NH Construction Law
  • Home
  • Blog
  • Links

#62:  The Implied Covenant of Good Faith and Fair Dealing

11/28/2017

0 Comments

 
“In every agreement, there is an implied covenant that the parties will act in good faith and fairly with one another.”  So states Birch Broadcasting, Inc. v. Capitol Broadcasting Corp., Inc., 161 N.H. 192, 198 (2010), and many other New Hampshire court cases.  But what does this really mean?  And how does it shake out in construction contracts?
 
As the Birch Broadcasting case notes, “implied good-faith obligations fall into three general categories: (1) contract formation; (2) termination of at-will employment agreements; and (3) limitation of discretion in contractual performance.”  The third category is the one most relevant to construction contracts.  It prohibits an exercise of contractual discretion “inconsistent with the parties’ agreed-upon common purpose and justified expectations as well as ‘with common standards of decency, fairness and reasonableness.’”  Id.

The first thing to notice is that the implied covenant comes into play only when one party has the discretion to act in a way that could deprive the other party of the expected benefits of its bargain.  Discretion exists where “a legal directive or contract term is indeterminate because it fails to identify a single specific action that is legally permitted, prohibited, or required under the circumstances.”  Milford-Bennington R. Co. v. Pan Am Railways, Inc., No. 10-cv-00264-PB,
2011 WL 6300923 at *5 (D.N.H. Dec. 16, 2011), aff’d, 695 F.3d 175 (1st Cir. 2012).  In other words, not everything is nailed down; the contract presents an opportunity for one party to move the goal posts on the other party after the contract has been entered into.  Conversely, if the claimant has an express contractual right to the benefit it seeks, the other party’s refusal to tender that benefit is simply a breach of an express rather than an implied contract term.  No true discretion exists.

The second thing to notice is the tension between “two apparently inconsistent principles: that the covenant of good faith and fair dealing should be implied to limit the exercise of a discretionary power, and that express terms of a contract cannot be varied by an implied covenant.”  Hobin v. Coldwell Banker Residential Affiliates, Inc., 144 N.H. 626, 630 (2000).  The apparent dilemma is resolved by examining the degree of specificity with which the contract allows the challenged conduct.  If the exercise of discretion yields an outcome that is specifically mentioned as authorized by the contract, courts will not impose reasonableness limits on the exercise of that discretion.  Rouleau v. U.S. Bank, N.A., 2015 WL 1757104, at *5 (D.N.H. Apr. 17, 2015) (“a party does not breach the duty of good faith and fair dealing simply by invoking a specific, limited right that is expressly granted by an enforceable contract”).  In such a case the exercise of discretion would necessarily be consistent with, not inconsistent with, the parties’ “agreed-upon common purpose and justified expectations.”
 
In construction settings, claims of breach of the implied covenant will almost always be “upstream” claims, by a subcontractor against a general contractor or by a general contractor against an owner.  Where I see the implied covenant of good faith and fair dealing implicated most often is in the rescheduling of work.  An instance is New Design Constr. Co., Inc. v. Hamon Contractors, Inc., 215 P.3d 1172 (Colo.App.Div. 2 2008).  As is commonly the case, Hamon, the general contractor, had the contractual right to modify the project schedule.  When it did so to the detriment of its paving sub, it crossed the line.  The Court noted that “Hamon was responsible for developing and maintaining a schedule, NDCC was responsible for completing its work when directed by Hamon to do so, and Hamon was required not to abuse its discretion when directing NDCC to complete its work.”  Id. at 1182.
 
The wise contract drafter attempts to identify areas of discretion, and tries to limit them.  Nothing prevents contracting parties from flagging potential instances of application of the implied covenant -- for example, with language making one party’s action subject to the other’s consent but providing that such consent shall not be unreasonably withheld
.
0 Comments

    Author

    Frank Spinella

    Archives

    March 2021
    February 2021
    January 2021
    December 2020
    November 2020
    October 2020
    September 2020
    August 2020
    July 2020
    June 2020
    May 2020
    April 2020
    March 2020
    February 2020
    January 2020
    December 2019
    November 2019
    October 2019
    September 2019
    August 2019
    July 2019
    June 2019
    May 2019
    April 2019
    March 2019
    January 2019
    November 2018
    October 2018
    September 2018
    August 2018
    July 2018
    June 2018
    May 2018
    April 2018
    March 2018
    February 2018
    December 2017
    November 2017
    October 2017
    September 2017
    August 2017
    July 2017
    June 2017
    April 2017
    March 2017
    February 2017
    January 2017
    December 2016
    November 2016
    October 2016
    September 2016
    August 2016
    July 2016
    June 2016
    May 2016
    April 2016
    March 2016
    February 2016
    January 2016
    December 2015
    November 2015
    October 2015
    September 2015
    August 2015
    July 2015
    May 2015
    April 2015
    March 2015
    February 2015
    January 2015
    December 2014
    November 2014
    October 2014
    September 2014
    August 2014
    July 2014
    June 2014
    May 2014

    Categories

    All

    RSS Feed

Powered by Create your own unique website with customizable templates.