Every contract is subject to the duty of good faith. A breach of this is difficult to prove, as the duty is relatively easy to fulfill.
In 2017, a contractor agreed to mill and surface a 36-mile segment of State Highway 59 for the Minnesota Department of Transportation (MnDOT) for approximately $9.8 million.
In preparing its bid, the contractor logically considered, among other things, the locations and costs of transporting the materials to the project site. According to a state law and a corresponding specification in the contract, MnDOT “may” designate a public road or highway used as a detour or haul route as a temporary state road. If so, MnDOT “shall maintain the road during the project” and restore it to good condition after the project.
The contractor requested approval for 13 haul roads. A district engineer (not a MnDOT engineer) raised concerns about three of the requested haul roads. MnDOT inspected the three roads in question and approved them subject to certain weight restrictions.
After the project was completed, the contractor discovered that the lack of full use of the three haul roads had increased its costs by nearly half a million dollars.
The contractor sued MnDOT. The jury found in favor of the contractor, finding that MnDOT breached its duty of good faith and fair dealing. The court affirmed the verdict.
On appeal, the Minnesota State Court of Appeals (an intermediate appellate court) overturned the trial court’s decision, finding that the jury’s verdict was not supported by sufficient evidence. Central Specialties, Inc. v. MnDOT5 NW3d 409 (April 1, 2024).
There are at least two notable points to be drawn from this case. First, and perhaps surprisingly to some, a court and the parties are not bound by a jury’s decision unless that decision is supported by sufficient evidence. Enough evidence to convince a jury is not necessarily enough evidence to be legally guilty. Mere allegations, claims, and unsubstantiated conclusions are not evidence, but they can make good stories.
Second, the question the jury and the courts had to answer was whether MnDOT breached its duty of good faith and fair dealing. Such a duty is implied in any contract. A party breaches that duty when it acts or fails to act with an ulterior motive.
In support of its claim, the contractor argued that MnDOT has a reputation for failing to maintain haul roads and that there is an ongoing, separate dispute between MnDOT and one of the counties in which the haul roads are located. As a result, MnDOT wrongfully denied full permitting for the haul roads in order to appease the county at the contractor’s expense.
The contractor further argued that the denial of this project was an arbitrary or unreasonable denial based on an ulterior motive because MnDOT has a history of approving all requested haul routes.
The appeals court reversed the trial court’s decision, arguing that a party does not breach its duty of good faith and fair dealing when exercising its discretion, provided it does so in good faith and not with ulterior motives. In this case, MnDOT did not blindly accept the county’s concerns. Rather, the record shows that MnDOT considered the county’s concerns and conducted its own investigation of the roads.
MnDOT then exercised its discretion by granting a limited, though not full, permit.
An ulterior motive is neither an honest mistake made while trying to do the right thing, nor an assisted decision with which another party disagrees. An ulterior motive requires either: (i) an intention to harm/wrong or hinder the other party (i.e., specific intent), or (ii) a lack of care knowing the likelihood (not certainty) that the other party will suffer harm or be unable to realize the benefits of the agreed terms.
The duty of good faith and fair dealing is based on the parties’ mutual promises to act (or not act) in a way that will assist or at least not hinder each other in enjoying the benefits of the agreement. Why else would anyone enter into contracts? RB
