Construction Contracts and Acting in Good Faith

The Fifth Appellate District Affirms the Implied Duty to Act in Good Faith in Contract Matters

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It is well established in Ohio that “public policy dictates that every contract contains an implied duty for the parties to act in good faith and to deal fairly with each other.”  Gator Dev. Corp. v. VHH, Ltd., 2009-Ohio-1802 at ¶24.  However, it is the rare case where this implied duty forms the basis for an award of attorney’s fees for a party’s breach.  Nonetheless, that is exactly what happened in MCM Home Builders, LLC v. Sheehan, 2019-Ohio-3899. 

This case arose out of a dispute between MCM Home Builders and the Sheehan’s, who had contracted for the construction of a new home under a “Cost-Plus Contract”.  Under a Cost-Plus Contract, an arrangement typically used in custom-built homes, a builder may take house plans, bid out the different phases of the home construction, and establish or arrive at a budget based upon the totality of the bids.  Allowances may be put in place for certain selections or features but the Customer has the flexibility to change plans or elements of the construction with the Builder then charging a fee based upon the total budget.  In this case, MCM did just that, and agreed on a base budget with the Sheehan’s.  However, the Sheehan’s were directly in contact with various vendors and made several changes to the plans and finishes constructed and installed. 

A dispute arose by and between the parties during the punch list phase when the Sheehan’s were presented the final accounting from MCM, which had already drawn the entirety of the construction loan for the project.  The Sheehan’s were frustrated with how they felt the punch list was being addressed, and further frustrated when they were presented with a final accounting that showed that they had significantly exceeded their initial budget.  As a result, the Sheehan’s sent a notice to MCM instructing them not to return to the home to complete any further work.  MCM filed a mechanic’s lien, and then ultimately brought suit on the outstanding balance.  After discovery, MCM moved to amend its complaint, increasing the amount of damages it sought from the Sheehan’s, and further moved to add a cause of action for bad faith and willful and wanton breach of the contract.  The basis of the bad faith/willful and wanton breach claim was based on MCM determining, through the discovery process, that a substantial amount of the alleged overages were based on items purchased or invoices rendered that the Sheehan’s had actually personally approved, but were now refusing to pay. 

The case proceeded to a jury trial and the jury, through specific questions presented to it at the conclusion of the case found that not only did MCM fulfill its obligations under the contract, but that the Sheehan’s had breached the contract.  Further, the jury found that the Sheehan’s conduct in breaching the contract was in bad faith, the bad faith finding opened the door for MCM to argue that despite the American Rule which holds that each party is responsible for their own attorney’s fees absent a contractual arrangement to otherwise allocate that obligation, MCM was entitled to recover its attorney’s fees as a result of the Sheehan’s bad faith.  The Court of Appeals reviewed the evidence that had been submitted in the trial and found that there was competent and credible evidence from which the jury could have found that the Sheehan’s breach was in bad faith because the majority of the budget overages and increased final costs were in fact due to choices made by the Sheehan’s in pursuit of their custom-built dream home.  The Court noted that it was the Sheehan’s, not MCM, that met with the vendors, reviewed the finish options and ultimately made the selections that cause the overages.  As an example of one particular instance, the Court referred to an email between the Sheehan’s and one of the vendors in which the Sheehan’s had been advised, before proceeding with the window selection that “if you are trying to keep within a budget, these (windows) will blow it up.”  As such, the Court affirmed the jury’s finding that the Sheehan’s acted in bad faith. 

As a result of the finding of bad faith, MCM was allowed to petition the Court for attorney’s fees, and received an award of attorney’s fees and expenses of $221,452.00, in addition to the $124,868.00 of overages effectively making the cost of the Sheehan’s $500,000.00 home over $846,000.00.

Unfortunately, disputes are not uncommon in construction matters, and that is no less the case in consumer matters where emotions can run high, and the final project, such as a home in this case is often an intimately personal experience for the buyer.  The take away however is that before a party takes matters into its own hands, it is always advisable to solicit the opinion and advice from an attorney experienced in the area who can council and guide the parties on their respective rights and obligations under an agreement.

If you have any questions on any of your Contractors or disputes involving any construction projects, please don’t hesitate to contact Michael W. Sandner at msandner@pselaw.com or call 937-223-1130 at Pickrel, Schaeffer & Ebeling Co., L.P.A. to review or discuss.

AUTHOR: Mike Sandner
msandner@pselaw.com