As written, most construction contracts leave lots of space for interpretation. These ambiguous or gray areas are often what lead to contract disputes. Parties involved in the design, bid, and build process may naturally assume the most favorable version of terms, and it can be tempting to take advantage of the contract’s lack of clarity.
However, when taking advantage crosses the line into abusing another party, it can violate the implied duty of good faith and fair dealing. Good faith and fair dealing obligates each party in a contract to act with fairness and common sense, which at a minimum means not interfering with another party’s ability to perform.
This duty lurks quietly within every contract, but can result in real consequences. Two 2017 decisions by the Court of Federal Claims demonstrate how the government’s breach of good faith and fair dealing caused two projects to veer off course, forcing the contractors to rely on the courts to hold the government accountable for its breach.
NASA Gets Grounded
In Horn & Associates v. United States, NASA tasked an audit recovery contractor with finding overpayments by NASA that were eligible for reimbursement. NASA agreed to compensate the contractor with a portion of the funds recovered. The contractor identified hundreds of claims worth hundreds of millions of dollars.
Throughout the project, NASA employees exhibited apathy and indifference toward the contractor’s efforts, hindering its ability to complete the audits. For example, NASA personnel:
- Provided incomplete data;
- Erroneously denied claims;
- Created confusion by giving inconsistent directions;
- Failed to collect overpayments;
- Refused to schedule meetings;
- Displayed unwillingness to deal with the contractor’s personnel; and
- Responded to emerging issues by attempting to suspend the contract.
These factors had a damaging and material impact on the contractor’s ability to perform, running counter to “reasonable expectations” of cooperation. Consequently, the court found that NASA had breached its duty of good faith and fair dealing under the contract.
USACE Burns Bridges
In MW Builders, Inc. v. United States, the U.S. Army Corps of Engineers failed to secure easements needed to connect permanent power to the project site, something that should have happened before bidding. To make matters worse, the Army Corps then misled and kept the contractor out of the loop during key negotiations with the power company, creating confusion about who would sign a line extension agreement needed before construction could proceed.
The court ordered the government to pay the contractor for breach of contract, because the government’s games had cost the contractor significant time and money. Specifically, by interfering with, hindering, and failing to cooperate with the contractor, the government violated its duty of good faith and fair dealing.
Our Mission: The Space Between
The implied duty of good faith and fair dealing functions as a common-sense “gap-filler” in contracts. Courts recognize that it can be extremely difficult to draft a contract that anticipates every possible circumstance that might undermine the work. As a result, courts in most states (including Iowa, Minnesota, North Dakota, and South Dakota) have found that some version of this implied duty exists in every contract.
This presents both opportunities and challenges for contractors. When a job suffers because one party refuses to cooperate, an implied duty may offer a legal remedy. But it can be difficult to know about, much less prove, a violation. Applying the duty to real-world situations is also challenging because it is nearly impossible to find a consistent and meaningful standard that applies to every situation.
- Some courts hold that the duty “requires the Government . . . to do whatever is necessary to enable the other party to perform.”
- Other courts emphasize that the duty is not limitless, and does not require owners to “be nice.”
- Courts have different opinions about whether the implied duty can be invoked as a standalone violation, or if it can only accompany violation of a written contract term.
There is a wide range of opinions, and no two projects are the same. Nevertheless, it should be clear that building a successful job requires not only a solid grasp of the technical details of the work, but also a commitment to common sense, fairness, and cooperation.
Service. Integrity. Quality.
© 2018 Welle Law P.C. No unauthorized use or reproduction.
This blog is for informational purposes only and should not be interpreted as legal advice. You should contact your attorney regarding any particular issue or problem. Nothing on this website creates an attorney-client relationship between Welle Law P.C. (or any of its attorneys) and the reader.
