The covenant of good faith and fair dealing “prohibits arbitrary or unfair acts by one party that work to the disadvantage of the other”. In this appeal, the court held that the district court properly applied the covenant of good faith and fair dealing when it awarded delay damages to a subcontractor against the prime contractor who settled a claim with the project owner but failed to include the subcontractor claim in the settlement. The Prime advised the subcontractor that its claim was being rejected by the Owner due to lack of backup information. But in reality, the Owner rejected the subcontractor claim because it was presented directly by the subcontractor instead of by the Prime on behalf of the subcontractor. The court also held that the conditional waiver and release signed by the subcontractor didn’t preclude it from recovering its damages. APACO Construction, Inc. v. Helix Electric of Nevada, LLC, 509 P.3d 49 (2022).
After the original project completion date passed, the subcontractor notified the Prime that it reserved the right to receive payment for additional costs incurred due to the delay. Prime responded by advising the subcontractor to seek reimbursement of its costs by providing documentation to the Prime that the Prime would submit to the Client. The Prime created a change order request for the subcontractor claim and submitted it to the Client. The Client rejected the change order request, said the court, “because the [Client] did not have a contract with the Subcontractor.”
It is not clear from the court decision, but it seems that the client wanted the Prime contractor to essentially certify the subcontractor claim and make it a change order request to the Client directly from the Prime instead of having a separate change order request from the Subcontractor.
In any event, the Prime never explained to the Subcontractor that this was why the claim was denied, and ultimately the Prime settled all the Prime’s outstanding claims with the Client and advised the Subcontractor that the Subcontractor claim was denied due to lack of adequate documentation.
The Prime argued that the covenant of good faith and fair dealing was improperly used by the court here because the express wording of the subcontract contained a no damages for delay clause, and provided that the subcontractor could only seek time extensions. The appellate court rejected that argument and explained, “An implied covenant of good faith and fair dealing exists in all contracts.” “A plaintiff can recover damages for breach of the covenant of good faith and fair dealing “[e]ven if a defendant does not breach the express terms of a contract.” “When one party performs a contract in a manner that is unfaithful to the purpose of the contract and the justified expectations of the other party are thus denied, damages may be awarded against the party who does not act in good faith.”
The conditional release and waiver Helix signed does not preclude it from receiving delay damages.
The Prime argued that the court should have enforced the release and waiver that the Subcontractor signed to received its retention payment. The court rejected that argument because it stated that any release or waiver required to be provided to receive payment or retention must, by state statute, be “limited to claims related to the invoiced amount of the labor, materials, equipment or supplies that are the subject of the progress bill or retainage bill.” The subject of the release was the retention payment for the work completed prior to the delay costs, and the release was therefore limited to that payment, held the court. Moreover, since the Subcontractor never received its delay costs, the Prime could not have withhold a retention amount from those costs – and the Subcontractor could therefore pursue a claim for those delay costs that were not contemplated by the waiver.
Comment: The covenant of good faith and fair dealing is often expressly stated in a contract. Even when not stated, however, the court here explains that all contracts by common law contain a covenant of good faith and fair dealing. In contrast, we sometimes see contracts that state the parties have a duty of “trust and confidence” and to each other. That is not the same as “good faith and fair dealing.” We believe it could lead to a fiduciary duty that is not appropriate in design and construction contracts. Therefore, whenever we see word like “trust and confidence” we strike them and replace them with “good faith and fair dealing.”
About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with ConstructionRisk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk Report, Vol. 25, No. 1 (January 2023).
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