The Implied Duty of Good Faith and Fair Dealing

Construction contracts often give one party discretion over certain aspects of the administration of a project. For example, a contract may give the owner the “sole discretion” to approve the use of contingency on a job or whether to give a contractor a time extension for an excusable delay.

Even where an owner has discretion to make specific determinations under the contract, there is generally at least one legal principle that limits how the discretion may be exercised—the implied duty of good faith and fair dealing.

I have written about how a contractor may breach the implied duty / covenant of good faith and fair dealing (click here for that post). This post shows how an example of how a public owner breached the implied duty of good faith and fair dealing by, among other things, improperly assessing liquidated damages.

The Case
In Appeals of ECC International, LLC, a contractor was awarded two projects, which were related to the construction of a military police school for the federal government. The advertisement for the project in question provided that the project would have a 365-day period of performance. The contractors bidding on the project did not know, however, that there were internal communications among government / owner representatives that the project could not be completed in 365 days. In fact, one owner representative wrote that the 365-day period of performance was “NOT POSSIBLE.” Instead, it was thought that the period of performance should be at least 550-600 days.

During construction of the project, the contractor encountered numerous issues with the project, which caused the project to be untimely completed. The owner failed to adjust the completion date for excusable and compensable delays, and the owner assessed liquidated damages for late completion of the project. The owner also refused to provide the contractor with additional compensation that the contractor requested.

Appeal to the Armed Services Board of Contract Appeals
The contractor appealed the owner’s / government’s deemed denial of the contractor’s various claims. The appeal was with the Armed Services Board of Contract Appeals. The contractor argued, among other things, that the government breached the duty of good faith and fair dealing.

The ASBCA outlined the following about the duty of good faith and fair dealing:

Every contract imposes on each party a duty of good faith and fair dealing in its performance and enforcement. The covenant of good faith and fair dealing imposes obligations on both contracting parties that include the duty not to interfere with the other party’s performance and not to act so as to destroy the reasonable expectations of the other party regarding the fruits of the contract. While 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 the contract provisions, it prevents a party’s acts or omissions that, though not proscribed by the contract expressly, are inconsistent with the contractor’s purpose and deprive the other party of the contemplated value. The duty to cooperate is an aspect of the implied duty of good faith and fair dealing.

(Internal quotation marks and citations omitted).

The ASBCA noted that the government imposed a 365-day period of performance “despite unanimous contemporaneous internal opinion that the period of performance was far too short and should more appropriately have been at least 550-600 days.” In other words, the government advertised the project with a period of performance of 365 days, even though the government knew that 365 days was not likely achievable.

On the other hand, the ASBCA found that the contractor reasonably believed 365 days would be achievable because the government had communicated that it was committed to achieving accelerated construction and the contractor had successfully completed other accelerated projects with the government. There was also a document provided to the contractor that expressed the “primary objective is the construction schedule,” and that quality and cost were secondary objectives.

The Government Fell Short in Three Ways
The ASBCA focused on three shortcomings on the part of the government. First, the government could have approved “designs that departed from the conceptual drawings and specifications in ways that were not only compatible with the most recent guidance, but were also better suited to achieve completion in 365 days.” And the government “chose not to do so.”

Second, the government failed to help the contractor obtain unfettered access to the job site that would have allowed the contractor to work double shifts and overtime needed to achieve the schedule. As a result, the contractor could only work 7.5 hours per day instead of the 20 days per day it intended to work.

Finally, the ASBCA noted that the government improperly withheld funds, issued unsatisfactory performance ratings, and assessed liquidated damages against the contractor. Such actions were improper because, among other reasons, the government refused to grant relief to the contractor for government-caused and excusable delays.

The ASBCA concluded that the government breached the covenant of good faith and fair dealing because the government advertised its intent to implement an accelerated construction and relaxed design standards and then administered the contract inconsistent with that advertised intent. The government’s failure to cooperate with the contractor by implementing the relaxed design standards and giving the contractor the needed access to job site deprived the contractor of the contemplated value of the contract. Thus, the ASBCA held that the contractor was entitled to its damages flowing from the breach of the implied covenant of good faith and fair dealing.

Bottom Line
Even if an owner has sole discretion as to how to administer a contract, there are limits on that discretion. In particular, an owner should not unreasonably exercise any discretion it has under the contract. Otherwise, an owner may breach the implied covenant of good faith and fair dealing and end up owing the contractor additional compensation. 

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