Punch list turns into a black eye

Aug. 19, 2002

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.

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.