Inapposite of most train of thought, it is not required that one be found guilty of breaching an express contract term to be held liable for breaching an implied covenant of good faith and fair dealing. The implied covenant of good faith and fair dealing, however, may not be used to create new, independent rights or duties beyond those agreed to by the parties. The implied covenant of good faith and fair dealing must arise from the language used or be indispensable to effectuate the intention of the parties as determined by the contract language, the parties' conduct and their course of dealing. The implied covenant of good faith and fair dealing simply requires that neither party to a contract act in a manner that would injure the rights of the other party to receive the benefit of the agreement. The parties at all times must act in accordance with the agreed upon common purpose of the contract and the justified expectations that were set forth.
In City of Gillette v. Hladky Construction, Inc., 196 P.3d 184 (WY 2008), a contractor on a city project brought an action against the city alleging breach of implied covenant of good faith and fair dealing. The city breached the implied covenant of good faith and fair dealing by interfering or failing to cooperate with contractor's ability to perform under the contract. The court held that because the city went along with its representative’s oral modification of contract specifications regarding concrete panels and did not act on the contractor's change order request regarding such panels it breached the implied covenant of good faith and fair dealing.
When the City of Gillette opted to remodel and expand city hall, it hired Schutz Foss Architects as the project architect. The Architect assigned one of its employees to act as the on-site project manager during construction. Included in the project specifications was a requirement that precast concrete exterior panels be installed and that the precast concrete manufacturing plant be certified by the Precast/Prestressed Concrete Institute, Plant Certification Program, prior to the start of production. The language requiring that certification take place prior to the start of production was added to a standard American Institute of Architects (AIA) contract by an employee of the architectural firm. The language specification was thought to be necessary to promote competitive bidding and to keep the only certified precast concrete manufacturing plant at the time, Gage Brothers Concrete Productions, Inc., from artificially inflating its bid and to allow others to become certified later, before beginning production of the precast panels.
One of the bidders for the project, Hladky Construction, Inc. (Hladky) initially submitted a bid identifying Gage Brothers. However, on the day that bids were accepted by the City, Hladky changed its bid to name another precast panel manufacturer, Winfrey Architectural Concrete, Inc. (Winfrey) that Hladky incorrectly believed was a certified precast manufacturer. Winfrey indicated that it could produce the panels for almost $70,000 less than Gage Brothers. The City accepted and awarded the project to Hladky.
Approximately one week after signing the contract for the project, Hladky met with the City and the Architect and was informed that it needed to produce Winfrey's certification before ordering the precast panels. This requirement was in contradiction to the project specification that required the manufacturer to have its certification prior to the start of production of the panels. This new requirement presented a problem for Hladky because it needed to place the order for the precast panels to avoid a disruption in the project schedule and could not wait for Winfrey to obtain certification before placing the order.
After the meeting, Hladky advised Winfrey that the order for the precast panels could not be placed until Winfrey was certified. Hladky also reached back out to representatives for the City and the Architect requesting that they withdraw the requirement that certification take place before the precasts were ordered and reinstate the requirement that certification take place prior to the start of production. Hladky also submitted a request for a change order to allow it to substitute Gage Brothers for Winfrey as its precast supplier for an additional cost but the Architect did not respond to the request.
Hladky again met with the City and Architect in an attempt to obtain approval for the change order request. The City responded by stating that it could not grant authorization to approve the request and that Hladky should focus on Winfrey’s certification process. Approximately four weeks later, Hladky submitted a second change order request proposing to remove the precast panels from its bid and have the City negotiate with certified suppliers for production of the panels “in an effort to minimize the cost of delays, litigation, etc.” Hladky also included a letter stating that “[d]ue to the ambiguous specifications there is potential for a major impact on the schedule causing loss of productivity and increased costs.” The Architect denied the request.
A few weeks later Hladky sent another letter restating that the City’s actions and inactions resulted in delay to the schedule and in additional costs. Two weeks later, the City approved a change order to allow Hladky to substitute Gage Brothers for Winfrey. Unfortunately, Gage Brothers was unavailable due to work on another project and could not begin work on the precast panels for several weeks. Hladky informed the City that it would reschedule subcontractors as necessary to complete the project as efficiently as possible and that it would document the costs associated with the delays caused by the City. Roughly one year after the project was scheduled to be completed, Hladky completed the work.
Subsequently, Hladky submitted a claim to the City for approximately $1.3 million dollars in damages allegedly caused by changes in the project specifications and subsequent delays. The City and Hladky attempted to mediate the claim but were unsuccessful. Consequently, Hladky filed a complaint claiming that the City breached the contract and the implied covenant of good faith and fair dealing when it refused to allow Hladky to order the precast panels from Winfrey until Winfrey, contrary to the express contract provision requiring certification prior to the start of production, obtained the required certification. Hladky also claimed that the City breached the contract and the implied covenant when it failed to approve Hladky's change order requests in time for Hladky to obtain the precast panels from Gage Brothers and prevent further delay.
After a jury trial, the jury returned a verdict finding that the City had not breached the contract but had breached the implied covenant of good faith and fair dealing. The jury awarded Hladky damages in the amount of $1.125 million dollars, to include attorney fees. On appeal, the City attempted to argue that Hladky failed to provide adequate notice of claim as to the conduct giving rise to the claim for breach of the implied covenant and the damages allegedly resulting from the breach.
Contrary to the City’s argument, the evidence showed that Hladky served the City with a notice of claim for $1,300,015.97. Further, Hladky's notice of claim described in detail the time, place and circumstances of the alleged loss, in accordance with the requirements of the Wyoming State Statute.
The City also attempted to argue that because it was able to establish that it did not breach the contract, Hladky could not recover for breach of the implied covenant of good faith and fair dealing. The City rested its assertion on the fact that language in the contract unambiguously provided that the Architect did not have the authority to bind the City and that any modifications to the contract must be in writing. The City attempted to show that statements made by the Architect had no effect on the contract, did not bind the City and did not prevent Hladky from ordering precast panels from Winfrey.
Hladky contended that a breach of the implied covenant of good faith and fair dealing could exist without breaching the express terms of the contract. It argued that an implied covenant to cooperate and not interfere with contract performance existed in every contract separate and apart from the express terms. Hladky asserted that the City breached the implied covenant when it refused to allow Winfrey to order precast panels until Winfrey was certified and when it did not act on Hladky's change order request to substitute Gage Brothers as the precast supplier until it was too late for Hladky to meet the scheduled deadline.
The Court, applying Wyoming law, stated that “the implied covenant requires that neither party to a commercial contract act in a manner that would injure the rights of the other party to receive the benefit of the agreement.” Further, the implied covenant “requires the parties to act in accordance with their agreed common purpose and each other's justified expectations. A breach of the implied covenant occurs when a party interferes or fails to cooperate in the other party's performance.”
The Court identified the fact that an implied covenant of good faith and fair dealing “must arise from the language used or be indispensable to effectuate the intention of the parties as determined by the contract language” and not used to create new or independent rights or duties. The question of whether the implied covenant of good faith and fair dealing was breached is ordinarily one of fact, focusing on the conduct alleged as constituting the breach within the context of the contract language, the parties' course of conduct and industry standards. The fact-finder will look to the actions of the parties to determine whether they were in conformity with the clear contract language.
The Contract Language
The contract identified the City as the Owner and stated that the Architect did not have authority to bind the Owner without an express written modification of the contract. No written modification of the contract specification requiring certification prior to the start of production ever took place. Therefore, the City contended that it did not breach the implied covenant when the Architect orally modified the contract specification requiring certification prior to ordering the precast panels.
The evidence, however, “created a reasonable inference that, rather than conforming to the agreed common purpose and [Hladky’s] justified expectations, the City instead interfered and failed to cooperate with [Hladky's] ability to perform.” The evidence showed that, despite the contract provisions, the City went along with the Architect’s oral modification of the contract specification and opted not to object to or dispute statements made by the Architect at meetings requiring certification prior to ordering the precast panels.
Article 4.2.1 of the contract provided that the Architect was to administer the contract and was the City's representative during construction. Article 4.2.2 provided that the Architect, as the City's representative, was to guard the City against construction defects and deficiencies. Article 4.2.4 provided that the City and Hladky were to communicate through the Architect. Article 4.2.6 gave the Architect authority to reject work that did not conform to the contract. Article 4.2.7 required the Architect to review Hladky's submittals for checking conformance with the contract. Article 4.2.8 required the Architect to prepare change orders. Article 4.2.11 required the Architect to interpret and decide matters concerning performance under and requirements of the contract on written request of Hladky or the City. Articles 4.4.1 and 4.4.5 required claims to be submitted to the Architect and provided that the Architect's decision concerning any claim was final and binding on the parties subject to mediation.
In addition to the evidence tending to show that the City breached the implied covenant when it went along with the Architect’s oral modification of the contract specification, the evidence also permitted a reasonable inference that the City breached the covenant when it did not act on Hladky's change order request to substitute Gage Brothers as the precast supplier until after the scheduled deadline had passed.
There was no question that the City knew the precast panels needed to be ordered or the project would be delayed and damages would result. Because the City took no action to allow Hladky to order the precast panels from Winfrey or, alternatively, to substitute Gage Brothers as the supplier, the City breached the implied covenant of good faith and fair dealing by interfering or failing to cooperate with Hladky's ability to perform.
A breach of the implied covenant occurs when a party interferes or fails to cooperate in the other party's performance. To determine whether a party has breached the implied covenant of good faith and fair dealing, the courts will focus on the conduct alleged as causing the breach within the context of the contract language, the parties’ course of conduct and applicable industry standards. If the actions of the offending party run contrary to the clear contract language and the evidence establishes a material dispute as to whether a party's conduct went beyond the exercise of contract rights and amounted to self-dealing or a violation of community standards of decency, fairness or reasonableness, the issue is one for determination by the fact-finder.
To avoid breaching the implied covenant of good faith and fair dealing, ensure that all actions and conduct fall within the context of the contract language. Where a contract authorizes one party discretionary authority to determine a contract term, it is important that the authority refrains from doing anything that will have the effect of frustrating the rights of the other party.