Court of Appeals Discusses Implied Duty of Good Faith and Fair Dealing in Public Works Contracting

The implied duty of good faith and fair dealing is implied in every contract, including construction contracts.  Generally speaking, this implied duty requires parties cooperate with one another so that they each obtain the full benefit of their contracted bargain.  Recently, the Court of Appeals (Division II) in Nova Contracting, Inc. v. City of Olympia discussed this duty’s application to a public works contract.

In early 2014, the City of Olympia published an invitation for bids to replace a culvert that conveyed a creek underneath a paved bike trail.  Nova Contracting was awarded the Project.  The specifications required that Nova submit a number of submittals, the approval of which was required before Nova could commence work.  The contract also provided that the City’s decision with respect to these submittals would be final and that Nova would bear all risk and costs of delays caused by non-approval of any submittals.

Nova provided the City with its submittals, but the City rejected the vast majority of Nova’s submittals and then continued to reject Nova’s re-submittals.  Further, the City required all submittals be approved before Nova could begin the planned 45-day project rather than just the submittals pertinent to the initial work.  The City’s reasons for submittal rejection included rejection of 13 submittals because the submittals did not provide for flaggers to accompany all vehicles despite the fact this was not a specification requirement, rejection of a submittal for failure to attach a work plan that was attached to three other submittals filed at the same time, and rejection of nine submittals because mill reports for the new pipe had not been provided even though mill reports could not be prepared until the pipe was available for delivery which could only occur with an approved submittal.  Eventually, the City issued a notice of default and termination for a number of reasons, including failure to mobilize (though the City would not provide Nova access to the site), and failure to provide the proper submittals.

Nova then filed suit asserting the City breached the parties’ contract.  The City sought summary judgment, arguing it properly terminated the contract for default, that Nova was liable for liquidated damages, and that Nova was not entitled to recover damages.  In response, Nova argued that questions of fact existed as to why the project was not completed, that the City breached its duty of good faith and fair dealing, and the City engaged in other conduct that constituted a breach of contract.  The trial court, however, granted the City’s motion, dismissed Nova’s claims, and awarded the City liquidated damages.

On appeal, the Court of Appeals reversed the trial court’s findings and remanded the matter for further proceedings.  Of significant interest is the Court’s discussion of the duty of good faith and fair dealing.  After a detailed analysis, the Court ultimately concluded that the contract (which provided the City with “final approval” of submittals) did not give the City unconditional authority to accept or reject submittals, but rather discretionary authority and, more importantly, that the duty of good faith and fair dealing applied to the City’s consideration of Nova’s submittals.  The Court then went on to conclude that, while maybe one instance of the City’s conduct on its own may be insufficient, the City’s conduct in the aggregate raises a question of fact as to whether the City breached the duty of good faith and fair dealing.  The matter was remanded to the trial court for further proceedings.

Though the decision is unpublished, it provides a good reminder and analysis with respect to the implied duty of good faith and fair dealing.  The existence of the implied contractual duty of good faith and fair dealing is an established principle of law, but the analysis of the context and application of that duty has been brief and unclear.  The Court’s discussion and clarification of the implied duty, including the duty’s applicability where a public entity has discretionary authority under the contract, as well as the kind of evidence that would enable a judge or jury to find that the duty had been breached, will provide useful guidance to parties and courts that was not previously available. Such a decision will also hopefully bring other benefits.  When the parties to a public works contract have a better and more clear understanding as to their obligations, the implied duty of good faith and fair dealing will ideally ensure more consideration is used with respect to performance and enforcement of public works contracts, benefiting the public owner, the contractors, and taxpayers alike. Finally, the City has sought Petition for Discretionary Review with the Supreme Court, and we will provide an update if granted.

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