Texas Court Holds That Subcontractor Has No Independent Tort Cause Of Action For General Contractor’s Breach of Duty of Good Faith And Fair Dealing

Electro Assocs., Inc. v. Harrop Constr. Co., Inc.,
908 S.W.2d 21 1995 Tex. App. LEXIS 1968 (Tex. Ct. App. August 24, 1995).

Because the contractor-subcontractor relationship is not a “special relationship” giving rise to common law duty to act in good faith, subcontractor’s suit against general contractor for breach of duty sounds in contract only, not in tort.

Defendant Harrop Construction Co., Inc. (“Harrop”) was the general contractor for the construction of a “boot camp” probation facility for Harris County, Texas. Harrop subcontracted the electrical work for the project to plaintiff Electro Associates, Inc. (“Electro”).

Harrop’s contract with the County provided that, by court mandate, the facility was to be ready for occupancy on April 20, 1991. As the project progressed, the work was delayed for a variety of reasons, and it became apparent that construction could not be completed by the court-mandated deadline. Harrop reached a revised agreement with the County whereby liquidated damages would not be assessed if certain portions of the project were finished by April 30, 1991. The subcontractors, including Electro, worked overtime and met the new deadline. The County then gave Harrop an extension of time for completion of the remainder of the project, and Harrop passed this extension along to Electro.

At the end of the Project, Harrop and Electro could not reach a settlement of various backcharges for work Harrop claimed it had done on Electro’s behalf. Harrop placed the funds due Electro in a separate account pending resolution of the dispute, and this suit followed, alleging breach of contract, quantum meruit, misapplication of construction trust funds, conversion, fraud and breach of the duty of good faith and fair dealing. After a jury trial, the trial court entered judgment in favor of Electro on all counts except the breach of the duty of good faith and fair dealing, which the court had refused to submit to the jury.

On appeal, Electro claimed that the trial court had erred by refusing to submit to the jury its tort claim for breach of the duty of good faith and fair dealing. The Texas Court of Appeals noted that a breach of the duty will give rise to a tort cause of action only where a “special relationship” exists between the parties to a contract. It held that “[a]bsent a ‘special relationship`, the duty to act in good faith is contractual in nature, and its breach does not amount to an independent tort.”

Electro argued that the subcontractor-contractor relationship is a “special relationship” because the subcontractor’s contract prohibits it from dealing directly with the owner, therefore placing the subcontractor in an inferior bargaining position because it must rely on the contractor to represent its interests to the project owner.

The Texas Court of Appeals rejected Electro’s argument that a subcontractor’s dependence on the general creates a ‘special relationship`, stating that “[a] business entity’s trust of another and its reliance on the other’s contractual promise to perform the contract do not, of themselves, engender a special relationship.” Accordingly, the court upheld the trial court’s refusal to submit the breach of the duty of good faith and fair dealing to the jury as a separate tort claim. It held that the relationship between Electro and Harrop was an “ordinary commercial contractual relationship.”

In support of this holding, the court noted that while the Texas Supreme Court had recognized a special relationship in the context of a contract between an insurance company and its insured, Texas courts had held that the duty of good faith did not apply in the following contexts: employer-employee, employment-at-will, creditor-guarantor, lender-borrower, supplier-distributor, insurance company-third party claimant and franchisee-franchisor.

In separate, unpublished sections of the opinion, the court also held that Electro could not recover duplicative amounts awarded by the jury under different legal theories. The court first eliminated the damages awarded under Electro’s quantum meruit theory as duplicative of the damages awarded under its contract theory. It then found that the damages awarded for conversion and misapplication of the funds Harrop had placed into a segregated account were also duplicative of the breach of contract award. The court found that the money in the segregated account was merely a part of the sum owed under the breach of contract claim.

Finally, the court found that Electro could not recover on its fraud claim because there was no evidence of “an injury proximately resulting from the alleged fraud apart from the damages flowing from the breach of contract.” The court found that this absence of a separate injury also precluded the jury’s punitive damage award on the fraud claim because “punitive damages are not recoverable for a breach of contract absent an independent tort with accompanying actual damages.”

In the last part of its holding, the court excluded the jury’s award of delay damages, finding that a no-damage-for-delay clause in Electro’s contract limited its remedy to an extension of time.

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