RULING DEALING WITH CONSTRUCTIVE CHANGES, CONSTRUCTIVE SUSPENSION, AND THE IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING

Posted on January 14, 2024January 14, 2024 by David Adelstein

A dispute pending in the Armed Services Board of Contract Appeals (ASBCA) dealt with interesting legal issues on a motion to dismiss. See Appeals of McCarthy Hitt-Next NGA West JV, ASBCA No. 63571, 2023 WL 9179193 (ASBCA 2023). The dispute involves a contractor passing through subcontractor claims due to impacts caused by the COVID-19 pandemic and the government’s response to the pandemic. More particularly, the claim centers on the premise that the government “failed to work with [the contractor] in good faith to develop a collaborative and cooperative approach to manage and mitigate the impacts and delays arising from the COVID-19 pandemic.” See Appeals of McCarthy Hitt.

The contractor (again, submitting pass through claims from subcontractors) claimed: (a) constructive changes to the contract entitling it to an equitable adjustment under the Changes clause of Federal Acquisition Regulation (F.A.R.) 52.243-4; (b) construction suspensions of the contractor’s work entitling it to an equitable adjustment under the Suspensions of Work clause of F.A.R. 52-242-14; and (c) the government breached the implied covenant of good faith and fair dealing. Each of these legal issues and theories will be discussed below because they are need-to-know legal issues. Keep these legal issues in mind, and the ASBCA’s ruling on the motion to dismiss as its analysis may demonstrate fruitful in other applications.

(a) Constructive Changes

“To prevail upon a constructive change theory, a contractor must show (1) that it performed work beyond the contract requirements, and (2) that the added work was ordered, expressly or impliedly, by the government.” See Appeals of McCarthy Hit.

The government moved to dismiss this claim arguing the complaint did not allege sufficient facts to support a constructive change theory. The ASBCA disagreed and found sufficient facts were pled to allege the government required the contractor (and subcontractors) to perform beyond the contract requirements.

For example, [the contractor] alleges that the [government] required it to comply with government guidance on COVID-19 and implement COVID-19 exposure control procedures; perform additional job safety analyses and task-specific analyses; create new health and safety signage; provide additional training; develop contact tracing, testing, and quarantine programs; impose quarantines and enforce return-to-work protocols; impose tool and shared surface disinfection and cleaning requirements; comply with social distancing requirements; provide and utilize additional personal protection equipment; add air filtration systems; require temperature checks and daily health checks; permit additional breaks; provide for additional break areas; change office, break, and trailer spaces and configurations; change site logistics; and change crew compositions and work plans.

See Appeals of McCarthy Hit.

(b) Suspension of Work

To recover under the Suspension of Work clause, the contractor must show (1) that the contracting officer suspended the work; and (2) that the resulting delay was unreasonable. A constructive suspension occurs when, absent an express order by the contracting officer, the work is stopped for an unreasonable amount of time and the government is found to be responsible for the work stoppage. “A constructive suspension has the same effect and consequences as an actual suspension, and relief should be granted as if an actual suspension order had been issued.

See Appeals of McCarthy Hit (internal citation omitted).

The government moved to dismiss this claim arguing the complaint did not allege sufficient facts to support a constructive suspension theory. The ASBCA disagreed and found sufficient facts were pled to support a constructive suspension. For example, the contractor alleges:

[The government’s] actions and inactions in administering the Contract once the pandemic struck had the effect of unreasonably disrupting, delaying or hindering the work on the Project. For example, the complaint alleges that the government refused to work with [the contractor] to develop a collaborative and cooperative approach to manage the impacts caused by the pandemic, instead simply insisting that the work proceed on schedule, which had the effect of hindering and delaying the work unreasonably. The complaint also alleges that [the contractor] informed [the government] of the impacts of its action and inactions, but that [the government] refused to acknowledge that the work was being delayed.

See Appeals of McCarthy Hit.

(c) Implied Covenant of Good Faith and Fair Dealing

Like every contract, the Contract here contained an implied duty on each party to perform with good faith and fair dealing. The implied duty “prevents a party’s acts or omissions that, though not proscribed by the contract expressly, are inconsistent with the contract’s purpose and deprivethe other party of the contemplated value.” A breach occurs when a party violates its obligation “‘not to interfere with the other party’s performanceand not to act so as to destroy the reasonable expectations of the other party regarding the fruits of the contract.”’ The implied duty “‘cannot expanda party’s contractual duties beyond those in the express contract or create duties inconsistent with the contract’s provisions.”’

See Appeals of McCarthy Hit (internal citations omitted).

The government moved to dismiss this claim arguing the complaint did not allege sufficient facts to support a breach of an implied covenant and good faith and fair dealing claim. The ASBCA disagreed and found sufficient facts were pled to support this claim. For example, the complaint alleges:

“[A]fter the pandemic struck, the government declined to cooperate with it in managing or addressing the impacts, which were severe andunexpected. Rather, it is alleged, the government insisted that [the contractor] and the Subcontractors continue to perform as though nothing ofconsequence was occurring, used the DO-C2 rating as a means of exerting pressure to maintain the schedule at all costs, and was non-responsiveto requests for help in complying with all the new and changing requirements placed upon [the contractor] and the Subcontractors. Theseallegations suggest that the government essentially left [the contractor] “twisting in the wind” by insisting on uninterrupted performance in the faceof extraordinary circumstances and are sufficient to make out a plausible claim for a breach of the duty of good faith and fair dealing.

See Appeals of McCarthy Hit (internal citations omitted).

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

BREACH OF AN ORAL CONTRACT AND UNJUST ENRICHMENT AND IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING

Posted on December 3, 2023December 3, 2023 by David Adelstein

In an ideal world, parties would have written contracts. In reality, parties should endeavor to ensure every transaction they enter into is memorialized in a written contract. This should not be disputed. Of course, written contracts are not always the case. Parties enter transactions too often whereby the transaction is not memorialized in a clean written agreement. Rather, it is piecemealing invoices, or texts, or discussions, or proposals and the course of business. A contract can still exist in this context but it is likely an oral contract. Keep in mind if there is a dispute, what you think the oral contract says will invariably be different than what the other party believes the oral contract says. This “he said she said” scenario gets removed, for the most part, with a written contract that memorializes the written terms, conditions, and scope.

A recent federal district court opinion dealt with the alleged breach of an oral contract. In Movie Prop Rentals LLC vs. The Kingdom of God Global Church, 2023 WL 8275922 (S.D.Fla. 2023), a dispute concerned the fabrication and installation of a complex, modular stage prop to be used for an event. But here lies the problem. The dispute was based on an oral contract and invoices. The plaintiff, the party that was fabricating the modular stage prop, sued the defendant, the party that ordered the stage prop for the event, for non-payment under various claims. The defendant countersued under various claims.

The trial court analyzed a motion for summary judgment relating to the defendant’s breach of oral contract claim against the plaintiff. Each party claimed a different fixed price term for the transaction. The trial court found that while the parties disputed the fixed price amount, and whether there were fixed installment payments, it was undisputed that an oral contract existed for a fixed price with money being exchanged for the fabrication of the stage prop, and within a specific duration, as consideration. However, the trial court found that whether the payments were to be installment payments were not an essential term when “it is undisputed that the Oral Contract contains a specified price, a specific duration, and a defined scope of work to be performed.” Move Prop Rentals, supra, at *6.

Because of the oral contract, the trial court granted summary judgment as to an unjust enrichment claim. “As noted, Defendants rely on their payments under the Oral Contract to support their unjust enrichment claim. That fact is fatal to their unjust enrichment claims, as [a]ny proof of an express agreement between the parties as to the compensation to be paid for the services rendered…defeat[s] rather than sustain[s] an action based upon quantum meruit.” Movie Prop Rentals, supra, at *8 (internal quotations and citation omitted). Stated differently, the oral contract precluded the unjust enrichment claim.

Because of the oral contract, the trial court granted summary judgment as to a breach of an implied duty of good faith and fair dealing claim.

Where a party to a contract has in good faith performed the express terms of the contract, an action for breach of the implied covenant of good faith will not lie. Accordingly, a cause of action for breach of the implied covenant cannot be maintained (a) in derogation of the express terms of the underlying contract or (b) in the absence of breach of an express term of the underlying contract.

Movie Prop Rentals, supra, at *8 (internal quotations and citation omitted).

Here, the trial court found that the breach of implied covenant of good faith and fair dealing was in derogation of the express terms of the oral contract because it was based on the plaintiff’s failure to fabricate in exchange for payment:

Defendants content that the Oral Contract obligated Plaintiffs to fabricate the Stage Prop in exchange for Defendants’ installment payments, contingent on Plaintiffs’ status updates. Defendants’ breach of the Oral Contract claim is based on Plaintiffs breach of this express term rather than on an implied duty to perform in good faith. Plaintiff’s failure to fully perform either constitutes a breach of this express term, or, should Plaintiff prevail on their breach of contract claim, Plaintiff’s partial performance does not constitute a breach in light of Defendants’ failure to continue making payments.

Movie Prop Rentals, supra, at *8.

Could this dispute have been avoided with a written contract? Maybe. Maybe not. However, one thing is clear. A written contract would have memorialized terms and conditions and each of the parties’ expectations under the contract as it relates to payment and work progress.

IMPLIED COVENANT OF GOOD FAITH & FAIR DEALING ATTACHES TO EVERY CONTRACT

Posted on December 5, 2015November 8, 2024 by Edward Garber

There is an implied covenant of good faith and fair dealing in every contract. Meruelo v. Mark Andrews of Palm Beach, Ltd., 12 So.3d 247, 251 (Fla. 4^th DCA 2009). “Its purpose is to protect the reasonable expectations of the contract parties.” Snow v. Ruden, McClosky, Smith, Schuster & Russell, P.A., 896 So.2d 787, 791 (Fla. 2d DCA 2005).

A breach of this implied covenant of good faith and fair dealing is not really an independent cause of action. This is because the implied covenant of good faith and fair dealing attaches to the performance of a contractual provision. Snow, 896 So.2d at 791. Thus, if a contractual provision has not been breached, there has not been a breach of the implied covenant of good faith and fair dealing. Id. The implied covenant of good faith and fair dealing cannot override the express terms the parties agreed to in a contract. Id.

For example, in Avatar Development Corp. v. De Pani Const., Inc., 834 So.2d 873 (Fla. 4^th DCA 2002), a developer terminated a stucco subcontractor. The subcontractor sued the developer. The trial court held that the developer violated the implied covenant of good faith and fair dealing by terminating the subcontractor. The Fourth District reversed because the implied covenant is not a tool to override the agreement of the parties:

The trial judge found that Avatar[developer] violated the implied covenant of good faith and fair dealing in terminating the contract pursuant to Article 67. However, the covenant of good faith cannot be used to create a breach of contract on Avatar’s part, where there was no breach of any express term of the contract. As this Court explained in Indian Harbor Citrus, Inc. v. Poppell, 658 So.2d 605 (Fla. 4th DCA 1995), an implied covenant of good faith cannot be used to vary the unambiguous terms of a written contract and when parties negotiate “a fully specified, unambiguous contract, this court is not at liberty to change their bargain.” Id. at 607. The “duty of good faith must relate to the performance of an express term of the contract and is not an abstract and independent term of a contract which may be asserted as a source of breach when all other terms have been performed pursuant to the contract requirements.” Hosp. Corp. of Am. v. Fla. Med. Ctr., Inc., 710 So.2d 573, 574 (Fla. 4th DCA 1998). The language of Article 67 was plain and unambiguous: Avatar could terminate the contract at any time for any reason. It was a valid contract with an enforceable termination clause.

Avatar, 834 So.2d at 875.

Typically, the implied covenant of good faith and fair dealing comes into play “when a question is not resolved by the terms of the contract or when one party has the power to make a discretionary decision without defined standards.” Speedway SuperAmerica, LLC v. Tropic Enterprises, Inc., 966 So.2d 1, 3 (Fla. 2d DCA 2007) quoting Publix Super Markets, Inc. v. Wilder Corp. of Del., 876 So.2d 652, 654 (Fla. 2d DCA 2004).

For example, in Speedway SuperAmerica, a landlord refused to give its tenant consent to assign a commercial lease. The lease provided that the tenant could not assign the lease without the prior written consent of the landlord and that any assignment without the landlord’s consent would be void allowing the landlord, at its discretion, to terminate the lease. Here, the tenant assigned the lease even after the landlord refused to provide its written consent to the assignment. The trial court ruled that the landlord had the unfettered right to refuse to provide its written consent and the tenant’s assignment constituted a material breach of the lease entitling the landlord to retake possession of the leased space. The Second District reversed because the discretion the landlord had in providing its written consent (without any defined standards as to when the landlord would or would not provide such consent) was subject to the implied covenant of good faith and fair dealing to protect the contracting parties reasonable commercial expectations.

The bottom line is that a claim that a party violated the implied covenant of good faith and fair dealing will fail without proving that the party actually violated an express contractual provision. This claim, however, is not a vehicle to rewrite contractual performance obligations and will not be used to supersede what the parties agreed to. It can be used when the contract gives a party a discretionary obligation (such as to act reasonably, or gives the party the power to do something at its option) that has no defined standards. In such circumstance, a party can argue the other party breached the contract by breaching the implied covenant of good faith and fair dealing by not exercising or exercising such discretionary obligation in good faith, thereby impacting the reasonable expectations of the contracting parties.