In addition to the considerable risks an Owner encounters when designing and constructing a project, an Owner is subject to obligations “implied by law.” Arizona recognizes an implied duty of good faith and fair dealing in all contracts, and construction contracts are no exception. Arizona’s implied duty of good faith and fair dealing prohibits a party, as a matter of law, from doing anything to prevent another party from receiving the benefits it was entitled to under the contract. Rawlings v. Apodaca, 151 Ariz. 149, 153-54, 726 P.2d 565, 569-70 (1986). Bad faith may take a variety of forms, including “evasion of the spirit of the bargain, lack of diligence and slacking off, willful rendering of imperfect performance, abuse of a power to specify terms, and interference with or failure to cooperate in the other party’s performance.” Restatement (Second) of Contracts § 205 (19811), cmt. (d) (discussing judicially recognized examples of bad faith).
In 2002, the Arizona Supreme Court expanded the implied duty of good faith, holding that a party may violate the implied duty, even without expressly breaching the contract, if that party takes action inconsistent with the risks assumed by the other party upon entering the contract. Wells Fargo Bank v. Arizona Laborers, Teamsters and Cement Masons Local No. 395 Pension Trust, 201 Ariz. 474, 38 P.3d 12 (2002). Wells Fargo created a new test to determine if a breach of the implied duty of good faith and fair dealing had occurred: has one party “wrongfully exercised a contractual power for ‘a reason beyond the risks’” assumed by the other party? If so, a jury may find that a breach has occurred. Id. at 492, 38 P.3d at 30.
In 2007, the Arizona Court of Appeals further extended a party’s contractual good faith obligation, determining as a matter of public policy “that a party should not benefit from a bargain it performed in bad faith.” Airfreight Express Ltd. v. Evergreen Air Ctr., Inc., 215 Ariz. 103, 111, 158 P.3d 232, 240 (App. 2007) (finding that a contractual limitation of damages clause may be unenforceable if the party attempting to enforce the clause acted in bad faith).
In 2010, the Arizona Court of Appeals addressed the implied duty of good faith and fair dealing in an owner-contractor setting. County of La Paz v. Yakima Compost Co., Inc., 224 Ariz. 590, 233 P.3d 1169 (App. 2010). In September 2002, the La Paz County and Yakima Compost Company, Inc., entered into an agreement under which Yakima would process sewer sludge on behalf of the County (the “Agreement”). Under the Agreement, a sludge drying facility would be temporarily located on a County landfill and relocated within three years, with Yakima’s assistance. Additionally, the Agreement required Yakima to comply with all applicable environmental laws, provide the County with a closure plan for the temporary facility for approval prior to operation, and furnish a $1 Million performance bond to the County to ensure a surety would complete closure of the temporary facility in the event of Yakima’s default. Id. at 596, 233 P.3d at 1175.
Disputes arose between the parties which eventually culminated in the County filing suit in May 2003. A jury returned a $9.2 Million verdict in favor of Yakima and the trial court denied the County’s motion for judgment as a matter of law (“JMOL”). The County appealed. Id., 233 P.3d at 1175. On appeal, the Court of Appeals determined that the trial court had properly denied the County’s JMOL because sufficient evidence supported a finding that the County had exercised its contractual risks for reasons beyond the risks assumed by Yakima. Although Yakima assumed the risk that the County could terminate the Agreement for various reasons, there was evidence to support a conclusion that the County had changed its mind about the Agreement and had purposefully delayed approving Yakima’s approved closure plan to prevent Yakima from timely posting the required bond. Because Yakima did not assume the risk that the County would change its mind about entering into the Agreement, ample evidence existed for the jury to conclude that the County breached the implied duty of good faith and fair dealing. Id. at 604-05, 233 P.3d at 1183-84.
Although there are a few Arizona cases addressing other implied duties owed by the owner, other jurisdictions have addressed duties, including:
- The duty to disclose material information to prospective bidders/contractors Helene Curtis Indus. V. U.S., 160 Ct. Cl. 437, 312 F.2d 774, 778 (1963) – The government breached an implied duty when it failed to disclose vital information, which it was aware the contractor did not possess, regarding a grinding process for materials without which the government’s specifications could not be met.
However, in N. Pac. Erectors, Inc. v. Dep’t of Admin., 2013 WL4768380 (Alaska 2013), the failure of the contractor to undertake pre-bid investigation precluded a claim for additional compensation by the contractor performing asbestos abatement and renovation for one floor of a state office building, including denial under differing site conditions. The contractor claimed the state knew that the concrete decking was “dimpled” rather than smooth, resulting in substantial additional cost to remove. Applying a three-part test for a differing site condition claim, which requires that: (1) the contractor not know about the relevant conditions encountered; (2) the contractor could not have anticipated the condition from site inspection, reasonable investigation or general experience; and (3) the condition varied from the norm in similar contracting work, the court found that, by failing to conduct a pre-bid site investigation, the contractor was charged with knowledge that a reasonable investigation would have revealed, including the contractor could have interviewed prior subcontractors who worked on five prior asbestos abatement projects in this state office building. The court distinguished its earlier holding of Morrison – Knudsen Co., Inc. v. State, 519 P.2d 834 (Alaska 1974), where it held a duty to disclose information in its possession based upon:
“Did the State occupy so uniquely-favored a position with regard to the information at issue that no ordinary bidder in a plaintiff’s position could reasonably acquire that information without resort to the State? Where resort to the State is the only reasonable avenue for acquiring the information, the State must disclose it; it may not claim it as a defense either the contractor’s failure to make an independent request or exculpatory language in the contract documents.” Id. at 841.
Similarly, in Beck Constructors v. State Dep’t of Highways, 604 P.2d 578 (Alaska 1979), the court determined that the state had no duty to disclose earthquake damage reports concerning a bridge based upon information obtained by simple “visual” inspection of the bridge, concluding “in short, a successful superior knowledge claim by a contractor requires the government to have unique control over information.”
Failure to conduct pre-bid inspection did not foreclose recovery of a differing site condition in Sherman R. Smoot Co. of Ohio v. Ohio Dep’t of Admin. Serv., 136 Ohio App. 3d 166, 736 N.E.2d 69 (2000). Based upon a claim that differing site conditions necessitated the use of “form footings” rather than “trench footings” for wall footings on four of seven buildings, the court found the owner had a duty under the Spearin Doctrine to grant the change, regardless of the failure of the contractor to conduct the jobsite prior to submitting its bid. Id. at 177-78, 736 N.E.2d at 77. The court held that a pre-bid inspection would not have revealed the differing sub-surface conditions as the “jobsite did not exist until after the contractor had been awarded the contract; the jobsite having been created by cut and fill.” Id. at 177-78, 736 N.E.2d at 77. At the time of bidding, the south end of the site was anywhere from 15-35 feet above the grade. Id. at 177, 736 N.E.2d at 77.
- The duty to provide accurate plans and specifications PCL Constr. Servs., Inc. v. U.S., 47 Fed. Cl. 745, 795-96 (2000) – The owner’s duty to provide accurate plans and specifications applies only to “design specifications” and not “performance specifications.” In United States vs. Spearin, 248 U.S. 132, 39 S.Ct. 59, 63 L.ed. 166 (1918), the United States Supreme Court held that a contractor building according to plans and specifications prepared by the owner will not be responsible for the consequences of defects in the plans and specifications. See also Chaney Bld. Co. v. City of Tucson, 148 Ariz. 571, 574, 716 P.2d 28, 31 (1986); Willamette Crushing Co. v. State, 188 Ariz. 79, 81-82, 932 P.2d 1350, 1352-53 (App. 1997). Similarly, a claim of impossibility was made resulting from insufficient or defective plans. Miller vs. City of Broken Arrow Oklahoma, 660 F.2d 450 (10th Cir. 1981). During installation of a sewer line, the project encountered “extremely muddy, unstable area which could not support the sewer pipe in its natural condition.” The owner, by its engineer, prepared a change order requiring the use of crushed stone to provide adequate support for the pipe. Id. at 453. After 93% of the line had been installed utilizing the material required by the change order, less stable areas were encountered. The contractor claimed it was “impossible to stabilize the muddy areas utilizing crushed rock.” The contractor made repeated requests for design change or different methods of stabilization. No change order was issued. Id. at 454. That contractor was ultimately terminated. The completion contractor, without advice of the city engineer, utilized different equipment and material to complete the project. Id. The court held that the owner was obligated to bear the losses or damages incurred as a result of compliance with the plans and specifications. Id. at 458-59.
- The duty to provide accurate site information Warner Constr. Corp. v. City of Los Angeles, 2 Cal. 3d 285, 466 P.2d 996 (1970) – The City was liable for providing the contractor inaccurate information regarding the soil composition of certain portions of the worksite, despite the City’s disclaimer that the City was not warranting that such information was representative of the conditions at any other portion of the work site or time.
- The duty to obtain necessary permits, approvals, and easements Lapp-Gifford Co. v. Muscoy Water Co., 166 Cal. 25, 30-31, 134 P. 989, 991 (1913) – The owner could not recover delay damages against the contractor after the contractor completed construction of a pipeline over a specified route late because the owner had not obtained an easement over a railroad.
- The duty to provide access to the worksite U.S. Steel Corp. v. Miss. Pac. R.R. Co., 668 F.2d 435, 438-39 (8th Cir. 1982) – Owner actively interfered with a bridge contractor’s performance when it issued a notice to proceed, despite knowledge that another contractor’s work (on which the bridge contractor was dependent) would not be timely completed. The court refused to apply the no damage for delay cause due to “active interference.” Active interference requires a finding that defendant committed some definitive, willful act in bad faith which unreasonably interfered with contractor’s compliance with the terms of the construction contract. Courts have also found active interference where the contractee, despite knowledge of delay-causing conditions, had issued notice to proceed to the contractor, resulting in increased cost because of the contractor’s premature initiation of its work. Peter Kiewiet Sons’ Co. v. Iowa S. Utils. Co., 355 F. Supp. 376, 399 (Iowa Dist. Ct. 1973).
- The duty to timely review contractor submittals and requests Newberry Square Dev. Corp. v. S. Landmark, Inc., 578 So. 2d 750, 752 (Fla. Dist. Ct. App. 1991) – The jury could consider whether the owner actively interfered with the contractor’s work when the owner delayed executing change orders but refused to let the work proceed without the change orders and threatened to “break [the contractor] before he’d pay.”
- The duty to make timely inspections Russell R. Gannon Co. v. U.S., 189 Ct. Cl. 328, 417 F.2d 1356, 1358 (1969) – The government may have breached its implied duty to make timely inspections when the contract required a government inspector witness certain inspections and the government required 72 hours notice prior to an inspection but had no full-time inspector on site.
- The duty to maintain the worksite in safe condition Lewis v. Sims Crane Serv., Inc., 498 So. 2d 573, 574 (Fla. Dist. Ct. App. 1986) – Trial court had given a proper jury instruction that the owner/general contractor had a duty to maintain a construction site in a reasonably safe manner when a contractor’s employee was injured while using a construction hoist.
- The duty to coordinate multiple contractors Broadway Maint. Corp. v. Rutgers State Univ., 90 N.J. 253, 272, 447 A.2d 906, 915 (1982) – Although the owner has a duty to coordinate multiple prime contractors, the owner has the right to engage a separate contractor to coordinate and supervise the project and thus absolve itself of the duty to coordinate.
- The duty not to hinder, delay, or interfere with the contractor’s work Adams v. U.S., 175 Ct. Cl. 288, 358 F.2d 986, 992 (1966) – The government arbitrarily and unreasonably rejected a large number of wood tent pins produced by the contractor in violation of this implied duty.
- The duty to provide owner supplied material Tribble & Stevens Co. vs. Consol. Servs., Inc., 744 S.W.2d 945, 948-49 (Tex. App. 1988) – During construction of the owner’s retail building, the electrical subcontractor was prevented from timely completing its work due to lack of material to be provided by the owner and lack of adequate job coordination. Following termination, the electrical subcontractor’s claim was upheld, including the failure of the owner to timely provide kitchen equipment to be wired and change cash register locations.
- “No damages for delay” provisions frequently addressed duties owed by an owner, though not necessarily consistently. J.A. Jones Constr. Co. vs. City of Dover, 372 A.2d 540 (Del. Super. Ct.) (1977) included limitation of liability provisions. The contractor sued the City of Dover in connection with expansion of the City’s electrical generating plant. The City of Dover contracted directly with Westinghouse and General Electric, as well as other contractors for different portions of the project. Contractor J.A. Jones sought recovery for delay and related matters, based upon breach of implied covenant, quantum meruit, and tort. The City of Dover’s motion for summary judgment was denied, although the contract with J.A. Jones specifically provided that “no such delay in time for completion” would result in any liability on the part of the owner, or any claim for extension of time. The court held … delay must be a reasonable delay and due exclusively to causes which are not within the control of and are not the fault of plaintiff stating at 544.
“Even if the parties intended the language to protect the owner from a claim for damages against the owner, public policy intervenes to prevent absolute protection. A party may not protect itself against liability for its own fraudulent act or bad faith. 6A Corbin on Contracts 1472, P.606. Even if a contract purports to give a general exoneration from “damages,” it will not protect a party from a claim involving its own fraud or bad faith. Anthony P. Miller, Inc. vs. Wilmington Hous. Auth., D.Del., 165 F. Supp. 275 (1958).”
Reviewing owner’s obligations, the court at 546 held:
“Dover cannot be liable unless it (1) was under a duty and (2) breached that duty. An owner owes certain duties to a contractor who undertakes to build upon the owner’s land which are inherent in the contract. He must make the land available for the work to be done. Bomberger v. McKelvey, Cal.Supr., 35 Cal.2d 607, 220 P.2d 729 (1950); Bates & Rogers Const. Co. v. Bd. Of Com’rs. Of Cuyahoga County, Ohio, supra; Wright & Kremers, Inc. v. State, N.Y. Ct.App., 263 N.Y. 615, 189 N.E. 724 (1934); Southern Gulf Utilities, Inc. v. Boca Ciega San. Dist., Fla.App., 238 So.2d 458 (1970). He must not interfere with the progress of the work. California v. U.S., D.Cal., 151 F.Supp. 570 (1957); Norman Company v. County of Nassau, N.Y.App.Div., 27 A.D.2d 936, 278 N.Y.S.2d 719 (1967); Northeast Clackamas C.E. Co-Op v. Continental Gas Co., supra; Burgess Const. Co. v. M. Morrin & Son Co., Inc., supra. If plan approvals or other choices are contemplated, he must take action reasonably. Seglin-Harrison Const. Co. v. State, N.Y.Ct.Cl., 30 N.Y.S.2d 673 (1941). If he has contracted with others to perform work which is interrelated with the work of this contract, he may have a responsibility to take reasonable action to assure such performance – at least upon request. Tippets-Abbett v. New York State Thru. Auth.,N.Y.Ct.Cl., 27 Misc.2d 522, 212 N.Y.S.2d 275 (1961).”
- Is “Builder’s Risk” insurance an implied owner obligation? As a practical matter, when current construction is damaged or destroyed by fire, wind and other causes unrelated to the contractor’s acts, the owner will have to pay twice. See Westfield Ins. Group v. Affinia Dev., LLC, 982 N.E.2d 132, finding that waiver of subrogation in AIA A201 barred Westfield, the owner’s insurer, from recovering damages against the contractor.
In summary, to avoid liability, an Owner (and the Owner’s lawyers) should be aware of the numerous implied obligations the Owner is subject to before and during a construction project.
