General Contractor's Scope Reduction Of A Subcontract Calls Into Question General Contractor's Good Faith

In a recent Nevada case,[1] Road & Highway Builders, LLC (RHB) was awarded a 2.3 mile portion of the Carson City freeway by the Nevada Department of Transportation (NDOT).  The project, among others, required the installation of more than 3,000 lineal feet of reinforced concrete boxes under the roadway surface as drains.  The reinforced concrete boxes contained a substantial amount of reinforcing steel (rebar). 

RHB used Northern Nevada Rebar (NNR) as its subcontractor to supply and install the rebar for the project.  Unbeknownst to NNR, RHB, if awarded the project, was considering using precast reinforced concrete boxes rather than poured in-place boxes.  Moreover, if NDOT approved the use of precast reinforced concrete boxes, the precast contractor (not NNR) would perform the vast majority of the rebar installation.

RHB was awarded the project and executed a subcontract with NNR, but simultaneously issued a purchase order to Rinker Materials (Rinker) for the precast reinforced concrete boxes.  Although NDOT approved the use of the precast reinforced concrete boxes shortly after the project was awarded to RHB, RHB did not inform NNR of the change. 

When NNR began delivering and installing rebar on the project, it discovered that the reinforced concrete boxes were precast and had been installed by Rinker.  At this point, NNR, realizing its rebar quantities would be drastically reduced, sought an equitable adjustment to modify its unit price. RHB rejected NNR’s request.  NNR then sought payment for work it had done to date and requested to be released from its subcontract.  RHB also rejected NNR’s request to be paid for the work in place but eventually terminated the NNR subcontract. 

Adding insult to injury, RHB then filed suit against NNR for breach of contract (NNR had to finish its other non-reinforced concrete box related rebar supply and installation). NNR counterclaimed for breach of contract, breach of the implied duty of good faith and fair dealing, and for fraud in the inducement (asserting that RHB’s deceit caused NNR to enter into the subcontract).  After a four day jury trial, the jury unanimously awarded NNR $1 million in damages: $700,000 for breach of contract and $300,000 in punitive damages for fraud. 

The Nevada Supreme Court, however, partially overturned the jury award on appeal and held that NNR was not entitled to recover its claim for fraud in the inducement.  The Court reviewed the contract and noted that a changes clause in the contract expressly allowed RHB to reduce NNR’s scope of work.  Though the Court acknowledged that RHB might have breached the subcontract by unilaterally and making alterations to the scope of work without an agreement in writing, this action could not form the basis for fraud because the subcontract contemplated a potential reduction or alteration in the scope of work, and thus, the Court overturned the $300,000 punitive damage award. 

Comment: The jury’s award is easy to relate to and understand.  NNR was induced to enter into a contract believing it would furnish a large quantity of rebar, and thus, provided RHB with a unit price that anticipated delivering and installing a significantly larger quantity than actually installed when it discovered the reinforced concrete boxes were precast.  Puzzling in the case is why the court would not have found that the actions by RHB were a violation of the covenant of good faith and fair dealing that RHB owed NNR.  RHB took a calculated risk in its bid anticipating its request to use precast reinforced concrete boxes would likely be approved by NDOT.  NNR submitted its bid in good faith believing that it was bidding on a substantial rebar project that was reduced significantly when RHB’s precast method was approved.  It appears that the court allowed the general contractor to reap a significant profit and provided the subcontractor with no relief for the substantial opportunity it lost.

The subcontract for rebar was based on a unit price. The final quantities of rebar would match NDOT’s quantities.  Thus, RHB was aware that there would be a substantial quantity underrun in NNR’s subcontract. Though by contract RHB had a right to only pay NNR the quantities of reinforcing steel that NDOT agreed to, the lack of candor by RHB and the manner in which it proceeded should have triggered the breach of the implied obligation of good faith and fair dealing, which could have resulted in damages to NNR (NNR’s unit price was based on a substantial quantity of rebar and, when the quantities under ran, there were cost implications to NNR).

Moreover, RHB had a number of opportunities to advise NNR of its plan to use precast rather than in-place reinforced concrete boxes. The case indicates that RHB had begun the precast approval process prior to bid, but did not disclose that to NNR.  RHB had a second opportunity to make that disclosure but failed to do so when it delivered a written subcontract agreement to NNR.  Finally, after award, RHB did not tell NNR when NDOT gave RHB approval to use precast units; NNR was only made aware of the precast RCBs when it showed up on site. That lack of candor clearly offended the jury and could have formed the basis for the implied duty of good faith and fair dealing claim (owed by all parties to the contract). The case is unclear as to why that legal basis was not pursued with more vigor.  RHB was allowed to reap the entire profit of the savings realized by precast method and NNR’s loss went uncompensated. The Nevada Supreme Court’s decision is difficult to reconcile with these facts.

Another lesson in this case is that the courts are primarily interested in enforcing and upholding the parties’ bargain.  When the court found a provision in the contract that expressly allowed RHB to reduce the scope of NNR’s work, it seized on that contract provision. NNR could not avoid the fact that the deal it struck expressly allowed the general contractor (RHB) to reduce the scope of the subcontract which RHB did to the detriment of NNR. 


[1] Road & Highway Builders, LLC, v. Northern Nevada Rebar, Inc., 284 P.3d 377 (Nev. 2012).

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