By: Cordell Parvin
I reviewed a case recently which raised issues ranging from
the covenant of good faith and fair dealing to the concept of cardinal change—a
change so drastic that the undertaking is materially different than what was
bargained for in the contract to the concept of notice. In Scherer Construction
LLC v. Hedquist Construction Inc., 2001 WY 23 (2001), the Supreme Court of
Wyoming recognized a contract-based claim for breach of the implied covenant of
good faith and fair dealing, but refused to extend the cardinal change doctrine
to third parties.
Scherer Construction entered into a subcontract to perform
paving work for Hedquist Construction on the city of Casper’s East Second
Street Reconstruction Project. Thereafter, Hedquist convinced the city of
Casper to substitute concrete for the asphalt paving required by the project
specifications. On June 19, 1998, the city issued a change order, reducing the
value of Scherer’s subcontract from $448,240.45 to $105,093.81.
A year later, a dispute arose over Scherer’s allegedly
defective work. On June 30, 1999, Hedquist demanded that Scherer perform the
“punch list” of requested repairs by July 6. Scherer refused
because it had not been paid for work already performed and claimed it was not
responsible for the punch list items. Hedquist hired another construction
company to perform the repairs and deducted the cost of those repairs from the
amounts owed to Scherer.
Scherer sued Hedquist, claiming breach of the subcontract
and the implied covenant of good faith and fair dealing. The district court
granted Hedquist’s motion for summary judgment. Scherer also asserted a
claim alleging wrongful retention of payments owed by Hedquist. Hedquist
asserted that it was entitled to offset the additional costs incurred as a
result of Scherer’s defective work. The district court concluded that
Hedquist had failed to give Scherer reasonable time to make the repairs, denied
Hedquist’s offset request and awarded Scherer the $23,280.74 that
Hedquist had withheld. Scherer and Hedquist both appealed.
Dealing with it
The Supreme Court reversed the summary judgment on the good
faith and fair dealing issue. The court relied on Section 205 of the
Restatement (Second) of Contracts, which provides, “Every contract
imposes upon each party a duty of good faith and fair dealing in its
performance and its enforcement.” With that support the court held that
Scherer may bring a contract-based claim for breach of the implied covenant of
good faith and fair dealing with Hedquist.
Scherer next argued that the district court should have
recognized the cardinal change doctrine, because the reduction in scope of work
was so drastic that Scherer was forced to perform duties materially different
from what it bargained for under the subcontract. The court declined to extend
the cardinal change doctrine to include third parties, because the city of
Casper, and not Hedquist, issued the change order to the prime contract
substituting concrete for asphalt.
Finally, the court reviewed Hedquist’s appeal. It
argued that because Scherer did not make the necessary repairs within a
reasonable time after notice, it was entitled to withhold the costs incurred to
repair Scherer’s defective work. The Wyoming Supreme Court noted that
Hedquist was required by the subcontract to give Scherer reasonable notice
before making the repairs itself. The court concluded that since Hedquist gave
only a six-day notice and was aware that Scherer was already scheduled to
perform another job on the day it demanded the repairs be made, the notice was
unreasonable.
Majority disappointment
By recognizing the implied covenant of good faith and fair
dealing in commercial contracts, the court has joined a majority of
jurisdictions that require contracts be performed in good faith. The
court’s refusal to extend the cardinal change doctrine to third parties,
however, ignores the reality of the situation. Even though in this instance,
the city, with whom Scherer did not have a direct contractual relationship,
issued the change order, the effect of the change was to materially alter the
terms of Scherer’s contract with Hedquist by drastically decreasing the
scope of work. Additionally, Hedquist actually initiated the discussion to
substitute concrete. Finally, Scherer’s subcontract incorporated the
terms of the prime contract. In my view, these factors should have caused the
Wyoming Supreme Court to look at the issue differently.
