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Adverse inferences from contractor’s use of Fifth Amendment privilege


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McLean

By Sean McLean

As the project deadline neared, the contractor’s project manager resigned and expressed to the company his frustration and apparent disappointment with the contractor’s style of overseeing the project.  Once a new project manager was retained, he began investigating the status of the project and charges paid by the company.  The new project manager determined that of the $600,000 paid by the company, approximately $250,000 was unaccounted for and none of the necessary construction permits had been obtained.  Thereafter, the company filed a criminal complaint against the contractor with the local police and filed an application for prejudgment remedy in the Superior Court of Connecticut. Under Connecticut law, a plaintiff may, under certain circumstances, seek to place a lien on real property or other assets of a defendant as security for a later judgment. In its application for prejudgment remedy, the company alleged, among other things, that the contractor breached the covenant of good faith and fair dealing.

Covenant of good faith and fair dealing
The court noted every contract carries an implied covenant of good faith and fair dealing requiring that neither party do anything that will injure the right of the other to receive the benefits of the agreement.  To constitute a breach, one party must, in bad faith, impede the right of the other party to receive benefits that he or she reasonably expected to receive under the contract.  Bad faith involves actual or constructive fraud, or a design to mislead or deceive another, or a neglect or refusal to fulfill some duty or some contractual obligation, not prompted by an honest mistake as to one’s rights or duties, but by some interested or sinister motive. In other words, bad faith requires more than mere negligence, it involves a dishonest purpose.

In reviewing the evidence, the court found that the company made payments for labor, materials, and some services that were never rendered. The court also found that the contractor had knowledge that the company was overpaying for services and that he knew construction permits had not been obtained despite representing to the company that they had been obtained. The court also addressed whether it was appropriate to draw any inferences from the contractor’s refusal to testify after he invoked his Fifth Amendment privilege against self-incrimination.

Fifth Amendment privilege
The court noted the Fifth Amendment privilege against self-incrimination not only protects an individual against being involuntarily called as a witness against himself in a criminal prosecution but also privileges him not to answer official questions put to him in any other proceeding, civil or criminal, formal or informal, where the answers might incriminate him in future criminal proceedings. The court found the contractor invoked his Fifth Amendment privilege against self-incrimination at trial when asked about rendering services under the contract, preparation of fraudulent invoices, his authorization to do business in the jurisdiction, and overcharges for labor, material and services.  The court noted, however, the privilege does not forbid the drawing of adverse inferences against parties to civil actions when they refuse to testify in response to probative evidence offered against them.  The prevailing rule is that the Fifth Amendment does not preclude the inference where the privilege is claimed by a party to a civil cause.  Accordingly, the court drew an adverse inference from the contractor’s refusal to testify as to these issues that the contractor had acted in bad faith.  Accordingly, the court found that there was probable the contractor breached the implied covenant of good faith and fair dealing under the contract with the company and awarded a prejudgment remedy in favor of the company for over $1.5 million dollars.

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