Honorable Calvin K.Y. Say

Speaker, House of Representatives

Twenty-Second State Legislature

Regular Session of 2004

State of Hawaii

Sir:

Your Committee on Consumer Protection and Commerce, to which was referred H.B. No. 1259 entitled:

begs leave to report as follows:

The purpose of this bill is to keep Hawaii abreast of National Conference of Commissioners on Uniform State Laws (NCCUSL) revisions to the Uniform Commercial Code (UCC) by replacing UCC Article 1, which provides the definitions and general provisions for the entire UCC, with a revised Article 1. Substantive changes to Article 1 in this bill include those that:

At the January 29, 2003, hearing of this bill, which carried over to the 2004 Regular Session, testimony in support of the bill was provided by the Hawaii's Commission to Promote Uniform Legislation (CPUL). The Hawaii Bankers Association (HBA) opposed the measure.

Your Committee finds that over the years, the various articles of the UCC have been revised and updated to recognize changes in technology and business practices, and to correct errors and ambiguities. In 2003, your Committee deferred decision making on this bill after HBA testified that few other states had enacted the amendments in this bill, and therefore, the interest in uniformity would not be served.

Your Committee now finds that Texas, Virginia and the Virgin Islands have adopted the new Article 1, which has also been approved by the American Bar Association. Six other states in addition to Hawaii are considering its adoption: Alabama, Idaho, Massachusetts, Minnesota, Oklahoma, and West Virginia.

Your Committee has amended this bill to reflect a consensus draft developed by HBA and CPUL, to address HBA's objections. As amended, this bill differs from NCCUSL's model act in that it:

Your Committee finds that while this bill appears uncontroversial, a much closer look is warranted. Your Committee's review of the modified definition of "good faith" raises the possibility that this bill may effect a substantial change in both statutory and common law.

Until fairly recently, the current definition of "good faith" -- honesty in fact in the contract or transaction -- applied throughout the Code with the exception of Article 2 (Sales) which defined "good faith," in the case of a merchant, as honesty in fact and the observance of reasonable commercial standards of fair dealing.

However, in the late 1980s, this Article 2 definition was gradually incorporated throughout the Articles of the UCC as they were revised, with the exception of Article 5. In light of this emerging consensus, NCCUSL's Article 1 model act in the original draft of this bill, redefined "good faith" using the Article 2 definition.

The consensus draft developed by HBA and CPUL in the House Draft 1 of this bill returns to the original definition of "good faith": honesty in fact in the contract or transaction.

Your Committee finds that the testimony on this bill was so cursory, that it is not clear whether this change will substantially lower the standard of "good faith" as it applies in many consumer transactions in Hawaii, not to mention the potential effect on the common law principle that contracts contain an implied covenant of good faith and fair dealing. This apparently harmless bill may actually have serious negative consequences for Hawaii's consumers.

At this point, your Committee is not certain that it fully understands the true effect of this bill, and notes that a second amendment removing the NCCSUL's new choice of law provisions was also agreed to by the parties.

The issues raised in this committee report may ultimately prove ephemeral, but the testimony to date does not fully inform the Legislature and needs to be much more complete in any hearings that are held in the Senate. For that reason, the bill has been further amended to delay the effective date until July 1, 2099.

As affirmed by the record of votes of the members of your Committee on Consumer Protection and Commerce that is attached to this report, your Committee is in accord with the intent and purpose of H.B. No. 1259, as amended herein, and recommends that it pass Second Reading in the form attached hereto as H.B. No. 1259, H.D. 1, and be placed on the calendar for Third Reading.