Clarifying Punitive Damages

By Jon Straw

In June 2021, the South Dakota Department of Transportation contracted for the demolition and construction of a bridge on State Highway 38 outside of Salem, S.D. The prime contract included the DOT’s standard specifications, which included strength, quality, testing and inspection requirements for concrete.  

Payment terms were outlined between the prime and sub at a price per cubic yard for A45 concrete. However, no written agreement was created between prime and sub. In this case; therefore, the credibility of each witness was all the more important. Goldenview Ready-Mix, LLC v. Grangaard Construction, Inc., 24 N.W.3d 711 (South Dakota Supreme Court, July 23, 2025).

The prime contract required a minimum 28-day compressive strength of 4,500 PSI. In September 2021, the testing results revealed the concrete placed for the bridge footings achieved only 3,890 PSI, which the DOT, nevertheless, accepted. At this point, the prime suspected that the DOT would assess payment deductions for non-conforming concrete, but deductions were not yet certain.

In October 2021, the sub became concerned with the prime’s payment history, so the sub sought new payment terms for further concrete deliveries. Instead of a credit limit, which the prime had already exceeded, half payment would be due before delivery with the balance due one day after delivery. The prime assured the sub that the concrete already provided was satisfactory, and the prime accepted the new payment terms.  

The next day, the prime learned the DOT would be assessing deductions for non-conforming concrete. As such, the prime did not follow the new payment terms as agreed on the prior day. The prime made no further payments to the sub. (The prime later asserted that its acceptance of the new payment terms had been conditioned upon there being no deductions by the DOT.)  

In November 2021, the sub transmitted its final invoice to the prime for payment. A month later, the prime informed the sub that DOT testing results were needed before payment would be made. In January 2022, the DOT assessed payment deductions against the prime for non-conforming concrete.  

In February 2022, the DOT determined that the prime had met the conditions for an early completion incentive bonus payment, and the DOT notified the prime of same. The amount of the early completion incentive bonus was: one, about 2.5 times greater than the amount the prime owed to the sub and, two, about six times greater than the amount of the deductions for non-conforming concrete.  

Such amounts were presented to the jury, which issued a verdict for the sub. The prime later appealed arguing, among other points, that presentment of such amounts was prejudicial, and the jury improperly awarded punitive damages.

The most common damages for a breach of contract are expectation damages – so-called because the damages put the non-breaching party in the expected position if the breach had not occurred. Punitive damages are not recoverable for a typical breach of contract action. A showing of something more than failure of a duty is necessary to punish the bad actor(s).  

The sub argued the prime breached its duty of good faith by withholding information from the sub (i.e., the testing results and anticipated deductions by the DOT for non-conforming concrete). The appellate court held the trial court conflated the duty of good faith with bad faith – the two are not opposite sides of the same coin.

The duty of good faith requires acting, in good faith and without hinderance, upon a promise made. Bad faith is more than merely failing to act in good faith or carelessly hindering. Bad faith is acting dishonestly or with harmful intent. The higher degree of intent may warrant punitive damages. Damages for failing to act in good faith are limited to the non-breaching party’s expectations absent the breach.

Here, the sub retained its expectation damages awarded by the jury, but the award of punitive damages was overturned on appeal.

Jon Straw is a partner with Kraftson Caudle, PLC, a law firm in McLean, Va., specializing in heavy-highway and transportation construction. Straw can be contacted via email at [email protected].