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(A revised version of this article appears in The Construction
Lawyer, Volume 21, No. 3, July 2001, published by the
American Bar Association's Forum on the Construction Industry.)
By John W. Ralls
A
general contractor agreed to undertake a street reconstruction
project for the City of Casper, Wyoming. The general contractor
let a subcontract for the paving work. The project specifications
called for use of a special rubberized asphalt. In preparation
for placing the rubberized asphalt, the paving subcontractor
spent more than $35,000 on special equipment and materials.
Shortly
before the paving was to begin, the general contractor,
the city and the project engineer discussed switching to
concrete. The general contractor recommended the switch
as a "positive partnering/value engineering concept.…"
The city issued a change order substituting concrete for
asphalt. As a result of the change, the paving work was
taken out of the subcontract, reducing its value from $448,240.45
to $105,093.81. In addition, the specialized materials and
equipment purchased for the job no longer were needed.
Three
weeks after the change order was issued, the subcontractor
sued the general contractor for breach of the subcontract
(based on a cardinal change) and breach of the implied covenant
of good faith and fair dealing (based on the general contractor's
active solicitation of the change order). The trial court
granted the general contractor's motion for summary judgment.
The trial court reasoned that clear and unambiguous language
in the contract documents established that the general contractor
could make changes to the work, including deducting from
the work. The trial court rejected application of the cardinal
change doctrine on a number of grounds, including the fact
that the doctrine had not been adopted in Wyoming. The trial
court also disposed of the claim for breach of the implied
covenant on the ground that such a claim requires a special
relationship of trust absent which there could be no tort
liability.
The
subcontractor appealed. The Wyoming Supreme Court reversed
on the claim for breach of the implied covenant of good
faith and fair dealing. Scherer Construction, LLC v.
Hedquist Construction, Inc., 18 P.3d 645 (Wyo. 2001).
The court held that the subcontractor could not state a
claim for breach of the implied covenant in tort but could
state a claim for breach of the implied covenant under a
contract theory, which the trial court had failed to consider.
After reviewing the Second Restatement of Contracts and
decisions from the courts of Montana, New Mexico, Utah and
South Dakota, the court concluded, "Today we explicitly
adopt §205 [of the Second Restatement of Contracts]
and hold that parties to a commercial contract may bring
a claim for breach of the implied covenant of good faith
and fair dealing based on a contract theory."
However,
the court affirmed summary judgment on the breach of contract
claim.
The
court rejected the subcontractor's cardinal change theory
on the ground that it was the owner, not the general contractor,
who issued the change order. The court held that the cardinal
change doctrine could be applied only, if at all, against
a party who issued the change order.
While
the subcontractor's suit was pending, it stayed on the job
to do the asphalt paving work at the tie-ins between the
new concrete street and the intersecting streets. Toward
the end of the job, the general contractor demanded that
the subcontractor repair defects at the tie-in locations.
The subcontractor claimed it was not responsible for the
defects and requested an independent analysis to determine
the cause. The general contractor hired a replacement contractor
to do the contested repair work and withheld the amount
charged from the subcontractor.
The
subcontractor amended its complaint to allege that the general
contractor wrongfully withheld these sums. The case proceeded
to a bench trial on this issue. The trial court concluded
that the general contractor had breached the contract because
it failed to give the subcontractor reasonable notice to
make repairs. Accordingly, the trial court awarded the withheld
amount to the subcontractor. The general contractor appealed.
The Wyoming Supreme Court affirmed. The subcontract contained
no specific notice period. The court concluded that the
general contractor was required to give reasonable notice
to the subcontractor before taking over or completing the
work but had failed to do so.
The
general contractor pointed to evidence that the subcontractor
had been aware of the alleged problems for months. However,
the court relied on the fact that the general contractor
provided only six days notice that if the subcontractor
did not repair the work, an alternate contractor would be
brought on. The subcontractor had notified the general contractor
that it was unavailable and committed to another project
during the six-day period. The court also noted that the
six-day notice did not comply with the seven-day notice
requirement of the prime contract, which was incorporated
into the subcontract.
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