Frequently, the parties involved with building a construction project believe that one of the other parties is acting unreasonably. There are times where one of those parties — the owner, the prime contractor, a subcontractor, or a design professional — act so unreasonably that they may violate the implied covenant of good faith and fair dealing.

Under Florida law, every contract contains an implied covenant of good faith and fair dealing. The purpose of the implied covenant of good faith and fair dealing is to protect the reasonable expectations of the contracting parties in light of their express agreement.

While not a Florida case, a recent federal court case that went to trial in Idaho shows an example of a prime contractor acting unreasonably with its subcontractors on a federal government project.

The Case
In United States ex rel. Mountain Utilities v. Fidelity & Deposit Company of Maryland, the United States Army Corps of Engineers awarded a nearly $50 million design-build water treatment project to AMEC Foster Wheeler Environment & Infrastructure, Inc. (“AMEC”). Another company, Wood Environment & Infrastructure Solutions, Inc. (“Wood”) was the successor-in-interest to AMEC. Wood obtained performance and payment bonds from a group of sureties.

Wood then entered into a subcontract with Anderson Environmental Contracting, LLC (“AEC”) for a portion of Wood’s work at the project. AEC also obtained performance and payment bonds from a surety for its work at the project.

AEC then entered into a sub-subcontract with Mountain Utilities, Inc. for a portion of AEC’s work at the project–the installation of piping and other underground utilities.

The project had numerous payment disputes among the parties. Ultimately, Wood refused to enter into change orders with AEC for additional work, and AEC walked off the job. Wood then terminated AEC’s contract for default. AEC believed it was owed additional money and part of that money would have flowed down to the sub-subcontractor Mountain Utilities.

Mountain Utilities sued Wood, Wood’s sureties, AEC, and AEC’s surety for breach of contract. Wood and AEC filed cross claims against each other, including claims for breach of contract and breach of the implied covenant of good faith and fair dealing.

The Trial
The case failed to settle, and a two-week trial was held. The court bifurcated the trial, and a jury tried the claims of Mountain Utilities (the sub-subcontractor) against AEC (the subcontractor), Wood (the prime contractor), and Wood’s sureties. Once the jury trial was complete, the court held a bench trial to decide the claims among Wood, AEC, and AEC’s surety.

As to Mountain Utilities’ claim against Wood and Wood’s sureties, the jury awarded Mountain Utilities about $307,000. The jury also rejected Mountain Utilities’ claim against AEC for breach of contract, finding that AEC was not in breach.

The court then made numerous findings about the dispute between Wood and AEC, including that Wood significantly underbid the job and Wood’s own internal financial audit calculated that the projected profit margin of the job was a negative 39.8%. The court found that was a “powerful motive” to lean on its subcontractors in an effort to limit the massive losses it was experiencing in completing the project.

The Court’s Ruling
The court then outlined how Wood breached the implied covenant of good faith and fair dealing. Under Idaho law, which applied to the case, there is an implied covenant of good faith and fair dealing that “requires the parties to perform in good faith, the obligations required by their agreement.” The court went on to note that a “violation of the covenant occurs when either party violates or significantly impairs any benefit of the contract,” and a “violation of the implied covenant is a breach of contract.”

Ultimately, the court concluded that Wood breached the implied covenant of good faith and fair dealing because Wood “did not administer the Project in good faith. Nor did it fairly deal with its contractors and sub-contractors.”

The court again noted that Wood had a major motive to “squeeze” subcontractors to try and limit “the enormous losses it faced in completing the Project.” This included Wood’s failure to timely pay its subcontractors and “holding onto invoices for months without disputing or providing any explanation to the unpaid contractors for the holdup in payments.”

As a result, the court concluded that AEC was entitled to essentially the entirety of its claim against Wood. The court awarded AEC nearly $1.2 million, which included approximately $525,000 for the contract balance due AEC, $239,000 in field overhead costs, and $394,000 in unpaid change order requests. AEC was also awarded 12% prejudgment interest under Idaho law and its attorneys’ fees.

Bottom Line
If an owner is going to withhold money from the contractor or a contractor is going to withhold funds from a subcontractor, the party withholding the money needs to have a good reason for doing so. This is true even if the withholding party has unfettered discretion to withhold the money under the contract.

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