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ConstructionPro Week, Volume: 3 - Issue: 10 - 03/07/2014

What Is the Implied Warranty of Good Faith and Fair Dealing?

By Bruce Jervis

 

It is frequently stated that every contract contains an implied warranty of good faith and fair dealing. This sounds quite civilized and reasonable, but what exactly is the scope of this warranty? It is an implied warranty, so we never see it in writing. At what point does prickly insistence on one’s contractual rights cross the line to become unfair dealing?

 

The U.S. Court of Appeals for the Federal Circuit has enunciated an answer. In the context of a federal construction contract, at least, the government breaches the implied warranty of good faith and fair dealing when the government’s conduct has the effect of reappropriating a benefit conferred under the contract. The government need not specifically intend to reappropriate that benefit, but its action or inaction has that effect.

 

The Federal Circuit concluded that the U.S. Navy breached the implied warranty when it refused to issue change orders that were justified by inaccurate contractual representations regarding subsurface conditions.

 

But is good faith required in every situation? Can the scope of the implied warranty be modified by the express terms of the contract? In another case this week, a Michigan court ruled that when a project owner reserved the right to terminate a contract at its sole discretion, the court would not entertain the contractor’s argument that the owner had terminated in bad faith. The term “sole discretion” would be enforced according to its plain meaning.

 

What is your opinion? Is the implied warranty of good faith and fair dealing a vague concept used as a fall-back argument when nothing else seems to fit? Or, is it a clear, implicit term of every agreement? If so, should the parties be allowed to modify or limit the implied warranty under the express terms of the contract? I welcome your comments.

 

COMMENTS

In my opinion it is a clear, implicit term of every agreement. If the parties entering into the agreement want to modify any terms, they have every opportunity to do so when drafting the express terms contained in the contract at its' genesis.
Posted by: Charles (Bud) Herman - Friday, March 07, 2014 9:54 AM


Bruce - This is an important issue. I've found in the Fed environment, a given agency's lack of funds & lack of in-depth professional pre-project planning & lack of due diligence can lead to a lack of clear scope documentation & inept budget prep. Thus, some agencies will pass on what they (in error) call "risk" onto a private contractor. That agency desires the benefit of a given project, thus, that agency should not benefit from undue-enrichment caused by that agency's lack of in-depth preparation.
Posted by: Carl Sherrill - Friday, March 07, 2014 10:11 AM


Why is it so hard to say what you mean, and (Mean what you say)in a contract unless the intent is to mislead the signers?

Then again, why is it so hard to write, clear, specific code sections?
Posted by: ADAguy - Friday, March 07, 2014 10:53 AM


Implied warranties are important legal rights that in our system govern over ALL contracts. I believe implied warranties are imposed by the Uniform Commercial Code governing commerce in the US. In my opinion, the implied warranty of good faith means the parties are obligated to carry out their resposibilities and duties as enumerated in the express terms of the contract. Whether the express terms of a contract are fair or not is irrelevant and not for the courts to determine. Based on the facts presented by Mr. Jarvis, the rulings in both cases are not inconsistant with that principle.
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