court concluded that non-sale aspects predominated the franchise agreement, and the duty of good faith and fair dealing embodied in O.C.G.A. § 11-1-203 did not apply. Am. Casual Dining, L.P. v. Moe's Southwest Grill, L.L.C., 426 F. Supp. 2d 1356 (N.D. Ga. 2006).

Substantial compliance with spirit of contract.

- "Good faith" is merely a shorter way of saying substantial compliance with the spirit, and not the letter only, of the contract. Crooks v. Chapman Co., 124 Ga. App. 718, 185 S.E.2d 787 (1971).

Banking provision enforceable subject to good faith requirement.

- Business checking account agreement containing provision that bank may charge any indebtedness of depositor to bank, whether or not matured, against account if the bank deems itself insecure with respect to any such indebtedness, is enforceable, subject to the general requirement of good faith in its enforcement as set forth in O.C.G.A. § 11-1-203. First Nat'l Bank v. Appalachian Indus., Inc., 146 Ga. App. 630, 247 S.E.2d 422 (1978).

No bad faith discharge of notes due to charge backs under factoring agreement.

- Delta Diversified, Inc. v. Citizens & S. Nat'l Bank, 171 Ga. App. 625, 320 S.E.2d 767 (1984).

Good faith not violated.

- Bank's failure to foreclose sooner on secured collateral did not constitute a breach of good faith and fair dealing owed to guarantors. Greenwald v. Columbus Bank & Trust Co., 228 Ga. App. 527, 492 S.E.2d 248 (1997).

When plaintiff Jobber petroleum distributors' only allegations of wrongdoing was defendant oil company's purported recapture of the cost of a prompt-pay discount when setting its price, and the parties' contract imposed no limits on the costs that could be recouped in setting the price, the good-faith safe harbor provided in O.C.G.A. § 11-2-305(2) applied; O.C.G.A. § 11-2-103 did not support imposing fundamental substantive limitations on the pricing methodology set out in the contract. Autry Petroleum Co. v. BP Prods. North America, Inc., F.3d (11th Cir. June 26, 2009)(Unpublished).

Cited in Geohagan v. Commercial Credit Corp., 130 Ga. App. 828, 204 S.E.2d 784 (1974); Central Soya Co. v. Bundrick, 137 Ga. App. 63, 222 S.E.2d 852 (1975); Interstate Sec. Police, Inc. v. Citizens & S. Emory Bank, 237 Ga. 37, 226 S.E.2d 583 (1976); Henderson Few & Co. v. Rollins Communications, Inc., 148 Ga. App. 139, 250 S.E.2d 830 (1978); Fratelli Gardino v. Caribbean Lumber Co., 447 F. Supp. 1337 (S.D. Ga. 1978); Brack v. Brownlee, 246 Ga. 818, 273 S.E.2d 390 (1980); Smithloff v. Benson, 173 Ga. App. 870, 328 S.E.2d 759 (1985); West v. Koufman, 259 Ga. 505, 384 S.E.2d 664 (1989); Four County Bank v. Tidewater Equip. Co., 331 Ga. App. 753, 771 S.E.2d 437 (2015).

RESEARCH REFERENCES

Am. Jur. 2d.

- 11 Am. Jur. 2d, Banks and Financial Institutions, § 918. 11 Am. Jur. 2d, Bills and Notes, §§ 276, 283, 295 et seq. 12 Am. Jur. 2d, Bills and Notes, § 586. 15A Am. Jur. 2d, Commercial Code, § 20. 17A Am. Jur. 2d, Contracts, § 342. 67 Am. Jur. 2d, Sales, §§ 21-23.

C.J.S.

- 17B C.J.S., Contracts, § 562.

U.L.A.

- Uniform Commercial Code (U.L.A.) § 1-203.

ALR.

- Enforceability of transaction entered into pursuant to referral sales arrangement, 14 A.L.R.3d 1420.

Failure to deliver ordered merchandise to customer on date promised as unfair or deceptive trade practice, 7 A.L.R.4th 1257.

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