Every party to a contract must uphold the duty of good faith and fair dealing. But there is no free-floating duty under Washington law: the parties’ respective obligations must be tied to a particular contract provision. Division One of the Washington Court of Appeals recently determined that a project owner’s continued underpayment, if material, excused a general contractor from performance based on the duty of good faith and fair dealing. Materiality of the alleged breach remains the key to excusing performance.
In Lake Hills Investments, LLC v. Rushforth Construction Co., Inc., the court of appeals examined whether an owner’s continued underpayment could excuse a contractor from quitting the project. The owner (Lake Hills) had partially withheld payments from the contractor (AP) over several months on a construction project in Bellevue. The court of appeals considered whether such prior underpayment by Lake Hills could excuse AP’s decision to leave the job. With a narrow and fact-specific holding, the court determined AP could be excused for quitting.
AP argued that Lake Hills hindered and interfered with AP’s ability to perform its obligations under the contract, and that Lake Hills could not thereby assert a breach based on AP’s failure to perform. At trial, AP introduced evidence that Lake Hills withheld portions of payment, and AP proposed a jury instruction that would allow it to prove that interference or hindrance of AP’s work could excuse AP from performing. Only a prior material breach would typically excuse the other party’s failure to perform, and the court of appeals reaffirmed this principle by acknowledging “[t]he jury should have been instructed that only a material breach of the duty of good faith and fair dealing by Lake Hills could excuse performance by AP.” The thrust of the analysis is materiality of the alleged breach.
The court of appeals held the jury instruction misstated the law, omitting the word “material,” but the court also held that error was harmless because the jury entered a finding consistent with AP’s theory of the case. During trial, AP argued that Lake Hills engaged in underpayments to “starve” AP of financial resources and force AP off the project. The jury seemingly agreed, according to the court of appeals, because the jury awarded AP the majority of the sum sought for withheld payments. The court of appeals determined that the jury’s verdict was consistent with a finding of material breach, and the absence of the word “material” in the instruction was, therefore, harmless. The court took care to emphasize that its holding should be viewed narrowly, based on “the particular facts and arguments before the jury” and the “very particular facts presented” during trial.
The court’s holding nevertheless provides an important takeaway for owners and developers. Contractors often try to assert the duty of good faith and fair dealing to argue that any hindrance or interference with the contractor’s work is a breach sufficient to excuse performance. But that is not an accurate statement of the law. Only a material hindrance or material interference — under a specific term of the contract — will constitute breach. Ultimately, the court’s fact-specific analysis in Lake Hills does not change the law requiring materiality for an alleged breach, nor the law surrounding each party’s respective duty of good faith and fair dealing.