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Good Faith and Fair Dealing: The Essence of Construction Agreements

Written By: John Poole on December 28, 2014 3 Comments

Everybody loves to get hung up in contract language.  On construction projects, contractors, owners, and subs will fire contract language back and forth like missiles in what gets to be an arms race of legalities that negatively affects projects by creating panic and anxiety.  When lawyers get involved, the language starts to get twisted and manipulated along with all the facts of what has taken place.  You’re left with a contract that can be interpreted in a number of different ways, contractors that have most likely not gotten paid, and all parties thinking they deserve the favorable interpretation of the situation.

I recently finished a project where at the end, I thought I was owed $80,000 and the owner thought that I owed them $20,000 – and this is when the total contract is only $100,000!

I think it’s safe to say that the AIA construction contracts are favorable to the ownership.  And in public projects, there will often be supplemental conditions thrown in on top with things like liquidated damages and other caveats and indemnification that work to the advantage of the owner.

But what is the intention of all this heavily lopsided contract language?  Is it to give the owner, at their discretion, the opportunity to not make payment to a contractor and perhaps even collect money from them at the end of the project?  Absolutely not.

The contracts are written to provide protection to the owner; to be used as a shield and not as a sword.  The aggressive and overzealous use of the contract in order to gain advantage to one party violates the one thing that allows agreements between multiple parties to function and exist – Good Faith And Fair Dealing.

Basically, good faith and fair dealing is an implied obligation among parties in an agreement and while there is some grey area associated with what is fair and what is good faith, I’ve found people  to agree much more easily on what is fair than on what the contract is attempting to communicate.  You would think that enforcing something as subjective as “good faith” and “fair dealing” would be difficult and an enforcement of the more objective contract language would have a better chance of resulting in resolution.  But in my experience, it’s the other way around.  People actually tend to know the difference between fair and unfair, good and bad, right and wrong.  Things get much more muddled when contract language, and legalities are entered into the mix.

In a moment of inspiration, I decided to crack open my contract law book by Justin Sweet, a law professor at U. Cal. Berkeley.  I hadn’t read any of it since about 2002 which was well before I got into performing construction contracts on my own and certainly before I was treated unfairly by an owner.  At that time, I considered the drying of paint and the growing of grass to be of more interest than contract law, but now that I have about $60k tied up in a construction project that is on its way to court, I’m turning the pages like it’s a Grisham bestseller.  Anyway, there is reference to good faith and fair dealing all over Sweet’s book with examples of courts ruling against parties that did not act in good faith.  I didn’t notice all of this when I read the book during my contract law class – probably because I wasn’t looking for it.

Sweet sums it up beautifully, stating that, “each party should not only avoid deliberate and willful frustration of the other party’s expectations but should also extend a helping hand where to do so would not be unreasonably burdensome.  Contracting parties, although not partners in a legal sense, must recognize the interdependence of contractual relationships.”

Basically, when parties enter into a construction contract, they form a team and they need to act like one – and always in good faith.

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3 Responses to “Good Faith and Fair Dealing: The Essence of Construction Agreements”

  1. Josh Quinter says on: 19 November 2015 at 7:46 am

    I agree with this post for the most part John. I would caution people not to put too much emphasis on the duty of good faith and fair dealing though. The law is not as clear on this issue as some would think. In Pennsylvania, for example, the analysis always starts within the 4 corners of the contract. This is particularly the case when the parties are business entities. If the contract is clear, you never get to the underling “good faith” issue. And proving the intent of a party is really hard to do. My only point is that one has to be careful with this theory. It’s not as black and white as it may seem at first glance. #KAPLAWBuilds

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