Parties to construction contracts are often surprised to learn that they are bound to implied unwritten contract obligations in addition to the written terms of their contracts.
Courts in the United States began to recognize certain implied contract obligations about 100 years ago in circumstances where application of the common law rules of contract formation and interpretation would lead to results that the parties to the contract clearly did not intend. As a result, the courts required that the implied contract obligations be consistent with and necessary to carry out the express terms of the contract, such that it could be fairly said that the parties to the contract would have included such obligations in their contract had they thought about it.
Nowadays, implied contract obligations may provide either party to a contract with a basis for recovery or a defense to a claim that is not expressly addressed in the contract. This article focuses on the implied obligation of good faith and fair dealing, which is recognized by the Federal Government and most states, including Georgia.
The Restatement (Second) of Contracts § 205 provides that: “Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.” Comment d to Section 205 states:
Good faith performance. Subterfuges and evasions violate the obligation of good faith in performance even though the actor believes his conduct to be justified. But the obligation goes further: bad faith may be overt or may consist of inaction, and fair dealing may require more than honesty. A complete catalogue of types of bad faith is impossible, but the following types are among those which have been recognized in judicial decisions: 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 in the other party’s performance.
The Restatement comment suggests that bad faith depends upon the circumstances, rather than some formulistic definition; that is, “you know it when you see it.”
Historically, contracting parties were not required to act in good faith or deal fairly unless such an obligation was expressly written into the parties’ contract. The courts adhered to the maxim that parties should be provided absolute freedom to contract for whatever terms they desired, which allowed the parties to do whatever they wanted unless the contract expressly provided otherwise. The New York Court of Appeals challenged that view in 1917 when it recognized an implied duty to use reasonable efforts in the performance of a contract to market designs that did not expressly require any effort whatsoever, explaining that:
It is true that he does not promise in so many words that he will use reasonable efforts to place the defendant’s indorsements and market her designs. We think, however, that such a promise is fairly to be implied. The law has outgrown its primitive stage of formalism when the precise word was the sovereign talisman, and every slip was fatal. It takes a broader view today. A promise may be lacking, and yet the whole writing may be “instinct with an obligation,” imperfectly expressed.[1]
Since the New York Court of Appeals holding in Wood, courts in most states recognize that the duty of good faith and fair dealing is implied in every contract unless it is expressly excluded,[2] and such exclusion does not violate public policy. A breach of this duty occurs when the party’s acts or omissions are inconsistent with the contract’s purpose and deprive the non-breaching party of its contemplated benefit of the contract. The terms of the contract as a whole must be considered when determining the reasonable expectations of each party in a particular situation.
In Metcalf Constr. Co. v. United States[3], the plaintiff, Metcalf, was a design-builder of housing units at a Marine Corps base. Metcalf filed suit against the Government based on its assertion that differing site conditions forced it to bear higher costs than the parties expected under the terms of the parties’ agreement.
The request for proposal for the project included a government report marked “for preliminary information only,” that represented the soil at the site had a “slight expansion potential,” and the soil on site contained small amounts of Chlordane that would not need to be remediated. The contract required the successful bidder to test and investigate the soil during performance. The pre-bid clarifications stated “in plain terms that material deviations from the government’s report on swelling potential would be dealt with by change order” and that “no remediation action of the Chlordane contaminated soil is required.”
During post-award testing, Metcalf’s consultant determined that the soil’s swelling potential was actually “moderate to high,” not “slight,” which was significant because the expansion of soil was likely to damage concrete foundations and other parts of the work. Metcalf raised this issue with the contracting officer. The Government refused to grant a change order for the differing site conditions encountered by Metcalf, despite the existence of a differing condition clause in the contract, which Metcalf alleged breached its duty of good faith and fair dealing.
The trial court determined that the Government had not breached its duty of good faith and fair dealing because the contract required Metcalf to conduct an independent soil analysis, which precluded Metcalf from relying on the “for preliminary information only” report “in performing the project.” The trial court also determined that the duty of good faith and fair dealing was not breached because the Government did not “specifically target” the action nor undertake the action for the purpose of delaying or hampering contract performance.
The Court of Federal Claims reversed the trial court because “[t]he covenant of good faith and fair dealing imposes obligations on both contracting parties that include [1] the duty not to interfere with the other party’s performance and [2] not to act so as to destroy the reasonable expectations of the other party regarding the fruits of the contract.”[4] The Court further explained that [n]othing in the contract’s general requirements that Metcalf check the site as part of the designing and building the housing units, after the contract was entered into, expressly or implicitly warned Metcalf that it could not rely on, and that instead it bore the risk of error in, the government’s affirmative representations about the soil conditions. To the contrary, the government made those representations in the request for proposals and in pre-bid questions-and-answers for bidders’ use in estimating costs and therefore in submitting bids that, if accepted, would create a binding contract. The natural meaning of the representations was that, while Metcalf could investigate conditions once the work began, it did not bear the risk of significant errors in the pre-contract assertions by the government about the subsurface site conditions.[5]
As recognized in the Metcalf decision, the duty of good faith and fair dealing includes both the duty to cooperate and the duty not to hinder performance. The duty of cooperation requires “positive acts” to help the other party perform where cooperation is typically required only if the burden on the cooperating party is relatively small,[6] or if the cooperation is necessary for the other party to perform.[7]
The duty to not hinder precludes “negative acts,” such as intentionally, deliberately, or willfully frustrating the other party’s performance or expected benefit of the contract. Examples where courts have found a breach of the duty to not hinder include where: an owner actively interfered with the contractor’s work when the owner delayed executing change orders, but refused to let the work proceed without the change orders[8]; an owner unreasonably delayed acceptance of contractor’s deliverables[9]; an owner failed to make the work site available to allow for timely performance[10]; an owner failed to provide plans and drawings[11]; and an owner unilaterally imposed additional duties on the contractor.[12]
Each state applies the duty of good faith and fair dealing differently. In some states, the doctrine is used as a tool to interpret a contract; in other states, a breach of the implied duty is an independent cause of action.[13] Notably, in most commercial disputes, the jury is fact finder and usually decides whether a party’s conduct breached the duty.
About the Authors:
Scott Cahalan and Darren Rowles are partners in the construction law and litigation section of the law firm Smith, Gambrell & Russell, LLP. You can reach them by telephone at (404) 815-3500 or by email at scahalan@sgrlaw.com and drowles@sgrlaw.com.
This article is for informational purposes only, and not for providing legal advice. You should contact an attorney to obtain advice about any particular issue or claim.
[1] Wood v. Lucy, Lady Duff-Gordon, 222 N.Y. 88, 90-91 (1917).
[2] See, e.g., Metcalf Constr. Co. v. United States, 742 F.3d 984, 990 (Fed. Cir. 2014).
[3] Id.
[4] Id. at 991; see also Centex Corp. v. United States, 395 F.3d 1283, 1304 (Fed. Cir. 2005).
[5] Metcalf Constr. Co. v. United States, 742 F.3d at 995-996.
[6] See, e.g., Allied Fire & Safety Equip. Co. v. Dick Enter., Inc., 886 F. Supp. 491 (E.D. Pa. 1995) (finding that if one party can assist the other party’s performance at minimal cost, such cooperation should be required).
[7] See, e.g., Newberry Square Dev. Corp. v. S. Landmark,Inc., 578 So.2d 750, 752 (Fla. Dist. Ct. App. 1991) (finding duty to timely review contractor submittals and requests before the work can proceed)
[8] Id.
[9] Kehm Corp. v. United States, 119 Ct. Cl. 454, 93 F. Supp. 620 (1950)
[10] L.L. Hall Constr. Co. v. United States, 177 Ct. Cl. 870, 379 F.2d 559 (1966)
[11] Cedar Lumber, Inc. v. United States, 5 Cl. Ct. 539 (1984)
[12] Haddon Housing Assoc. v. United States, 99 Fed. Cl. 311 (2011), aff’d in part, reversed in part by 711 F.3d 1330 (Fed. Cir. 2013).
[13] In Georgia, an independent claim for breach of duty of good faith and fair dealing is not recognized; rather, any such claim must be based on a specific obligation under the terms of the agreement. See, e.g., American Casual Dining, L.P. v. Moe’s Southwest Grill, LLC, 426 F.Supp.2d 1356 (N.D. Ga. 2006) (finding that “the common law requirement of good faith and fair dealing is not an independent source of duties for the parties to a contract. Rather, the covenant to performance in good faith modifies the meaning of all explicit terms in a contract, preventing a breach of those explicit terms de facto when performance is maintained de jure. Thus, in order to state a claim for breach of the implied duty of good faith and fair dealing, a plaintiff must set forth facts showing a breach of an actual term of an agreement. General allegations of breach of the implied duty of good faith and fair dealing not tied to a specific contract provision are not actionable.”) (internal citations omitted).