This post is the third in our series regarding implied contract obligations in construction contracts, see previous articles: Implied Obligations in Construction Contracts; Implied Duty Not To Hinder Or Delay.
The implied duty of good faith and fair dealing is implied in every contract, including construction contracts. In its most general sense, the implied duty of good faith and fair dealing requires the parties cooperate with one another so that they each obtain the full benefit of their contracted bargain.[i] The duty of good faith requires “faithfulness to an agreed common purpose and consistency with the justified expectations of the other party.”[ii] Acting with good faith and fair dealing “excludes a variety of types of conduct characterized as involving ‘bad faith’ because they violate community standards of decency, fairness or reasonableness.”[iii] Examples of acting in bad faith include: “evasion of the spirit of the bargain, lack of diligence and slacking off, willful rendering of imperfect performance, abuse of a power to specify terms, and interference with or failure to cooperate with the other party’s performance.”[iv]
The Washington State Supreme Court has held that there is not a “free-floating” duty of good faith and fair dealing – there must be an existing contract for the duty to exist.[v] The duty only applies to the terms of the parties’ contract and does not “inject substantive terms into the parties’ contract.”[vi] Thus, the duty only exists in relation to performance of specific contract terms.[vii]
- A. Breach Of The Implied Duty Of Good Faith And Fair Dealing
In Frank Coluccio Const. Co., Inc. v. King County,[viii] King County and Frank Coluccio Const. Co., Inc. (FCCC) entered into a contract for a public works project for construction of a small utility tunnel. FCCC hired Donald B. Murphy Contractors, Inc. (DBM) as a subcontractor to construct an access shaft at one end of the tunnel, but problems arose during construction of the access shaft which resulted in repairs and delays on the project. Under the contract with FCCC, King County was obligated to provide insurance coverage to “insure against physical loss or damage by perils included under an ‘All Risk’ Builder’s Risk policy form.”[ix] King County never purchased the insurance. FCCC and DBM brought claims under the builder’s risk insurance coverage, which King County denied.
The court ultimately found that King County breached the implied duty of good faith and fair dealing because it failed to meet its contractual obligations: (1) to purchase an all-risk builder’s risk insurance; (2) to promote and sponsor FCCC and DBM’s builder’s risk claims; and (3) to adjust claims brought under the all-risk policy.[x] King County was found to be liable for the full amount of losses to FCCC and DBM that would have been covered under the insurance policy that the contract required King County to provide.[xi]
- B. No “Free-Floating” Duty
In Carlile v. Harbour Homes, Inc., a group of homeowners brought a lawsuit against Harbour Homes (a developer) alleging, in part, a breach of the implied duty of good faith and fair dealing because the homes did not meet contractual terms regarding certain plan specifications and quality.[xii] The court found that there was no contractual requirement regarding the homeowner’s claims and dismissed their suit because “there is no ‘free-floating’ duty of good faith and fair dealing apart from the terms of an existing contract…”[xiii] In other words, the implied duty of good faith and fair dealing cannot expand a party’s contractual duties beyond those in the express contract or create duties inconsistent with contract provisions.[xiv]
C. Public Contracts: Public Owners Also Owe Contractors An Implied Duty Of Good Faith And Fair Dealing
The implied duty of good faith and fair dealing has been read into public, as well as private construction contracts.[xv] In A.C. Shaw’s Const., Inc. v. Washoe County,[xvi] a sewer contractor objected to the termination of its contract. It claimed that the district court incorrectly ruled that there was no implied duty of good faith in public construction contracts. The appellate court agreed with the contractor on grounds that to hold “otherwise would suggest that a government entity has the right to refrain from cooperation in a contract, or that a government entity could act in bad faith, calculated to destroy the benefit of the contract to the other contracting party.”[xvii]
The implied covenant of good faith and fair dealing has also been extended to all federal contracts.[xviii] In Moreland,[xix] the court held the government breached its implied duty of good faith and ruled that “an implied term of every contract, including government contracts, is that each party will act in good faith toward the other, and that a party may be found to have breached the contract by acting in bad faith. The breach of the covenant occurs when there has been sharp dealing, such as taking deliberate advantage of an oversight by your contract partner concerning his rights under the contract.”[xx]
D. Examples Of Possible Breaches Of Implied Obligations.
In certain instances, the breach of the implied obligation not to hinder or delay (see previous blog) intersects with and becomes indistinguishable from the breach of the duty of good faith and fair dealing. Examples are:
- Overzealous and Retaliatory Inspection. In certain instances, the public owner’s inspectors may obstruct the progress of the work and increase the cost to the contractor. Particularly when there is a retaliatory aspect to non-compliance notices. It may be difficult to discern whether the misconduct is a breach of the implied duty not to hinder or delay or a breach of the covenant of good faith and fair dealing or both. However, not all inspector misbehavior is necessarily a breach of the implied duties.[xxi]
- Overbearing Contract Administration. An owner’s administration of the contract may obstruct the contractor’s performance, and thus, constitute a breach of the implied duties. For example, overly aggressive enforcement of specified safety programs, mandating attendance at meaningless meetings, or compliance with all tasks irrespective of how minor, can amount to a contract administration process that harasses the contractor and rises to the level of a breach of the implied obligations.
- Coercive Withholding of Payments. Owners may withhold considerable amounts because of perceived problems leaving the contractor to file claims and finance the project from its own resources. Under Washington statute RCW 39.04.360, a public owner is required to pay undisputed amounts and not hold change orders hostage until an owner acceptable bargain is reached. Withholding progress payments for improper reasons may also constitute a basis for breach of the implied obligations.
The bottom-line is that every contract has an implied duty that the parties will act in good faith and fair dealing. However, it is equally important to remember that the duty only applies to terms agreed to by the parties in their contracts.
Comment: Perhaps it is time for contractors to establish a past performance evaluation system for owners. This system would permit each contractor to submit a performance evaluation on the construction contracting activity and rate the owner’s performance during the contract at the completion of the project. This rating would be made available to the public; the agencies should be permitted to respond to the contractor’s critiques. Were such a system in place, all contractors would be able to determine how to price their contracts. Good owners would receive better prices than the poor performers, and thus, the playing field would be level. Contractors would be able to assume they will be treated fairly and accordingly, and estimate the cost of performance based on the rating of their colleagues.[xxii]
[i] Metro. Park Dist. v. Griffith, 106 Wn.2d 425, 437, 723 P.2d 1093 (1986).
[ii] Restatement (Second) of Contracts § 205 (1981).
[v] Keystone Land & Development Co. v. Xerox Corp., 152 Wn.2d 171, 94 P.3d 945 (2004).
[vi] Badgett v. Security State Bank, 116 Wn.2d 563, 569, 807 P.2d 356 (1991).
[vii] Keystone Land & Development Co., at 177.
[viii] Frank Coluccio Const. Co., Inc. v. King County, 136 Wn. App. 751, 150 P.3d 1147 (2007).
[ix] Id. at 756.
[x] Id. at 766.
[xi] Id. at 767.
[xii] Carlile v. Harbour Homes, Inc., 147 Wn. App. 193, 216, 194 P.3d 280 (2008).
[xiii] Id. at 216.
[xiv] Centex Corp v. United States, 395 F3d. 1283, 1304 – 06 (Fed.Cir. 2005).
[xv] See Savannah Airport Com’n v. Higgerson-Buchanan, Inc., 238 GA. App. 548, 519 S.E. 2nd 475 (1999).
[xvi] 105 Nev. 913, 784 P.2d 9 (1989).
[xviii] See Moreland Corp. v. U.S., 76 Fed. Cl. 268, 291 (2007).
[xxi] Precision Pine and Timber, Inc. v. U.S., 596 F.3d 817, 829 (Fed. Cir.) (2010).
[xxii] This concept is Ralph C. Nash’s idea. See Nash & Cibinic Report (February 2012).