Owners Beware: Washington Appellate Court Holds Playing ‘Gotcha’ With Project Submittal Review Could Breach the Duty of Good Faith and Fair Dealing

Nova Contr., Inc. v. City of Olympia, No. 48644-0-II, 2017 Wash. App. LEXIS 913 (Ct. App. Apr. 18, 2017)

This case arose out of a public project in which the City of Olympia (“City”) hired Nova Contracting, Inc. (“Nova”) to replace a culvert. A prior City project on which Nova completed work ended with Nova receiving extra compensation due to the City’s design errors and, as a result, a grudge held by some City staff against Nova.  The present contract required Nova to send submittals describing its plans for bypass pumping and excavation to the City’s engineer for approval before it could begin work.  The City’s decision regarding submittals was final and Nova bore the risk and cost of delay due to any non-approval.

The City issued its Notice to Proceed on August 11, 2014, but Nova could not begin construction due to the City’s rejection of its submittals. Nearly one month later, the City declared Nova to be in default because it failed to provide satisfactory submittals and failed to mobilize to the site.  Coincidentally, that same day, Nova had mobilized to the site; the City, however, later ordered Nova to cease work because it had commenced operations before obtaining the requisite approval.  Nova protested the City’s declaration of default, but the City terminated the contract on September 24.

Nova filed suit against the City for breach of contract, claiming that its handling of the submittals imposed requirements that were not part of the project’s specifications, thereby delaying Nova’s performance to a point where the project could not be timely completed. In support thereof, Nova’s witnesses declared that the City had appeared to be reviewing the submittals with the goal of rejecting them as a sort of “gotcha” review employed to prevent Nova’s performance.  The City moved for summary judgment, and the trial court granted its motion.  Nova appealed, arguing that there existed genuine issues of fact as to why the project was not completed and that the City had breached its duty of good faith by preventing Nova from attaining its justified contractual expectations.  The City argued that the duty of good faith did not apply because it had unconditional authority to accept or reject Nova’s submittals.

The appellate court reversed the grant of summary judgment, holding (1) that the duty of good faith applied to the City’s review of Nova’s submittals and (2) that Nova presented sufficient evidence to create a genuine issue of fact as to whether the City breached this duty. The court began by recognizing that the duty of good faith and fair dealing applies when a party has discretionary authority to determine a contract term and found that the City had such authority in its review of Nova’s submittals.  As a result, the City was required to exercise its discretion in a manner consistent with the contract so that Nova could obtain its benefits.

The court then concluded that Nova had presented sufficient evidence to create a genuine issue of fact as to whether the City had breached its duty. Highlighted by testimony regarding the City’s alleged grudge against Nova, this evidence demonstrated that (1) the submittal approval process was contrary to industry standards; (2) the City’s requirements were unreasonable, improper, and nonsensical; (3) the City’s repeated rejection of submittals—which complied with contract requirements—required Nova to work in a more cumbersome and expensive manner than contemplated by the contract; (4) the City sent mixed messages regarding project commencement and submittal approval; and (5) the City acted in a manner calculated to prevent project performance.

Accordingly, the appellate court reversed the trial court’s entry of summary judgment and remanded the case for further proceedings.

To view the full text of the court’s decision, courtesy of Lexis®click here.

John J. Gazzola

 

 

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