Title: SCHERER CONSTRUCTION, LLC. v. HEDQUIST CONSTRUCTION, INC.

State: wyoming

Issuer: Wyoming Supreme Court

Document:

SCHERER CONSTRUCTION, LLC. v. HEDQUIST CONSTRUCTION, INC.2001 WY 2318 P.3d 645Case Number: 00-106, 00-107Decided: 03/01/2001
 OCTOBER TERM, A.D. 2000

                                                                                                        
March 1, 2001 

 

SCHERER 
CONSTRUCTION, LLC,

a 
Wyoming limited liability company,

Appellant

(Defendant),

 

v.

 

HEDQUIST 
CONSTRUCTION, INC.,

a 
Wyoming corporation,

Appellee

(Plaintiff).

 

HEDQUIST 
CONSTRUCTION, INC.,

A 
Wyoming corporation,

                                                                                    
Appellant

(Defendant),

 

v.

 

SCHERER 
CONSTRUCTION, LLC, a

Wyoming 
limited liability company,

Appellee

(Plaintiff).

 

 

Appeal 
from the District Court of Natrona County

The 
Honorable W. Thomas Sullins, Judge

 

Representing 
Scherer Construction, LLC:

            
Mark W. Gifford, Casper, Wyoming.  
Argument by Mr. Gifford.

 

Representing Hedquist Construction, Inc.:

            
John H. Robinson, Casper, Wyoming.  Argument by Mr. Robinson.

 

Before LEHMAN, C.J., and THOMAS*, GOLDEN, HILL, and KITE, 
JJ.

 

*Concurred prior to retirement.

 

 

[¶1]      
These consolidated cases concern a dispute arising out of a subcontractor 
agreement.  In 
case No. 00-106, the subcontractor, Scherer Construction, LLC, (Scherer) appeals 
the district court's grant of summary judgment on its claim for breach of 
contract including the implied covenant of good faith and fair dealing by the 
main contractor, Hedquist Construction, Inc. (Hedquist), in soliciting and 
obtaining a change order from the City of Casper.  In Case No. 00-107, Hedquist appeals from the 
district court's determination that it had failed to fully compensate Scherer 
for work actually performed under the subcontract and denying Hedquist a 
set-off.  We 
reverse that portion of the district court's decision in Case No. 00-106 
relating to Scherer's claim for breach of the implied covenant of good faith and 
fair dealing.  
In Case No. 00-107, we conclude that the district court's findings and 
conclusions are not clearly erroneous and affirm.

 

[¶2]      
In Case No. 00-106, Scherer presents the following issue for 
consideration:

Did the trial court err in granting summary judgment in 
favor of [Hedquist] and against [Scherer] with respect to [Scherer's] claim for 
breach of contract, including its claim for breach of the implied covenant of 
good faith and fair dealing?

 

Hedquist 
responds with the following statement:

Whether the trial court committed reversible error in 
granting summary judgment where the undisputed facts supported Hedquist's 
contention that no breach of contract had occurred, and where Scherer submitted 
no facts or evidence supporting a cause of action for breach of the implied 
covenant of good faith and fair dealing.

 

In Case No. 
00-107, Hedquist presents a single issue for consideration:

Was the trial court's finding that Hedquist failed to give 
Scherer reasonable notice to repair its defective work, clearly erroneous or 
incorrect as a matter of law, considering the parties' unambiguous contract 
provisions regarding Scherer's duty to perform its work in a timely and 
workmanlike manner, and the undisputed evidence regarding numerous requests for 
Scherer to repair said defective work?

 

Scherer 
counters with a short statement of the issue in the form of a question:

Did the trial court commit clear error in awarding a 
judgment in favor of Scherer on its claim for amounts due for work performed on 
the Project?

 

FACTS

Case No. 
00-106

[¶3]      
Pursuant to our standard of review for summary judgments, the recitation 
of facts is from the vantage point most beneficial to the party who opposed the 
motion, awarding that party all favorable inferences that may be drawn from 
those facts.  
S & G Investors, LLC v. Blackley, 994 P.2d 941, 943 (Wyo. 
2000).

 

[¶4]      
Hedquist was the main contractor for the City of Casper's East Second 
Street Reconstruction Project (the Project).  Scherer was the successful bidder for the 
paving subcontract.  
The Project's specifications called for the use of "performance graded" 
asphalt, which was a special rubberized asphalt.  Approximately $340,000.00 of Scherer's total 
$443,802.43 bid was related to the costs associated with the special rubberized 
asphalt.  
Pursuant to the requirements of the Project, Scherer expended in excess 
of $35,000.00 on special equipment and materials.

 

[¶5]      
The contract between Hedquist and the City of Casper (the Main Contract) 
contained the following clauses:

 

6.11 All Work performed for [Hedquist] by a Subcontractor 
or Supplier will be pursuant to an appropriate agreement between [Hedquist] and 
the Subcontractor or Supplier which specifically binds the Subcontractor or 
Supplier to the applicable terms and conditions of the [Main Contract]. . . 
.

. . . .

10.1 Without invalidating the Agreement and without notice 
to any surety, [the City of Casper] may, at any time or from time to time, order 
additions, deletions or revisions in the Work.  Such additions, deletions or revisions will 
be authorized by a Written Amendment, a Change Order, or a Work Change 
Directive.  
Upon receipt of any such document, [Hedquist] shall promptly proceed with 
the Work involved which will be performed under the applicable conditions of the 
Contract Documents (except as otherwise specifically provided).

 

The subcontract 
agreement between Hedquist and Scherer, which was entered into on April 8, 1998, 
contains parallel language:

 

In consideration therefore, the Subcontractor (Scherer) 
agrees as follows:

. . . .

2. To be bound by the terms of said Main Contract with the 
[City of Casper] (including every part of and all the general and special 
conditions, drawings, specifications and addenda), in any way applicable to this 
Subcontract[.]

. . . .

     (d)  HEDQUIST 
may, without invalidating the SUBCONTRACT, order extra work or make changes by 
altering, adding to, or deducting from the work; the price herein being adjusted 
accordingly.  
All such work shall be executed under the conditions hereof, and of the 
MAIN CONTRACT, except that any claim for extension of time caused thereby must 
be agreed upon at the time of ordering such change.

 

[¶6]      
At the start of the Project, the use of concrete instead of asphalt had 
not been considered because of the presumed higher costs associated with 
concrete.  
However, shortly before the paving phase of the Project was to commence, 
discussions regarding a possible switch to concrete took place between Hedquist, 
the City of Casper, and the Project Engineer.  According to a representative of the City, 
Hedquist initiated the discussions.  The parties concluded that concrete would 
not, in fact, be cost prohibitive.  On June 3, 1998, Hedquist sent a letter to 
the Project Engineer detailing a cost comparison between concrete and 
asphalt.  On 
the same day, the Project Engineer sent a letter to the City detailing 
Hedquist's proposal.  
In a June 12 letter, Hedquist stated that it felt "that the concrete 
paving alternate would be a positive partnering/value-engineering concept for 
this project."

 

[¶7]      
On June 19, 1998, the City Engineer and Public Services Director 
recommended the issuance of a change order pursuant to the Main Contract 
allowing the substitution of concrete for asphalt paving on the Project.  A change order for 
the substitution was approved by the City on the same day.  The net effect of 
the change from asphalt to concrete paving was to reduce the value of Scherer's 
subcontract from $448,240.45 to $105,093.81.  In addition, the specialized materials and 
equipment Scherer had already purchased in anticipation of asphalt paving were 
rendered superfluous by the change.

 

[¶8]      
On July 10, 1998, Scherer filed this action against Hedquist.  Among other causes 
of action not relevant to this appeal, Scherer claimed that Hedquist breached 
the subcontract and an implied covenant of good faith and fair dealing.  In response, 
Hedquist moved for summary judgment.  In opposition to Hedquist's motion, Scherer 
made three arguments in support of its action.  First, Scherer contended, pursuant to § 205 
of the Restatement (Second) of Contracts (1981), that there is an implied 
covenant of good faith and fair dealing in every contract.  Scherer argued that 
Hedquist's active solicitation of the change order breached that implied 
covenant.  
Second, Scherer urged the adoption of the cardinal change doctrine, which 
recognizes that extraordinary changes can constitute a breach of contract 
despite the presence of a changes clause.  See, e.g., Allied Materials & Equipment Company v. United 
States, 569 F.2d 562 (Ct. Cl. 1978).  Finally, Scherer contended that summary 
judgment was inappropriate because Hedquist's motion was supported by a 
perjurious affidavit.  
Scherer alleged that the vice president of Hedquist's affidavit made 
untrue statements regarding Hedquist's role in soliciting the change order.  Scherer concluded 
that the motion for summary judgment should be denied since it was largely based 
on the statements put forth in that affidavit.

 

[¶9]      
On July 21, 1999, the district court issued a decision letter granting 
Hedquist's motion for summary judgment based on the following conclusions: 

 

[T]he Court would reject the defense's argument that the 
cardinal change doctrine be applied in this case as a basis for disregarding the 
legal obligations established by contract.  It would not appear that the cardinal change 
doctrine has been adopted in the State of Wyoming, nor would such doctrine have 
application in this case where the claim is not being asserted against the 
government, and where the subject change order was implemented and directed by 
the City of Casper, and was contractually beyond the control and authority of 
Hedquist. [Citations omitted.]

 

Having rejected the application of the cardinal change 
doctrine to the situation presented in this case, the breach of contract claim 
must fail.  The 
Subcontractor Agreement entered into by the parties reflects that there was an 
offer, acceptance, and consideration for the contract, and therefore this Court 
must conclude that there was a meeting of the minds and that an enforceable 
contract exists. Frost Construction Company v. Lobo, 
Inc., 951 P.2d 390, 394 (Wyo. 
1998).  
Further, the Court must give effect to the clear intent of the parties to 
the Subcontractor Agreement since such intent is expressed therein in clear and 
unambiguous language. Rissler & McMurray Co. v. 
Sheridan Area Water Supply Joint Powers Bd., 929 P.2d 1228, 1233 (Wyo. 
1996). The clear and unambiguous language of the contract documents quoted 
herein establish that Scherer agreed to be bound by the terms of both the Main 
Contract and the Subcontractor Agreement, and thereby agreed to the provisions 
allowing for change orders on the Project, including the provision that Hedquist 
could, without invalidating the Subcontract, make changes by altering, adding 
to, or deducting from the work subject to the agreement. . . .

 

Given the foregoing rulings finding a clear and unambiguous 
contractual relationship between the parties and the lack of any breach by 
Hedquist of the contractual duties imposed, it would not appear that the 
plaintiff's additional claims for recovery herein can be sustained. Polo Ranch Company v. City of Cheyenne, 969 P.2d 132, 136 (Wyo. 
1998).

 

In a footnote, 
the court disposed of the claim for a breach of the implied covenant of good 
faith and fair dealing by noting that such a claim "requires a rare and 
exceptional situation where there is a special relationship of trust and 
reliance to give rise to tort liability.  Terry v. Pioneer 
Press, Inc., 947 P.2d 273, 277 (Wyo. 1997)."  Scherer now appeals that decision to this 
Court.

 

Case No. 
00-107

[¶10]   After the 
change order had substituted concrete for asphalt, Scherer was still obligated 
under the subcontract to perform work on the Project consisting of a few parking 
lots and "tie-ins" where side streets intersected with Second Street.  Needless to say, 
the relationship between Scherer and Hedquist had become strained and, 
inevitably, a dispute arose between the parties regarding the quality of 
Scherer's work.  
In addition, the dispute was complicated by the unusual arrangement set 
forth in the agreement between the parties.  Hedquist was required to prepare the base and 
subgrade, while Scherer's sole responsibility was for the asphalt paving.  The usual course 
was for one party to assume responsibility for all of those tasks.  Naturally, this 
arrangement contributed to the dispute over ultimate responsibility for 
substandard work.

 

[¶11]   In March of 
1999, Maxim Technologies reported test results of core samples taken at every 
asphalt tie-in section.  The results disclosed deficiencies with 
asphalt thickness and density.  The parties disputed responsibility for the 
deficiencies.  
Hedquist insisted that it was the result of substandard paving work by 
Scherer, who countered that the problem lay with the base and subgrade put down 
by Hedquist.  
At a meeting on March 23, 1999, Hedquist demanded that Scherer repair the 
defects in its work, while Scherer requested an independent analysis to 
determine the cause of the deficiencies.  Neither of these courses of action was ever 
undertaken.

 

[¶12]   On June 10, 
1999, the Project Engineer issued a "punch list" of requested repairs related to 
the asphalt paving.  
On June 30, Hedquist demanded that Scherer appear at the job site on July 
6 ready to perform the repairs set out in the "punch list."  Scherer demurred 
based on Hedquist's failure to pay for work already performed and on its belief 
that the "punch list" items were not valid.  The next day Hedquist responded by noting 
that Scherer was not entitled to payment until after the contract work was 
completed and accepted.  Hedquist also demanded that Scherer 
acknowledge by 5 p.m. that day that it would be ready to complete the "punch 
list" on the morning of July 6 or alternative arrangements would be made.  In reply, Scherer 
declined to meet the "arbitrary" deadline propounded by Hedquist.  At the time of 
Hedquist's demand on July 1, Scherer was involved in another project in Rawlins 
and unavailable to receive the ultimatum.  Also, on the date for the proposed "punch 
list" repairs, Scherer was unavailable because of another project on Interstate 
25 near Buffalo.

 

[¶13]   Hedquist made 
good on its threat to find alternative arrangements and hired 71 Construction to 
do the "punch list" repairs.  71 Construction billed Hedquist $20,500.74 
for the job.  
Hedquist deducted the amount paid to 71 Construction along with an 
additional $2,780.00 in paving costs that it had incurred from the amounts owed 
to Scherer.  
The total amount withheld from Scherer was $23,280.74.

 

[¶14]   After the 
grant of the summary judgment motion at issue in Case No. 00-106, Scherer was 
allowed to amend its Complaint to assert a claim alleging a wrongful retention 
of payments owed by Hedquist.  Hedquist filed a counterclaim alleging that 
it was entitled to a "set-off" based on additional costs incurred to repair 
Scherer's deficient work.  The matter was heard in a trial before the 
district judge.  
On January 21, 2000, the district court judge issued Findings of Fact, 
Conclusions of Law, and Judgment in favor of Scherer.  The district court 
judge concluded that Hedquist had failed to give Scherer reasonable time to make 
reparation under the parties' agreement.  The court awarded Scherer the $23,280.74 that 
had been withheld and denied Hedquist's request for a set-off.  Hedquist now appeals 
that decision.

 

I.          
CASE NO. 00-106

            
A.  Standard of 
Review

[¶15]   Our standards 
for reviewing a summary judgment are well established and often reiterated:

 

Summary judgment is appropriate when no genuine issue as to 
any material fact exists and the prevailing party is entitled to have a judgment 
as a matter of law. Kahrs v. Board of Trustees for 
Platte County Sch. Dist. No. 1, 901 P.2d 404, 406 (Wyo. 1995); see also W.R.C.P. 
56(c).  A 
genuine issue of material fact exists when a disputed fact, if it were proven, 
would have the effect of establishing or refuting an essential element of the 
cause of action or defense which has been asserted by the parties. Adkins v. Lawson, 892 P.2d 128, 130 (Wyo. 
1995).  We 
examine the record from the vantage point most favorable to the party who 
opposed the motion, and we give that party the benefit of all favorable 
inferences which may fairly be drawn from the record. Jack v. Enterprise Rent-A-Car Co. of Los Angeles, 899 P.2d 891, 893 (Wyo. 
1995).  We 
evaluate the propriety of a summary judgment by employing the same standards and 
by using the same materials as were employed and used by the lower court. Adkins, 892 P.2d  at 130.  We do not accord any deference to the 
district court's decisions on issues of law. Kahrs, 
901 P.2d  at 406.

 

Bachmeier v. 
Hoffman, 1 P.3d 1236, 1240 (Wyo. 2000).

            
B. Discussion

[¶16]   The main issue 
raised by Scherer concerns the district court's summary judgment on its claim 
that Hedquist breached the implied covenant of good faith and fair dealing.   The district 
court granted summary judgment on this claim on the grounds that Scherer had 
failed to establish the existence of a "special relationship" with Hedquist 
giving rise to tort liability.  Scherer argues that the district court failed 
to distinguish between a contract-based and tort-based claim for the breach of 
an implied covenant of good faith and fair dealing.  Scherer argues that 
since every contract contains an implied covenant of good faith, the district 
court erred in granting summary judgment solely on the basis of a tort-based 
theory.

 

[¶17]   This Court has 
recognized a tort-based claim for breach of the implied covenant of good faith 
in limited circumstances.  McCullough v. Golden 
Rule Insurance Company, 789 P.2d 855 (Wyo. 1990) (insurance); Wilder v. Cody Country 
Chamber of Commerce, 868 P.2d 211 (Wyo. 1994) (employment).  In employment cases, we have limited the tort 
to those situations where a "special relationship" exists between the employer 
and the employee.1 Worley v. Wyoming 
Bottling Company, Inc., 1 P.3d 615, 624 (Wyo. 2000).  The district court granted summary judgment 
in this case based on its determination that Scherer had failed to establish the 
existence of a special relationship with Hedquist.  The district court 
clearly erred in granting the summary judgment on that basis alone.  We have not 
extended the scope of permissible tort-based breach of the implied covenant of 
good faith claims beyond the insurance or employment context.  See Cowardin v. Finnerty, 994 P.2d 335, 339 (Wyo. 1999) 
(refusing to allow tort recovery for consequential damages arising from a 
failure to pay sums due under a contract); and JBC of 
Wyoming Corporation v. City of Cheyenne, 843 P.2d 1190, 1197 (Wyo. 
1992).  
Therefore, the district court's decision to grant summary judgment 
against Scherer based on a tort theory was correct.  However, the 
district court did not go far enough because Scherer's claim was also based in 
contract.  We must now 
determine whether Wyoming law recognizes a claim for the breach of the implied 
covenant of good faith under a contract theory.

 

[¶18]   The Montana 
Supreme Court summarized the history of the implied covenant of good faith in 
commercial contracts:

 

The concept of good faith and fair dealing has a venerable 
history in the law of commercial contracts.  It first appears in classical Roman law and 
by the eighteenth century was a well established principle of English contract 
law imbuing commercial relationships with the common religious and moral 
principles of the time.  E. Farnsworth, Good 
Faith Performance and Commercial Reasonableness under the Uniform Commercial 
Code, 30 U.Chi.L.Rev. 666, 669-70 (1962-63).  In early twentieth century America, courts 
first implied the covenant in commercial contracts which, due to the imprecision 
of the business environment, required that some term be left to the discretion 
of one of the parties.  The implied covenant prevented one party from 
taking advantage of that discretion to deprive the other of the benefit of the 
contract.  See 
e.g. Loudenback Fertilizer Co. v. Tennessee Phosphate 
Co. (6th Cir.1903), 121 F. 298, 303 (holding 
that the manufacturer could not interpret "requirements" to purchase from the 
contract supplier only when the market price exceeded the contract price).  Courts used the 
covenant as a "gap filler" to interpret agreements to cover situations not 
anticipated in the writing.  See e.g. Kirke La 
Shelle Co. v. Paul Armstrong Co. (1933), 263 N.Y. 79, 188 N.E. 163, 168 
(holding that under a contract entered prior to the advent of "talkies," rights 
to a screen play included rights to the motion picture).  Use of the covenant 
became so common that it was codified in the Uniform Commercial Code.  See 1 R. Anderson, 
Uniform Commercial Code, § 1-201:82 (3rd ed. 
1981).  In all 
cases, the remedy was the same; breach of the covenant or implied contract term 
was breach of the contract.

                                                            

Story v. City of Bozeman, 791 P.2d 767, 772-73 (Mont. 1990).  The Restatement (Second) of Contracts has 
taken the concept beyond the commercial context:

 

                        
§ 205.  Duty of Good Faith and Fair Dealing

Every contract imposes upon each party a duty of good faith 
and fair dealing in its performance and its enforcement.

                        
Comment:

a.  Meanings of "good 
faith." Good faith is defined in Uniform Commercial Code § 
1-201(19) as "honesty in fact in the conduct or transaction concerned."  "In case of a 
merchant" Uniform Commercial Code § 2-103(1)(b) provides that good faith means 
"honesty in fact and the observance of reasonable commercial standards of fair 
dealing in the trade."  The phrase "good faith" is used in a variety 
of contexts, and its meaning varies somewhat with the context.  Good faith 
performance or enforcement of a contract emphasizes faithfulness to an agreed 
common purpose and consistency with the justified expectations of the other 
party; it excludes a variety of types of conduct characterized as involving "bad 
faith" because they violate community standards of decency, fairness or 
reasonableness.  
The appropriate remedy for a breach of the duty of good faith also varies 
with the circumstances.

. . . .

d.  Good faith 
performance.  Subterfuges and evasions violate the 
obligation of good faith in performance even though the actor believes his 
conduct to be justified.  But the obligation goes further: bad faith 
may be overt or may consist of inaction, and fair dealing may require more than 
honesty.  A 
complete catalogue of types of bad faith is impossible, but the following types 
are among those which have been recognized in judicial decisions: evasion of the 
spirit of the bargain, lack of diligence and slacking off, willful rendering of 
imperfect performance, abuse of a power to specify terms, and interference with 
or failure to cooperate in the other party's performance.

 

Restatement 
(Second) of Contracts, § 205 (1981); see also 13 
Samuel Williston & Richard A. Lord, A Treatise on the Law of Contracts § 
38:15 (4th Ed. 2000).

 

[¶19]   The implied 
covenant of good faith and fair dealing requires that neither party commit an 
act that would injure the rights of the other party to receive the benefit of 
their agreement.  
Gilmore v. Duderstadt, 961 P.2d 175, 182 (N.M.App. 1998); Andalex Resources, Inc. v. 
Myers, 871 P.2d 1041, 1047 (Utah App. 1994); Garrett v. 
Bankwest, Inc., 459 N.W.2d 833, 841 (S.D. 1990).  Compliance with the 
obligation to perform a contract in good faith requires that a party's actions 
be consistent with the agreed common purpose and justified expectations of the 
other party.  
Andalex Resources, Inc., 871 P.2d  at 1047; 
Restatement (Second) of Contracts § 205 cmt. a.  A breach of the covenant of good faith and 
fair dealing occurs when a party interferes or fails to cooperate in the other 
party's performance.  
Gilmore, 961 P.2d  at 182; Restatement 
(Second) of Contracts § 205 cmt. d.  "The purpose, intentions, and expectations of 
the parties should be determined by considering the contract language and the course of dealings 
between and conduct of the parties."  Andalex Resources, 
Inc., 871 P.2d  at 1047-48 (quoting St. Benedict's 
Dev. v. St. Benedict's Hospital, 811 P.2d 194, 200 (Utah 1991) (emphasis in original)).  The covenant of good faith and fair dealing 
may not, however, be construed to establish new, independent rights or duties 
not agreed upon by the parties.  Andalex Resources, 
Inc., 871 P.2d  at 1048 (citing Brehany v. Nordstrom, 
Inc., 812 P.2d 49, 55 (Utah 1991)).  In other words, the concept of good faith and 
fair dealing is not a limitless one.  "The implied obligation 'must arise from the 
language used or it must be indispensable to effectuate the intention of the 
parties.' "  Garrett v. Bankwest, Inc., 459 N.W.2d 833 at 841 (S.D. 
1990) (quoting Sessions, Inc. v. Morton, 491 F.2d 854, 857 (9th Cir. 1974)).  In the absence of 
evidence of self-dealing or breach of "community standards of decency, fairness 
or reasonableness," the exercise of contractual rights alone will not be 
considered a breach of the covenant.  Restatement (Second) of Contracts § 205 cmt. 
a.  "Whether 
there has been a breach of the covenant of good faith and fair dealing is a 
factual inquiry that focuses on the contract and what the parties agreed 
to."  Gilmore, 961 P.2d  at 182 (quoting Bourgeous v. Horizon Healthcare Corporation, 117 N.M. 
434, 439, 872 P.2d 852, 857 (1994))2.

 

[¶20]   After 
reviewing our case history, it is clear that this Court has never specifically 
stated whether or not it will recognize a claim for breach of the covenant of 
good faith and fair dealing based on a contract theory.  In several cases, a 
party attempted to raise a claim for breach of the implied covenant of good 
faith based on a contract theory, but the claim was inappropriate in light of 
the particular facts of the case.  See Husman v. Triton Coal Company, 809 P.2d 796, 801 (Wyo. 
1991); and Four Nines Gold, Inc. v. 71 Construction, 
Inc., 809 P.2d 236, 239 (Wyo. 
1991).  In Four Nines Gold we declined to address the claim for 
the simple reason that there was no contract.  809 P.2d  at 239.  It should almost go 
without saying that if there is no contract between the parties, then there can 
be no claim for a breach of an implied covenant of good faith based on a 
contract theory.  
In Husman, we declined to consider Husman's 
claim because it was based on an allegation of bad faith occurring prior to the 
entering of the contract where such behavior is more properly brought as a claim 
for fraud or negligent misrepresentation.  809 P.2d at 801-02; See also Restatement (Second) of Contracts § 205 cmt. c 
(This section does not apply to conduct during the formation of a 
contract.).

 

[¶21]   In several 
other cases, we have cited § 205 of the Restatement (Second) of Contracts, or 
the concept contained in it, with at least tacit approval even if the ultimate 
resolution of the case did not rely on it.  The first is Wilder 
v. Cody Country Chamber of Commerce, 868 P.2d 211, 220 (Wyo. 
1994).  In Wilder we established a rule that an employee may have 
a tort cause of action for breach of the implied covenant of good faith and fair 
dealing against his employer if a special relationship exists.  To that extent, it 
is not directly relevant to the issue before us in this case.  However, in Wilder we cited, with evident approval, § 205 and 
comment a, which defines "good faith." Id. 

 

[¶22]   A somewhat 
different scenario unfolded in State Farm Mutual 
Automobile Insurance Company v. Shrader, 882 P.2d 813, 825 (Wyo. 
1994), where, after quoting § 205 of the Restatement (Second) of Contracts, the 
Court made the following statement:

 

Wyoming has recognized that a breach of the implied 
covenant of good faith and fair dealing may be actionable in contract for 
compensatory damages.

 

The Shrader Court cites Arnold v. 
Mountain West Farm Bureau Mutual Insurance Company, Inc., 707 P.2d 161, 164 
(Wyo. 1985) in support of that broad statement.  Presumably, the Court in Shrader relied upon the following equally broad and 
unsupported statement from Arnold:

 

Where one party breaches the contract in bad faith, the 
injured party can seek damages for breach of the implied covenant of good 
faith.

 

Arnold, 707 P.2d  at 
164.  While 
both of these statements are clearly dicta within the context that they appear 
in those cases, their presence does, at least, suggest a general acceptance of 
the concept.  
See also Schuler v. 
Community First Naional Bank, 999 P.2d 1303, 1305 (Wyo. 2000) (Holding bank was within its rights to freeze line of 
credit and citing in support Price v. Wells Fargo 
Bank, 213 Cal. App. 3d 465, 261 Cal. Rptr. 735, 742 (1989) (The implied 
covenant of good faith and fair dealing "does not impose any affirmative duty of 
moderation in the enforcement of legal rights.")).

 

[¶23]   In response to 
Scherer's position, Hedquist cites our statement in Loghry v. Unicover Corporation, 927 P.2d 706, 711-12 (Wyo. 
1996):

 

Wyoming does not recognize a cause of action for breach of 
the covenant of good faith and fair dealing under a contract theory.

 

This statement 
appears to be in direct conflict with our statements in Arnold and Shrader.  In support of the 
statement, the Loghry opinion cites Hatfield v. Rochelle Coal Company, 813 P.2d 1308, 1310 (Wyo. 
1991) and Leithead v. American Colloid Company, 721 P.2d 1059, 1064 (Wyo. 
1986).  Hatfield was a wrongful termination action where this 
Court held that "under the current status of Wyoming law" it would decline to 
"recognize an implied covenant of good faith and fair dealing imposed upon an 
employer by virtue of his being a party to an employment contract."  813 P.2d  at 
1310.  
Similarly, Leithead was a wrongful 
termination suit where we declined to recognize the cause of action where the 
employee had an implied employment contract under which he could only be 
terminated for cause.  
721 P.2d  at 1064.  Neither of these cases supports the broad 
implications of the statement in Loghry.  Since these 
employees could only be terminated for cause, by definition they could only be terminated 
in "good faith" and, thus, there was no need to recognize an implied covenant of 
good faith as it was already a specified term of the contract.  In the at-will 
employment context, an employee may be terminated for any or no reason.  Wilder, 868 P.2d  at 217.  The existence of a contractual implied 
covenant is obviously incompatible with the at-will presumption and is not 
applicable in those situations.3  Accordingly, the statement in Loghry is correct as far as employment law is 
considered.  
The statement is also technically correct as far as commercial contracts 
are concerned in the sense that, as we have already noted, adoption or rejection 
of the implied covenant has not been explicitly ruled upon.  We now proceed to 
consider that very issue.

 

[¶24]   In Aztec Gas & Oil Corporation v. Roemer Oil Company, 
948 P.2d 902, 906 (Wyo. 
1997) (Thomas, J., dissenting), the dissent urged the adoption of § 205 of the 
Restatement (Second) of Contracts in light of our acknowledgment of it in Shrader, Wilder, and Husman.  Today we explicitly adopt § 205 and hold that 
parties to a commercial contract may bring a claim for breach of the implied 
covenant of good faith and fair dealing based on a contract theory.  The majority of 
jurisdictions recognize a duty to perform a contract in good faith.  Steven J. Burton, 
Breach of Contract and the Common Law Duty to Perform in 
Good Faith, 94 Harvard L.Rev. 369 (1980); Garrett, 459 N.W.2d  at 841; Amoco Oil Company v. Ervin, 908 P.2d 493, 498 (Colo. 1995).  Furthermore, a significant number of 
contracts in Wyoming already have a covenant of good faith imposed by statutory 
operation.  All 
contracts coming under the ambit of the Uniform Commercial Code have an 
obligation of good faith imposed in performance or enforcement.  Wyo. Stat. Ann. § 
34.1-1-203 (LEXIS 1999).  It would be incongruous to allow a 
significant portion of commercial contracts in this state to be governed by an 
implied covenant of good faith while denying the same to all others.  Consistency 
counsels adopting § 205 of the Restatement (Second) of Contracts.

 

[¶25]   Our adoption 
of § 205 of the Restatement (Second) of Contracts means that we must reverse the 
district court's summary judgment on Scherer's claim for breach of the implied 
covenant of good faith and fair dealing and remand the matter for further 
proceedings consistent with our opinion.

 

[¶26]   We turn now to 
Scherer's other claims.  In their second issue, Scherer argues that 
the district court should have recognized the cardinal change doctrine.  The doctrine has 
been described thusly:

 

Under established case law, a cardinal change is a 
breach.  It 
occurs when the government effects an alteration in the work so drastic that it 
effectively requires the contractor to perform duties material[ly] different 
from those originally bargained for.  By definition, then a cardinal change is so 
profound that it is not redressable under the contract, and thus renders the 
government in breach.

 

Allied Materials & Equipment Company, 
Inc., 569 F.2d at 563-64; see also 
McDaniel v. Ashton-Mardian Company, 357 F.2d 511 
(9th Cir. 1966); and Peter Kiewit Sons' Company v. Summit Construction 
Company, 422 F.2d 242 (8th Cir. 1969).  Scherer insists that the change from asphalt 
to concrete was a cardinal change.  Scherer points to the significant reduction 
in the monetary value of its subcontract as evidence that the change was a 
cardinal one.

 

[¶27]   In response, 
Hedquist argues that these cases apply the doctrine only against governmental 
entities, and it was the City of Casper that effectuated the change order, not 
Hedquist.  We 
need not determine whether the cardinal change doctrine applies only to 
governmental entities.  Cf. Peter Kiewit 
Sons' Company, 422 F.2d 242.  It is 
indisputable that it was not Hedquist that issued the change order.  Indeed, pursuant to 
the Main Contract, the only party that could make that change was the City of 
Casper.  Every 
case cited by Scherer involves an action by one party to a contract against the 
party, usually a governmental entity but not exclusively so, that actually 
issued the change order.  We decline to extend the doctrine to include 
third parties who happen to be parties to the contract.

 

[¶28]   In its final 
issue, Scherer claims that Hedquist's motion for summary judgment was based on a 
perjurious affidavit.  
Since we have reversed the summary judgment on the issue of the implied 
covenant of good faith and fair dealing, we perceive this issue as moot because 
Scherer has received the relief requested.  In addition, Scherer's complaint about the 
affidavit revolves around Hedquist's role in allegedly soliciting the change 
order.  This 
appears to be a factual dispute that goes to the heart of Scherer's claim for 
breach of the implied covenant of good faith and, accordingly, it is an issue 
that will be resolved one way or the other on remand.

 

II. CASE NO. 
00-107

            
A.  Standard of 
Review

 

[¶29]   The issue 
raised in this appeal is dependent upon a reading of the contract between the 
parties.  In 
those cases we have stated:

 

According to our established standards for interpretation 
of contracts, the words used in the contract are afforded the plain meaning that 
a reasonable person would give to them. Doctors' Co. v. 
Insurance Corp. of America, 864 P.2d 1018, 1023 (Wyo. 1993).  When the provisions in the contract are clear 
and unambiguous, the court looks only to the "four corners" of the document in 
arriving at the intent of the parties. [Union Pacific 
Resources Co. v. Texaco, Inc., 882 P.2d 212, 220 (Wyo. 1994); Prudential Preferred 
Properties v. J and J Ventures, Inc., 859 P.2d 1267, 1271 (Wyo. 
1993).] In the absence of any ambiguity, the contract will be enforced according 
to its terms because no construction is appropriate. Sinclair Oil Corp. v. Republic Ins. Co., 929 P.2d 535, 539 (Wyo. 
1996); Prudential Preferred Properties, 859 P.2d  at 
1271.

 

Amoco Production Company v. EM Nominee Partnership 
Company, 2 P.3d 534, 540 (Wyo. 2000).

 

[¶30]   In addition, 
this matter was tried before the district court, which made findings of fact and 
conclusions of law.

 

The factual findings of a judge are not entitled to the 
limited review afforded a jury verdict. Hopper v. All 
Pet Animal Clinic, Inc., 861 P.2d 531, 538 (Wyo.1993).  While the findings are presumptively correct, 
the appellate court may examine all of the properly admissible evidence in the 
record.  Id. Due regard is given to the opportunity of the trial 
judge to assess the credibility of the witnesses, and our review does not entail 
weighing disputed evidence. Id.  Findings of fact 
will not be set aside unless the findings are clearly erroneous. Id.  A finding is clearly erroneous when, although 
there is evidence to support it, the reviewing court on the entire evidence is 
left with the definite and firm conviction that a mistake has been committed. Id.

 

Stroup v. Oedekoven, 995 P.2d 125, 128 (Wyo. 
1999) (quoting Springer v. Blue Cross and Blue Shield of 
Wyoming, 944 P.2d 1173, 1175-76 
(Wyo. 1997)).

 

            
B. Discussion

 

[¶31]   Hedquist 
contends that it did not breach the contract when it withheld money from 
Scherer.  
Hedquist insists that it was entitled to withhold the money to cover the 
extra expenses incurred in repairing the defects to Scherer's work.  In support of its 
position, Hedquist points to several provisions of the Main Contract 
including:

 

6.29         
CONTRACTOR shall carry on the Work and adhere to the 
progress schedule during all disputes or disagreements with OWNER. No Work shall 
be delayed or postponed pending resolution of any disputes or disagreements, 
except as permitted by paragraph 15.5 or as OWNER and CONTRACTOR may otherwise 
agree in writing.

6.30.1  CONTRACTOR 
warrants and guarantees to OWNER, ENGINEER and ENGINEER's Consultants that all 
Work will be in accordance with the Contract Documents and will not be defective. . . .

6.30.2  CONTRACTOR's 
obligation to perform and complete the Work in accordance with the Contract 
Documents shall be absolute. . . .

. . . .

13.11  If required by ENGINEER, CONTRACTOR shall 
promptly, as directed, either correct all defective 
Work, whether or not fabricated, installed or completed, or, if the Work has 
been rejected by ENGINEER, remove it from the site and replace it with Work that 
is not defective.  CONTRACTOR shall pay all claims, costs, 
losses and damages caused by or resulting from such correction or removal 
(including but not limited to all costs of repair or replacement of work of 
others).

13.12.1 . . . If CONTRACTOR 
does not promptly comply with the terms of such instructions, or in an emergency 
where delay would cause serious risk of loss or damage, OWNER may have the defective Work corrected or the rejected Work removed 
and replaced, and all claims, costs, losses and damages caused by or resulting 
from such removal and replacement (including but not limited to all costs of 
repair or replacement of work of others) will be paid by CONTRACTOR.

 

Hedquist notes 
that pursuant to paragraph (A) of the subcontract, these clear and unambiguous 
provisions of the Main Contract apply to Scherer.  Hedquist contends that since Scherer did not 
rectify its defective work within a reasonable time after notice, it was 
entitled under the terms of the Main Contract to withhold payment to Scherer to 
cover its costs associated with repairing that work.

 

[¶32]   The district 
court concluded that Hedquist had breached the contract because it had failed to 
give Scherer reasonable notice to make reparation under the applicable contract 
terms.  "Where, 
as here, no time for performance is specified in a contract, the law implies 
performance must be within a reasonable time, and what is a reasonable time 
depends upon the circumstances of each case."  G.C.I., Inc. v. 
Haught, 7 P.3d 906, 909 (Wyo. 2000).  "What constitutes a reasonable time in any 
particular case is a question of fact." Id.  We will not reverse 
the district court's finding unless it was clearly erroneous. Id.

 

[¶33]   In addition to 
the clauses noted above, the Main Contract also contains the following relevant 
provision:

 

13.14  If CONTRACTOR fails within a reasonable time 
after written notice from ENGINEER to correct defective Work or to remove and replace rejected Work 
as required by ENGINEER in accordance with paragraph 13.11, or if CONTRACTOR 
fails to perform the Work in accordance with the Contract Documents, or if 
CONTRACTOR fails to comply with any other provision of the Contract Documents, 
OWNER may, after seven days' written notice to CONTRACTOR, correct and remedy 
any such deficiency.

 

The subcontract 
between Scherer and Hedquist contains a parallel provision:

[The Subcontractor agrees] [t]o commence and at all times 
to carry on, perform and complete [the] SUBCONTRACT to [t]he full and complete 
satisfaction [of] HEDQUIST, and of the Engineer or OWNER.  It is specifically 
understood and agreed that in the event HEDQUIST shall at any time be of the 
opinion the SUBCONTRACTOR is not proceeding with diligence and in such a manner 
as to satisfactorily complete said work within the required time, then and in 
that event HEDQUIST shall have the right, after reasonable notice, to take over 
said work and to complete the same at the cost and expense of the SUBCONTRACTOR, 
without prejudice to HEDQUIST'S other rights or remedies for any loss or damage 
sustained.

 

Under the clear 
and unambiguous terms of the Subcontract and the Main Contract, Hedquist was 
required to give Scherer reasonable notice prior to taking over the work and 
completing it at Scherer's expense.

 

[¶34]   Hedquist 
claims that it had concerns about the quality of Scherer's work almost from the 
beginning of the Project in the early summer of 1998.  However, there is 
no written evidence of any demand by Hedquist for Scherer to correct any alleged 
deficiencies in its work prior to the exchange of letters between the parties' 
attorneys on June 30, and July 1, 1999.  As we noted in our statement of the facts, 
Hedquist demanded that Scherer respond by 5 p.m. on July 1, to the demand that 
it be at the job site on July 6, to make the necessary repairs.  At the time that 
this demand was made, Scherer was on an out-of-town job site and could not be 
reached.  
Furthermore, Hedquist was informed that Scherer had another project 
scheduled for July 6.  
Nevertheless, when Scherer did not respond by the end of the day on July 
1, Hedquist proceeded to make alternative arrangements for repairing the 
deficiencies.

 

[¶35]   We agree with 
the district court that Hedquist did not give Scherer reasonable notice.  There is no 
evidence of any written demand prior to the June 30/July 1 letters by Hedquist 
that Scherer rectify its work on the Project.  Hedquist claims that Scherer was well aware 
of the problems associated with its work long before the exchange of these 
letters.  There 
is no doubt that Scherer was aware of the problems.  However, for 
several months prior to this, Hedquist was also aware that Scherer disputed the 
cause of the deficiencies in the asphalted areas.  The fact that Scherer was aware of alleged 
problems does not equate with a demand by Hedquist to make the repairs. The Main 
Contract specifically requires written notice, and Hedquist has not pointed to 
any evidence of such prior to the June 30/July 1 letters.

 

[¶36]   The time 
between the letters on June 30 and July 1, and the date set for the repair work 
on July 6, was not reasonable.  It was only a six-day notice, which does not 
even comply with the Main Contract's seven-day requirement.  Further, Hedquist 
had demanded a reply by 5 p.m. on the day it sent the notice despite the 
knowledge that not only was Scherer unavailable to reply that day, but it was 
already scheduled for another job on July 6.  Hedquist simply did not give Scherer a 
reasonable time to reply under the circumstances.  The district court's finding was not clearly 
unreasonable.

 

CONCLUSION

[¶37]   In Case No. 
00-106, we adopt § 205 of the Restatement (Second) of Contracts and hold that 
all commercial contracts have an implied covenant of good faith and fair 
dealing. We reverse that portion of the district court's summary judgment and 
remand for reconsideration of Hedquist's motion in light of our decision.  All other aspects 
of the district court's summary judgment are affirmed.

 

[¶38]   In Case No. 
00-107, we conclude that the district court's determination that Hedquist had 
failed to provide reasonable notice to Scherer to repair deficiencies in its 
work is not clearly erroneous.  The district court's order is affirmed in its 
entirety.

FOOTNOTES

  1A 
special relationship is also an element of a tort-based claim in the insurance 
context, which automatically exists by virtue of the unequal bargaining power 
the insurer has over an insured.  State Farm Mutual 
Automobile Insurance Company v. Shrader, 882 P.2d 813, 825 (Wyo. 
1994) (citing McCullough, 789 P.2d 855, 858).

  2This is not to 
imply that summary judgment may not be an appropriate means for resolving these 
claims.  A 
motion for summary judgment may be granted if, under the facts in the record, 
the party's actions alleged as the basis for the breach of the implied covenant 
were in conformity with the clear language of the contract. Our dictum that the 
interpretation and construction of a contract is a question of law and for the 
court to resolve in the first instance is still valid.  See Brockway v. Brockway, 921 P.2d 1104, 1106 (Wyo. 
1996).  If the 
action complained of is clearly within the intention of the parties as expressed 
within the unambiguous language of the contract, then summary judgment is 
appropriate.  
Conversely, a motion may be defeated by a demonstration that a genuine 
issue of material fact exists as to whether the party's conduct involved 
self-dealing beyond the mere exercise of contract rights or in violation of the 
community standards of decency, fairness, or reasonableness. In making a ruling 
on summary judgment, the district court should consider the conduct alleged to 
constitute the breach within the context of the language of the contract, the 
course of conduct of the parties, and the standards and norms of the subject 
industry.  The 
district court in this case did not have the opportunity to make its ruling 
based on the standards we have enunciated today.  Therefore, our reversal is with instructions 
for the court to reconsider Hedquist's motion for summary judgment in light of 
our ruling.

   3This assumes the existence of a contract of 
employment for an indefinite period.  If there is no contract, then no claim for a 
breach of the implied covenant can be made in any instance since the existence 
of a valid contract is the sine qua non of the 
claim.