Tano Group, Inc. v. DPW

IN THE SUPREME COURT OF THE COMMONWEALTH OF THE NORTHERN MARIANA ISLANDS TANO GROUP, INC., Plaintiff-Appellee/Cross-Appellant, v. DEPARTMENT OF PUBLIC WORKS, et al., Defendant-Appellant/Cross-Appellee. SUPREME COURT NO. 2008-SCC-0010-CIV SUPERIOR COURT NO. 05-0100B Cite as: 2009 MP 18 Decided December 31, 2009 Rexford C. Kosack, Saipan, Commonwealth of the Northern Mariana Islands, for Plaintiff- Appellee/Cross-Appellant R. Anthony Welch, Saipan, Commonwealth of the Northern Mariana Islands, for Defendant- Appellant/Cross-Appellee BEFORE: MIGUEL S. DEMAPAN, Chief Justice; ALEXANDRO C. CASTRO, Associate Justice; and JOHN A. MANGLONA, Associate Justice  CASTRO, J.: ¶1 Appellant Department of Public Works (“DPW”) appeals the trial court’s decision on the grounds that it did not have subject matter jurisdiction to hear the breach of contract and breach of the implied covenant of good faith and fair dealing claims by Tano Group, Inc. (“Tano”). DPW further appeals the trial court’s decision (i) awarding consequential damages, (ii) finding a breach of the implied covenant of good faith and fair dealing, (iii) granting additional time delays, and (iv) applying the incorrect interest rate to the damage awards. Tano asserts that the trial court erred in (i) not awarding consequential damages for costs related to third-party lawsuits, (ii) not awarding damages for some breach of the implied covenant of good faith and fair dealing claims, and (iii) improperly placing the burden of proof for the reasonableness of mitigation on Tano, the non-breaching party. For the reasons set forth below, we find that the trial court did have subject matter jurisdiction to hear the breach of contract and breach of the implied covenant of good faith and fair dealings claims. We further hold that the trial court properly awarded some consequential damages and not others, correctly ruled on the breach of the implied covenant of good faith and fair dealing claims, and correctly awarded the delay days. We find, however, that error was committed in placing the burden of proof regarding the mitigation of damages on Tano, and applying the fifteen percent interest rate to Tano’s damage awards. Therefore, we AFFIRM in part, REVERSE in part, and REMAND this matter to the trial court to enter judgment consistent with this opinion. I A. The Construction of Southern High School ¶2 In September 2000, Tano and DPW entered into a contract for the construction of Southern High School. The school was scheduled to be completed in August 2001 but it was not ready for use until a year later because numerous problems arose during the course of construction. Problems first arose between DPW and Tano during the design phase. This part of the contract was supposed to last ninety days, but it stretched to almost eleven months. The government made numerous changes to the design. As a result, the construction of the school was behind schedule from the beginning. To compensate, the government encouraged Tano to commence construction without a final set of plans or the necessary payment and performance bonds. Eventually, the government required Tano to obtain bonds. In late June 2001, the bond company informed the parties that a final design was needed to secure bonding. A month later Tano was bonded when a final set of plans was submitted to and approved by DPW. ¶3 Delays again arose in early 2002. The government failed to timely act on requests to setup permanent utility connections for water and electricity at the site as required by the contract. Tano wrote three letters to DPW, in February and March, directing PSS to take the necessary steps to set up permanent utilities. The March letter explicitly stated that Tano had been waiting for eight weeks for the power and water to be hooked up. In April, the Commissioner of Education gave notice to CUC that  construction was 96% complete, and requested an immediate connection for water and electricity. Electricity came to the site on May 8, 2002, and water was supplied on July 1, 2002. ¶4 The utility delays caused Tano to incur substantial standby expenses. On March 14, 2002, Tano, ready to start landscaping, moved equipment to the site for that purpose. This work could not start, however, until the site had a permanent water connection. Since water was not hooked up, Tano’s landscapers and the landscaping equipment remained on standby until July 1, 2002. On April 20, 2002, Tano ran out of any work that it could complete at the school without permanent water and electricity. As a result, its plumbers, who were on site to test various plumbing systems under island water pressure, also stayed on standby until July 1, 2002. Tano’s electricians, who were needed to commission the electrical equipment under island power, were on standby until May 8, 2002. For this period of time, Tano’s standby costs were $107,776.04 for labor and $127,600 for equipment. ¶5 The construction project was finally completed in August 2002, and the government issued a certificate of occupancy. Classes started one week later. Despite the school being completed for the start of the school year, by November 2002 DPW had still not closed out the contract. DPW failed to make the final progress payment and failed to release the retention payment. The retention payment was a ten percent withholding by the government on each progress payment. Under the terms of the contract, once it was closed, Tano was entitled to receive the retention money. Tano also sought additional sums for standby costs, and necessary work that exceeded the scope of the contract. B. Tano’s Financial Difficulties and the Parties’ Initial Attempts at Resolution ¶6 When the project was completed, the parties tentatively agreed to enter into arbitration concerning the disputes that arose over the course of the contract. The Director of Procurement (“Procurement”) supported DPW’s and Tano’s decision to arbitrate. The parties agreed that each wanted to reach a full conclusion of the matter before the end of 2003. The parties also informally agreed that Tano’s attorney would draft the arbitration documents. In September 2003, Tano presented the draft arbitration documents to the Office of the Attorney General. At this point, a new assistant attorney general who was assigned to represent DPW in the case maintained that there was no agreement to enter into arbitration. Consequently, the arbitration never occurred. Tano seeks $11,000 in reimbursement for the costs of drafting the arbitration documents. ¶7 In November 2002, Tano made several requests for payments totaling $638,469.53. It requested the $227,830.53 retention payment, the $113,089.32 final progress payment, $270,549.68 in standby costs, and $27,000 for the water tank and pump. It also requested that DPW release its payment and performance bonds. A month later, Tano filed a compensation request for 111 delay days due to the late hookup of permanent utilities at the site. That same month, Tano also filed an administrative dispute with DPW regarding a determination by the contracting officer that it would not receive 157 delay days. The  contracting officer determined that Tano would only receive sixty-four of the requested 157 delay days. The contracting officer denied delay days for shipping, a refinery fire, rain, and a permitting period for an endangered species known as the reed warbler. DPW failed to rule on any of Tano’s claims for payment or requests for time delays in either 2002 or 2003. ¶8 That same month, Tano was in such a difficult financial position that it sold its 150 ton Hitachi crawler crane for $75,000 in order to pay its bills. It had bought the crane for $230,000. Tano hired an expert to appraise the crane, who concluded that it was actually worth $850,000. The expert based this valuation on a similar crane that was for sale in Japan for $350,000 combined with a cost of $500,000 to ship it to Saipan. The expert claimed that an increasing number of Chinese contractors were purchasing heavy equipment, and that the increase in the value was attributable to increased demand in China. In less than six months Tano again experienced serious cash flow problems and sold its automatic building machine (“ABM”) for $100,000. It had bought the machine for $175,000. Tano hired the same expert to appraise the equipment. Based on a survey, the expert determined that the “present value” of the ABM was $325,000, and that its “replacement value” was $500,000. ¶9 In November 2003, at a meeting between Tano, DPW, and other government officials, Tano requested, among other things, the release of its payment and performance bonds. DPW responded that it would look into the matter. At another meeting a month later, Tano again inquired about the bonds. The government responded that it forgot and would look into the procedure for releasing bonds. DPW never acted upon Tano’s request for the release of its bonds. Furthermore, the government never responded to the claims for payment and time delays. ¶ 10 Eight months later in July 2004, the contracting officer issued a “determination letter” specifying what sums were owed to Tano. The contracting officer determined that the contract price should be reduced by $418,617. After this deduction, the remaining amount owed was $49,303 plus $3,882.58 in interest. Since the school was completed, Tano maintained that DPW owed it $638,469.53 for the retention payment, the final progress payment, standby costs, and the water tank and pump. The contracting officer’s determination letter did not specifically address these items, the request for time delays, or the request that DPW release the construction bonds. ¶ 11 Tano disputed the determination letter a month later. It mailed DPW and Procurement a “dispute letter” in response to the determination letter specifying all of its claims. Tano argued that the government was attempting to close out the contract without addressing all of the claims it made since the school was completed. In November 2004, Tano again met with DPW and various government officials to discuss the dispute letter. While the government promised to address Tano’s claims, no action ever resulted from the meeting. A month later, DPW requested that Procurement hear the dispute. Tano joined DPW in this  request. Three months later, Procurement responded that it was unable to hear the dispute because of the limited resources at the office’s disposal. Procurement recommended arbitration. C. Procurement’s Involvement ¶ 12 In March 2005 Tano filed its initial complaint against DPW with the trial court. Both parties claimed that the other failed to meet the terms of the contract. DPW filed a motion to dismiss asserting that Tano failed to exhaust its administrative remedies pursuant to the Administrative Procedure Act. The trial court granted the motion and remanded the case to Procurement for an administrative decision. Procurement issued an administrative decision in June finding that Tano was entitled to: (1) a final progress payment of $113,089.32; (2) a retention payment of $227,830.53; (3) no standby costs; (4) a payment of $27,000 for the supply and installation of a water tank and pump; (5) none of the additional ninety-three delays days for shipping, weather, and wildlife permitting beyond the sixty-four delay days already granted for period of January 5, 2002 to March 10, 2002; and (6) a credit of 111 delays days related to the late hookup of utilities at the site from April 20, 2002 to August 9, 2002. Procurement also determined that Tano was liable for $60,000 in liquidated damages for forty unjustified days of delay at $1,500 a day. Tano was also subject to a deduction of $127,000 from the contract for collateral equipment not purchased. Procurement did not award any interest, but stated that the Federal Acquisition Regulations specified the correct interest rate. Procurement’s final judgment awarded Tano $367,000, with deductions of $187,000, for a total award of $180,000. D. Judicial Review of Procurement’s Decision ¶ 13 Tano next filed its First Amended Complaint (“amended complaint”) alleging (1) breach of contract, (2) breach of contract and review of administrative decision, and (3) breach of the covenant of good faith and fair dealing. Tano then sought to limit judicial review of Procurement’s decision to only those issues that Tano appealed in its amended complaint. Since DPW did not seek to appeal Procurement’s decision, the trial court granted Tano’s request. DPW did not object to the trial court exercising subject matter jurisdiction over the dispute. ¶ 14 Tano’s amended complaint was comprised of three counts. “Count I” sought compensation for the breach of the contract. Specifically, Tano sought to recover (1) $113,089.32 as the final progress payment, (2) $227,830.53 for the return of the retention payment, and (3) $27,000 for the water tank and pump. Tano also sought consequential damages stemming from the government’s failure to timely pay these amounts. ¶ 15 “Count II” also concerned breach of contract claims, but it sought to reverse alleged errors in Procurement’s decision. Specifically, Tano argued that (1) the failure to award $270,549.68 in standby costs was incorrect, (2) the ninety-three delay days were wrongfully denied, (3) the $60,000 in liquidated damages awarded to DPW was in error, (4) Procurement made a $919.85 mathematical error in DPW’s  favor, (5) Procurement incorrectly deducted $127,000 from the contract price, and (6) Procurement incorrectly denied Tano’s request for interest. Tano also sought consequential damages stemming from the government’s failure to timely pay these sums. ¶ 16 “Count III” alleged that the government breached the implied covenant of good faith and fair dealing that exists in every contract. Tano alleged that the government breached the covenant by (1) failing to close out the contract for two and a half years, (2) failing to respond to Tano’s claims for payment and time delays, (3) refusing to release Tano’s payment and performance bonds, and (4) breaking its promise to submit the dispute to binding arbitration. ¶ 17 Tano sought compensation for the sale of its Hitachi crawler crane and its ABM, and lost profits as consequential damages. Tano alleged it was unable to secure new construction jobs that it was well- suited to bid on because the government failed to pay it the outstanding amount due on the contract and release its performance and payment bonds. Without cash flow and the ability to become bonded, Tano could not secure any new projects. Tano provided a list of several construction projects that it would have bid on if it had been in a financial position to do so. Tano additionally requested an award for costs related to third-party lawsuits. Tano claimed that DPW’s failure to close-out the contract caused it to default on payments it owed to suppliers on contracts unrelated to the construction of Southern High School. E. The Trial Court’s Decision ¶ 18 The trial court awarded Tano: (1) interest for the $180,000 awarded by Procurement from December 23, 2002 until it received payment on August 25, 2005; (2) $127,000 that Procurement subtracted from the contract price; (3) $60,000 in liquidated damages that Procurement deducted from Tano’s award; (4) interest on the $127,000 and $60,000 sums above and interest on the $919.85 that Procurement incorrectly subtracted from the award; (5) consequential damages in the amount of $155,000 for the sale of the crane, $75,000 for the sale of the ABM, and $252,290 in lost profits; (6) $19,975.60 in standby costs for security guards and $13,282.41 in interest on that amount for a total of $33,259.01; and (7) damages for the breach of the implied covenant of good faith and fair dealing, but the damages awarded in the six counts above represented those damages, so no new amount was awarded in order to avoid a double award in Tano’s favor. The trial court found that the fifteen percent rate of interest from 4 CMC § 1817, which Tano suggested, was applicable to the contract. ¶ 19 Tano was not awarded the $11,000 it claimed in arbitration expenses. The court found that the breakdown of negotiations to enter into arbitration did not amount to a breach of the implied covenant of good faith and fair dealing. Tano was not awarded any costs associated with the third-party lawsuits either. The trial court found that the evidence did not sufficiently show a connection between the government’s failure to pay and Tano’s subsequent failure to pay its suppliers for other construction  projects. Tano was also not awarded standby costs other than for security guards. The trial court found that Tano did not put forth any evidence showing that it made a reasonable attempt to mitigate those losses. ¶ 20 The final judgment was issued in January 2008. The total amount of damages and pre-judgment interest totaled $900,436.54. In addition to the damages awarded from the October amended findings of fact, conclusions of law, and order, the final judgment awarded Tano: (1) $21,935.16 in litigation costs; (2) $919.85 that was erroneously dropped by Procurement in its award plus $478.57 in interest on that amount from December 23, 2002 through June 12, 2006; (3) $124,342.19 in interest on the $187,000 that was improperly deducted by Procurement for the period of December 23, 2002 through May 30, 2007; and (4) $72,147.92 in interest on the $180,000 that Procurement awarded Tano for the period of December 23, 2002 to August 25, 2005. ¶ 21 Both parties subsequently appealed the trial court’s decision. DPW first claims that there was no subject matter jurisdiction for the lower court to consider Counts I and III of Tano’s amended complaint.1 DPW appeals (1) the award of $230,000 for the sale of the equipment, (2) the award of $252,290 for lost profits, (3) the award of sixteen rain delay days, (4) the finding that it breached the implied covenant of good faith and fair dealing, and (5) the trial court’s decision to award interest, claiming that interest was not due because the sum was unascertainable, and in the alternative that if interest is due, that the wrong interest rate was applied to the awards. Tano appeals other aspects of the decision. Tano seeks to recover (1) $27,834.35 in costs related to its defense of third-party lawsuits, (2) $11,000 it spent in preparing arbitration documents, and (3) $215,400.14 in standby labor and equipment expenses. II A. Subject Matter Jurisdiction Concerning Counts I and III ¶ 22 DPW claims that the trial court lacked subject matter jurisdiction to hear Tano’s breach of contract and breach of the implied covenant of good faith and fair dealing claims.2 It asserts that these issues were not in the record that Procurement examined and that Procurement’s decision only concerned equitable adjustments to the contract. DPW does not argue, in the alternative, that if subject matter jurisdiction exists that a breach of contract was improperly found. It does challenge certain damage 1 DPW’s brief states that breach of contract damages could not be awarded because there was no subject matter jurisdiction. DPW fails to make an alternative argument for why it did not breach the contract if the Court finds that subject matter jurisdiction exists. DPW did make this type of alternative argument for the breach of the implied covenant of good faith and fair dealing claim. In the conclusion section of DPW’s sole brief, for the first and only time, it asks the Court to reverse the award of damages for the breach of contract. DPW failed to provide either Tano or this Court with an argument for why the trial court’s finding that a breach of contract occurred was incorrect. Without an explanation of why we should reverse the trial court, we are unable to address this issue. A conclusory sentence fragment in the conclusion section of a brief does not amount to a claim that this Court is capable of addressing. 2 These were respectively Counts I and III of Tano’s amended complaint.  awards stemming from the breach of contract claim. DPW appeals the finding of a breach of the implied covenant of good faith and fair dealing generally. The specific parts of Counts I and III are discussed later in this opinion. Presently, we must only determine if subject matter jurisdiction was properly exercised over these aspects of the case. Whether subject matter jurisdiction to hear and rule on Tano’s Counts I and III existed requires this Court to review the lower court’s review of an agency action. We review the trial court’s review of agency action de novo; in other words, we are not bound by the findings of the lower court when it reviewed the agency action. In re San Nicolas, 1 NMI 329, 333 (1990). ¶ 23 Pursuant to 1 CMC § 9112(b), “[a] person suffering legal wrong because of agency action, or adversely affected or aggrieved by agency action, is entitled to judicial review of the action within 30 days thereafter in the Commonwealth Superior Court.” Furthermore, agency action includes an agency’s failure to act. 1 CMC § 9101(c). Since an agency’s failure to act constitutes agency action for the purpose of judicial review, Procurement did not have to rule on a claim for Tano to seek judicial review of the decision; the claim only had to be before Procurement. If the breach of contract and the breach of the covenant of good faith and fair dealing claims were before Procurement, then Tano was entitled to seek judicial review of those issues. ¶ 24 Procurement heard the dispute in an atypical way because it was ordered to do so by writ of mandate. It had the record that was initially presented to the trial court for review. Tano’s initial complaint filed in March 2005, which laid out all of its grievances against DPW, including the breach of contract and breach of covenant of good faith and fair dealing, was sent to Procurement. Therefore, these claims were part of the record that Procurement reviewed. ¶ 25 In its decision, Procurement awarded sums for the final progress payment, the retention payment, and payment for the water tank and pump. Procurement additionally ruled on standby costs, a request for delay days stemming from weather, shipping, and wildlife permitting, and a request for delay days stemming from the permanent utility connections not being brought to the construction site. Procurement also deducted $187,000 from Tano’s final award for liquidated damages and collateral equipment. While Procurement did not explicitly state that it ruled on Tano’s breach of contract claims, its decision directly addressed those issues. The awards for the final progress payment, retention payment, and standby costs constitute awards stemming from the breach of contract claims. Procurement did not make any rulings that touched upon the breach of the covenant of good faith and fair dealing, but those claims were before Procurement, as they were contained in the initial complaint that was sent when it was ordered to hear the dispute. Therefore, the nature of the award further supports the conclusion that the record Procurement reviewed contained the breach of contract and breach of the implied covenant of good faith and fair dealing claims. ¶ 26 Procurement’s ruling also went beyond mere equitable adjustments to the contract. Equitable adjustments are changes made to a contract to reflect a change in the scope of the work performed. Here, the only equitable adjustment that Procurement made was awarding costs for the installation of the water tank and pump because that was the only work Tano performed that exceeded the scope of the contract. Procurement’s other findings all concerned aspects of the contract within the initial scope of work. Based upon the documents presented to Procurement, and in light of its findings, the breach of contract and breach of the covenant of good faith and fair dealing claims were before it for review, and the decision addressed more than equitable adjustment claims. Therefore, Tano legitimately sought judicial review of these issues. ¶ 27 DPW’s answer to Tano’s amended complaint also admitted that subject matter jurisdiction existed for both of these claims pursuant to 1 CMC § 9112(b). Appellee’s Excerpt of Record (“ER”) at 50. Since the government admitted that subject matter jurisdiction existed concerning these claims at the time, and the trial court agreed, the present allegations that Counts I and III were not a part of the record that Procurement used to issue its administrative determination is groundless. Subject matter jurisdiction was properly exercised for the breach of contract and breach of the covenant of good faith and fair dealing claims. B. Consequential Damages ¶ 28 DPW claims that Tano’s award of consequential damages for the sale of its equipment and for lost profits constitutes error. Tano argues that clear error was committed in not awarding it consequential damages for certain costs stemming from third-party lawsuits. ¶ 29 A damage award is a finding of fact, and it is reviewed under the clear error standard. Ito v. Macro Energy, Inc., 4 NMI 46, 54 (1993). A finding of fact is clearly erroneous only when the reviewing court is left with the definite and firm conviction that a mistake occurred. United States v. United States Gypsum Co., 333 U.S. 364, 395 (1948). If there are two permissible views of the evidence, the choice of one view over the other is not clearly erroneous. Anderson v. Bessemer City, 470 U.S. 564, 573 (1985). The trial court’s assessment of witness credibility can also almost never amount to clear error. Lac du Flambeau v. Stop Treaty Abuse-Wisconsin, Inc., 41 F.3d 1190, 1194 (7th Cir. 1994). Thus, we will not disturb a damage award simply because we would have awarded damages differently. Meader v. United States, 881 F.2d 1056, 1060 (11th Cir. 1989). ¶ 30 According to the Restatement (Second) of Contracts: Measure of Damages in General § 347: A party has a right to damages based on his expectation interest as measured by (a) the loss in the value to him of the other party's performance caused by its failure or deficiency, plus b) any other loss, including incidental or consequential loss, caused by the breach, less (c) any cost or other loss that he has avoided by not having to perform.  Comment a of Restatement § 347 notes that a party should receive damages that would place him or her in as good of a position as if the contract was carried out. This will be impossible sometimes, such as when the breaching party causes the non-breaching party to miss an invaluable opportunity. ¶ 31 Restatement (Second) of Contracts: Unforeseeability and Related Limitations on Damages § 351 states: (1) Damages are not recoverable for loss that the party in breach did not have reason to foresee as a probable result of the breach when the contract was made. (2) Loss may be foreseeable as a probable result of a breach because it follows from the breach (a) in the ordinary course of events, or (b) as a result of special circumstances, beyond the ordinary course of events, that the party in breach had reason to know. Comment b of Restatement § 351 points out that to the extent the loss occurs outside of the ordinary course of events, recovery is inappropriate unless it was foreseen by the party because of special circumstances that the party knew of at the time they entered into the contract. Freund v. Washington Square Press, Inc., 34 N.Y.2d 379, 420-21 (1974) summarizes these principles as follows: In other words, so far as possible, the law attempts to secure to the injured party the benefit of his bargain, subject to the limitations that the injury -- whether it be losses suffered or gains prevented -- was foreseeable, and that the amount of damages claimed be measurable with a reasonable degree of certainty and, of course, adequately proven. 1. The Third-Party Lawsuits ¶ 32 Tano seeks $27,834.35 in damages for costs it incurred in defending lawsuits brought against it by some of its suppliers. Tano seeks the interest on the judgments as well as attorney’s fees for the plaintiffs’ attorneys in those suits. Tano argues that DPW’s failure to close out the contract caused it to default on debts it owed to these third-parties, and as a result, incur additional expenses from defending against the lawsuits they brought. Tano’s evidence consisted of a spreadsheet listing each lawsuit filed against it with the amounts owed, and various complaints filed by third-parties seeking payment. Tano argues that, but for DPW’s failure to close out the contract, it would have had enough cash flow to pay these debts. ¶ 33 The trial court held that none of this evidence was sufficient to support a finding in Tano’s favor. It found that the spreadsheet listing all of the lawsuits inadequately justified an award. It also found that the complaints Tano filed as evidence did not link DPW’s default on the contract to its liability on the third-party lawsuits. None of the complaints explicitly or implicitly mentioned the contract. ¶ 34 The decision did not make an explicit statement that the third-party lawsuit damages were unforeseeable. Nevertheless, Tano’s evidence merely listed the third-party lawsuits and did not explain how or why these damages were foreseeable to DPW. Also, none of this evidence adequately proved DPW caused these losses. The evidence was essentially a summary of Tano’s legal bills stemming from  late payment on other construction contracts. Tano’s evidence inadequately proved that DPW should be held liable for these costs. Finding that Tano presented insufficient evidence to support an award of damages for its costs stemming from the third-party lawsuits was not clear error. 2. The Sale of the Equipment ¶ 35 The next question is whether the award of $230,000 in consequential damages for the sale of the crane and ABM was proper. DPW maintains that Tano sold the equipment because of its poor financial health generally, and not its failure to close out the contract with Tano. Tano argues that the only reason it sold the equipment was that it had to pay bills that would have been paid with the $367,919.85 it was owed by DPW. The trial court found that the government starved Tano for cash, and as a result, was forced to sell the equipment at prices that were far below the market value. In reaching this decision, Tano’s financial position in November 2002 and March 2003 was examined. The testimonies of Ackerman, and Tano’s president, Bracken, that Tano did not want to sell either its crane or ABM, and that it would like the equipment back, was also accepted as true. ¶ 36 There was nothing inappropriate about examining Tano’s financial position in November 2002 and March 2003 and coming to the conclusion that Tano’s was in dire financial straits because DPW owed it $367,919.85. Furthermore, we have no reason to question the testimony of Bracken and Ackerman. The evidence supports a finding that DPW’s failure to pay Tano caused it to sell its equipment, and that it was foreseeable to DPW that the failure to pay Tano such a large sum would force it to sell valuable assets in order to remain financially liquid. Therefore, the award of damages for the sale of the crane and ABM was not clear error. 3. Lost Profits ¶ 37 The final item of contested consequential damages is the $252,290 in lost profits. The trial court found it foreseeable that a company would be unable to bid on new projects if all of its payment and performance bonds were tied up with another project. As a result, the company would lose profits that it might otherwise earn. It found that this was the position Tano was in because the government did not release the bonds until 2005 when it was ordered to do so. It was therefore foreseeable to DPW that the failure to release Tano’s bonds would cause it to be unable to obtain new work. It also found that a construction company needs cash flow in order to bid on new construction projects. The trial court found that Tano’s cash flow was severely restricted because it was owed $367,919.85. It found that having such a large sum of money tied up would foreseeably result in Tano not being able to bid on new projects, and thus, the company would lose profits. ¶ 38 Additionally, it acknowledged that Tano was well-suited to bid on several construction projects during the years of 2002 to 2005. Tano presented evidence of many projects that were similar to projects it completed in the past. While the court stated that Tano would not have won all of the bids, it recognized  that Tano likely would have bid on and won some of the projects. It found that Tano’s evidence regarding lost profits was sufficient to award damages. As a result, Tano was awarded $252,290 in lost profits. ¶ 39 The record supports these findings. The Restatement (Second) of Contracts § 351(3) holds that “[a] court may limit damages for foreseeable loss by excluding recovery for loss of profits, by allowing recovery only for loss incurred in reliance, or otherwise if it concludes that in the circumstances justice so requires in order to avoid disproportionate compensation.” However, the record contained a significant amount of evidence that DPW’s conduct directly and undeniably precluded Tano from bidding on and likely winning contracts that it was well-suited to perform. DPW’s actions denied Tano necessary cash flow, and DPW tied up Tano’s bonds for years without cause. Furthermore, it is foreseeable that a construction company would be unable to secure new work due to such circumstances. This evidence satisfies the requirements for an award of lost profits. Therefore, we find that the award of lost profits in light of the combined effects of inadequate cash flow and an inability to obtain new bonds was not clear error. C. Breach of the Covenant of Good Faith and Fair Dealing ¶ 40 Whether the trial court improperly found that the government breached the implied covenant of good faith and fair dealing in the contract, and thereby caused Tano damage, is a mixed question of law and fact. This Court will review application of contract law, as it applies to the covenant of good faith and fair dealing, under the de novo standard of review and any findings based on extrinsic evidence under the clear error standard of review. Camacho v. L & T Int’l Corp., 4 NMI 323, 326 (1996). 1. The Proposed Arbitration ¶ 41 According to the Restatement (Second) of Contracts § 205, “[e]very contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.” Additionally, Comment c, entitled “Good Faith in Negotiation,” states that bad faith in negotiation is not within the purview of the section, and that “remedies for bad faith in the absence of [an] agreement are found in the law of torts or restitution.” Moreover, Steiner v. Ziegler-Tamura, Co., 138 Idaho 238, 242 (2002), held that “[t]he covenant requires the parties to perform, in good faith, the obligations required by their agreement, and a violation of the covenant occurs when either party violates, nullifies or significantly impairs any benefit of the contract.” In this instance, unlike Steiner and the Restatement, there was no contract. Thus, even if the government’s conduct amounted to bad faith, we will not provide Tano with monetary compensation because it brought suit under the incorrect legal theory. ¶ 42 By Tano’s own admission in its brief, there was no finalized agreement to arbitrate. Tano created the arbitration documents on the basis of a conversation and an informal agreement to enter into binding arbitration. Tano’s excerpts of record contained no documents that constitute a memorialization of this informal agreement. When the new assistant attorney general started his representation of DPW, he felt  that arbitration was not in the best interest of the Commonwealth. He was not under a contractual obligation to enter into arbitration. If Tano wanted to ensure that it would be compensated for its arbitration preparations should the government back out prematurely, it should have procured a formal arbitration agreement before expending money. ¶ 43 Additionally, Tano