The duty of good faith and fair dealing comes with every contract. A breach of which is challenging to prove because it is relatively simple to fulfill.
In 2017, a contractor agreed to mill and overlay a 36-mile segment of State Highway 59 for the Minnesota Department of Transportation (MnDOT) with a successful bid of about $9.8 million.
In preparing its bid, the contractor logically considered, among other things, the locations and costs of transporting materials to the project site. Under a state statute and a corresponding specification in the contract, if a public street or highway is used for a detour or haul road, MnDOT “may” designate it as a temporary state highway and, if so designated, then MnDOT “shall . . . maintain” the road during the project and then restore such roads to good condition after the project.
The contractor sought approval for 13 haul roads. A county engineer (not a MnDOT engineer) expressed concern with three of the requested haul roads. MnDOT inspected the three roads in question and approved them, subject to certain weight limits.
Upon completion of the project, the contractor determined its inability to use the three haul roads without restrictions increased its costs by nearly half a million dollars.
The contractor sued MnDOT. The jury returned a verdict for the contractor finding MnDOT breached its duty of good faith and fair dealing. The trial court upheld the verdict.
On appeal, the Minnesota Court of Appeals (an intermediate appellate court) reversed the trial court by finding the jury’s decision was not supported by sufficient evidence. Central Specialties, Inc. v. MnDOT, 5 N.W.3d 409 (April 1, 2024).
There are at least two notable points from this case. First, in what may be surprising to some, a court and parties are not bound by a jury’s decision if that decision is unsupported by sufficient evidence. Enough evidence to convince a jury is not necessarily enough evidence to be legally at fault. Mere allegations, assertions, and unsupported conclusions are not evidence, but they may be good stories.
Second, the question for the jury and the courts to answer was whether MnDOT breached its duty of good faith and fair dealing. Such a duty is impliedly created by every contract. A party breaches the duty when acting or failing to act based upon an ulterior motive.
To prove its case, the contractor argued that because MnDOT had a reputation for not maintaining haul roads and because of an ongoing, separate dispute between MnDOT and one of the local counties in which the haul roads were situated, MnDOT improperly withheld full approval for the haul roads to appease the county at the contractor’s expense.
The contractor also argued that because MnDOT’s prior history was to grant all haul roads requested, the denial on this project was an arbitrary or unreasonable denial based on an ulterior motive.
In overturning the trial court, the appellate court reasoned that a party does not breach the duty of good faith and fair dealing by exercising its discretion if such exercise was done in good faith and not with an ulterior motive. Here, MnDOT did not blindly acquiesce to the county’s concerns. Rather, records reflected that MnDOT considered the county’s concerns and performed its own investigation of the roads.
Subsequently, MnDOT exercised its discretion by granting limited, even if not full approval.
An ulterior motive is not an honest mistake made while trying to do the right thing nor a supported decision with which another party disagrees. An ulterior motive requires either: (i) the intent to do harm/wrong to or hinder the other party (i.e., specific intent) or (ii) a lack of care with knowledge of the likelihood (not certainty) that the other party will be harmed or will not realize the benefits of the agreed-upon terms.
The duty of good faith and fair dealing is based upon the parties promises to each other to act (or not act) in ways that will help or, at least not prevent, each other from realizing the benefits of the agreement. Otherwise, why would anybody create contracts? RB
