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Contract Terms Trump Prior Course of Dealing



By Sean McLean

Pre-construction conference
Before construction began, the contractor requested that the entire project be exempt from the rideability provision based on (i) an inability to use a motion transfer vehicle because of overhead obstructions, (ii) an inability to use an automatic grade control system due to insufficient roadway width, and (iii) other conditions (e.g. manholes, railroad crossings, bridges, etc.) which severely hampered pavement smoothness.  The DOT told the contractor that a decision regarding a potential exemption would be made following completion of the project and upon review of the post-resurfacing test results.  The contractor was aware that the DOT had a history of granting exemptions to contractors for this type of project after completion of construction in order to encourage maximum efforts to obtain resurfacing smoothness.  Accordingly, the contractor moved forward with the project with the expectation that the requested exemption would be granted after review of the post-resurfacing test results.    

Post-construction testing
After the construction was complete, a post-resurfacing test was performed which showed that the contractor’s resurfacing work completely failed the requirements of the rideability provision.  The resurfaced road was actually rougher than before the construction.  The DOT notified the contractor that no exemption would be made for the project and damages would be assessed against the contractor.  The DOT then exercised its discretion to reduce payment to the contractor to offset its damages.  Thereafter, the contractor filed a claim alleging that the DOT breached its covenant of good faith and fair dealing under the contract by violating the contractor’s reasonable expectation for an exemption to the rideability provision.

Implied covenant of good faith and fair dealing
It is a well settled principle of Tennessee law that every contract includes an implied covenant of good faith and fair dealing in the contract’s performance and enforcement.  This covenant protects the parties’ reasonable expectations as well as their right to receive the benefits of their agreement.  However, the covenant does not extend beyond the agreed upon terms of the contract, and it does not create new contractual rights or obligations.  Moreover, the covenant cannot be used to circumvent or alter the specific terms of the parties’ agreement.  The court noted that despite the DOT’s history of granting exemptions after construction, the contractor knew before beginning construction that exemptions would be determined after reviewing the post-resurfacing tests.  Therefore, the DOT’s decision to deny the contractor an exemption based upon the post-resurfacing test results was not outside of the reasonable expectations of the parties’ contract.  Accordingly, the DOT’s actions did not breach its implied covenant of good faith and fair dealing.



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