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BHGR Newsletter: The Covenant of Good Faith and Fair Dealing In Construction Contracts

May 2009

Construction contracts commonly include project delay, sequencing and scheduling provisions. BHGR's Construction Practice Group recently won two published appellate cases in which the Colorado Court of Appeals held that parties must deal fairly with one another when enforcing and applying these provisions or they will be found to breach the contract. The two cases are: Tricon Kent Co. v. Lafarge North America, Inc. and New Design Construction Company v. Hamon Contractors, Inc. These cases provide important guidance for owners, contractors, and subcontractors concerning how such provisions are applied in projects.

These two cases demonstrate that courts should balance the parties' interests under a contract when determining whether a breach occurred. They also demonstrate that although general contractors wield considerable authority to run a project, that power must be tempered by the subcontractor's reasonable expectations.

Under Colorado law, all contracts contain an implied promise that the parties will deal fairly with one another and in good faith. The Tricon case applied that concept for the first time to a "no delay for damages" clause. The New Design case applied that concept for the first time to a project scheduling and sequencing provision.

In the Tricon case, BHGR represented the subcontractor. The general contractor took the position that the subcontractor did not timely perform its work and withheld part of the subcontractor's final payment. The subcontractor sued, seeking to recover subcontract earnings and damages resulting from the general contractor's scheduling of the work. The general contractor claimed the subcontractor was not entitled to these additional damages because the subcontract contained a "no damages for delay" clause. This was the first time an appellate court in Colorado considered such a clause. The Court of Appeals rejected the subcontractor's reliance on the "no damages for delay" clause, finding it unenforceable because the general contractor actively interfered with the subcontractor's performance. The court also ruled that the subcontractor did not need to show "bad faith" in order to prove the general contractor's active interference because of the implied covenant of good faith and fair dealing found in every contract. To read the full opinion in Tricon Kent Co. v. Lafarge North America, Inc., 186 P.3d 155 (Colo. App. 2008), click here.

In the New Design case, BHGR again represented the subcontractor. The general contractor stated that the subcontractor did not timely perform its work and withheld subcontract earnings. The subcontractor sued, claiming that delays on the project were caused by the contractor's changes to the project schedule and sequencing plan. The Court of Appeals held that although the general contractor had the contractual right to change the project schedule, it had to do so in a manner that did not violate the covenant of good faith and fair dealing. Therefore, the Court found the general contractor breached the subcontract when it changed the sequence of the project and failed to incorporate those changes into the project schedule. The Court ordered the general contractor to pay the subcontractor what it was owed plus the statutory 15% penalty interest. To read the full opinion in New Design Construction Company v. Hamon Contractors, Inc., ___ P.3d ___, 2008 W.L. 2522306 (Colo. App. 2008), click here.

If you have any questions about the above and how they may impact you or your company, contact our Commercial Construction Practice Group.

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