Opinion ID: 2601614
Heading Depth: 1
Heading Rank: 8

Heading: Is Excel entitled to maintain its claim of breach of a covenant of good faith and fair dealing?

Text: [¶ 37] As noted above, HKM's agreement with the Town of Lovell provided as follows in ¶ 9.10(A): Neither ENGINEER's authority or responsibility under this Article 9 or under any other provision of the Contract Documents nor any decision made by ENGINEER in good faith either to exercise or not exercise such authority or responsibility or the undertaking, exercise, or performance of any authority or responsibility by ENGINEER shall create, impose, or give rise to any duty in contract, tort, or otherwise owed by ENGINEER to CONTRACTOR, and Subcontractor, any Supplier, any other individual or entity, or to any surety for or employee or agent of any of them. The contract between Excel and the Town of Lovell incorporated these provisions. Excel argues that this language created an obligation on the part of HKM to act in good faith in its decision-making as the town's agent, and that it failed to do so. HKM makes a highly technical and somewhat implausible argument that the quoted language does not impose a duty to act in good faith, but only to decide in good faith whether to exercise its authority or not, after which the clause is inapplicable. Neither interpretation is correct. [¶ 38] The language in question is drawn from the standard general conditions portion of an owner-engineer form developed by a group of professional associations. This particular provision has been referred to in the case law as an exculpatory clause. See, e.g., Lyndon Prop. Ins. Co. v. Duke Levy & Associates, L.L.C., 475 F.3d 268, 271-72 (5th Cir.2007). It is so called because it purports to exculpate project managers for liability for torts which do not involve bad faith. At least some courts have held the clause invalid even for that purpose. Id. [¶ 39] This Court has recognized that all contracts contain an implied covenant of good faith and fair dealing. Scherer Constr., LLC v. Hedquist Constr., Inc., 2001 WY 23, ¶ 24, 18 P.3d 645, 655 (Wyo.2001). With some rare exceptions in insurance and employment law, a suit based on the implied covenant sounds in contract and not in tort. Id., ¶ 17, 18 P.3d at 652. The implied covenant imposes an obligation to act honestly in fact in the transaction, and to refrain from actions which would injure the rights of the other party to receive the benefit of its bargain. Id., ¶ 19, 18 P.3d at 653. Obligations under the implied covenant must arise from and may not conflict with the express obligations of the parties' contract. Id. [¶ 40] Excel did not contract directly with HKM, and there is therefore no implied covenant under Scherer. However, Excel argues that the language of ¶ 9.10(A) imposes the same duties upon HKM as the implied covenant would if Excel had contracted directly with HKM. [¶ 41] The Court does not construe the clause as creating an obligation on the part of the engineer to act in good faith in all decisions affecting the contractor as might arguably be the case under an implied covenant of good faith and fair dealing. The exculpatory clause would just limit the engineer's liability to claims which involve an element of bad faith. Negligence does not require proof of bad faith. On the other hand fraud or intentional misrepresentation requires proof of bad faith to the extent of knowingly making a false representation intended to induce reliance by another party. [¶ 42] In other words, the clause means that the contractor may not recover from the engineer for careless errors which were not made in bad faith, while it does not bar claims involving bad faith such as fraud, provided that Excel might pursue those claims as a matter of substantive law. The exculpatory clause is thus limited to claims which do not involve bad faith. The clause appears to be an effort to allocate the risks of certain types of conduct in performance of the contract, as encouraged by the economic loss rule. See Rissler, 929 P.2d at 1234-35. [¶ 43] As previously held, Excel may not maintain a claim of intentional interference with contract against the agent of a party to its contract, and it did not present a claim of intentional misrepresentation or fraud to the trial court on the pleadings in this case. Thus, although the clause did not purport to exculpate HKM for actions taken in bad faith, those claims either could not be maintained as a matter of substantive law, or were not presented by the pleadings before the trial court.