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General Contractor Has Duty To Deal With Subcontractor In Good Faith According to Pennsylvania District Court

1/6/2014 | Construction Blog

A recent decision in the Eastern District of Pennsylvania added some clarity and protection for contractors and subcontractors in their dealings with owners and contractors respectively. As part of a 117 page opinion, the Court held in Nippo Corporation/International Bridge Corp. v. AMEC Earth and Environmental, Inc., that the duty of good faith and fair dealing in a commercial transaction includes the duty not to hinder the other party’s performance of the contract.

By way of brief background, the Air Force Center for Engineering and the Environment contracted with AMEC Earth and Environmental, Inc., to refurbish the Air Force’s runway at Anderson Air Force Base in Guam. The project was to consist in part of the demolition and removal of an asphalt runway surface and the placement of a Portland cement runway with surrounding asphalt taxiways and approaches. This $21 million portion of the project was then subcontracted to a joint venture between Nippo and International Bridge.

According to the opinion, the problem on the project surrounded the proposed mix for the asphalt to be provided by Nippo/IBC. Using a local contractor, a mix design similar to one accepted by the Air Force on prior occasions was proposed. While the contractor (AMEC) initially accepted the mix design, the Air Force rejected it as non-compliant. Eventually, AMEC took over the mix design and cut Nippo/IBC out of the process. AMEC’s mix design was also rejected. Eventually, the Air Force accepted a mix proposed by AMEC that was very similar to that offered initially by Nippo/IBC. The entire episode caused 57 days of delay for the subcontractor before the work was completed though.

Hidden in a portion of the discussion was the Court’s analysis of the contractor’s duty to deal with its subcontractors in good faith. Although just a small portion of its decision, the Court held that the implied duty of good faith and fair dealing in a contractual setting includes the duty to not do anything that will hinder the other party’s performance of its work. When a party performs in a manner that is unfaithful to the purpose of the contract and the reasonable expectations of the other party, damages can be awarded. In this case, by taking over the design of the asphalt mix and excluding Nippo/IBC from the process to which it was contractually assigned, AMEC “hindered” the completion of its own subcontractor’s work. Accordingly, the Court found that sufficient grounds existed for Nippo/IBC to seek recovery of its damages.

While this opinion provides some clarity to the contractual duty of good faith and fair dealing, its reach is necessarily in dispute. It is a trial court decision that carries less weight once cited outside the Eastern District of Pennsylvania. The case also has a strong theme of Nevada law being applied. While the logic of the case would likely work under Pennsylvania law given that the duty of good faith and fair dealing does not vary significantly from state to state, no such breakdown was offered in the Court’s opinion. Regardless, the case offers some valuable insight into how owners and contractors are expected to treat contractors and subcontractors respectively in the court’s eyes.