Until recently, federal contractors and their attorneys were hollering foul following a U.S. Court of Federal Claims decision in 2011 which held that contractors on federal construction projects must show that the government took action “specifically designed” to take advantage of the contractor in order for the contractor to prove that the government breached the duty of good faith and fair dealing.
But first, what is the duty of good faith and fair dealing?
The duty of good faith and fair dealing is a legal obligation implied in all contracts and is recognized by federal courts as well as most state courts including courts in California. Although difficult to define with precision, as one California court has stated, “[t]here is an implied covenant of good faith and fair dealing in every contract that neither party will do anything which will injure the rights of the other to receive the benefits of the agreement.”
In Metcalf Construction Company, Inc. v. U.S., the U.S. Court of Federal Claims held that in order to prove that the federal government breached the duty of good faith and fair dealing that a contractor must show that the federal government’s action was specifically targeted to frustrate the ability of the contractor to obtain the benefits of the contract. However, on appeal, to the relief of federal contractors and their attorneys, in Metcalf Construction Company, Inc. v. U.S., 742 F.3d 984 (February 11, 2014), the U.S. Court of Appeals for the Federal Circuit reversed the Court of Federal Claims holding that proof of specific targeting is not required to prove breach of the duty of good faith and fair dealing on federal projects.
The U.S. Court of Federal Claims decision involved a $50 million military housing project at Kanoeohe Bay in Oahu. In 2002, Metcalf Construction Company, Inc. (“Metcalf”) was awarded a design-build contract by the U.S. Navy (“Navy”) to build 212 housing units at the base.
In its request for proposals, the Navy furnished bidders with a “soils reconnaissance report” which indicated that the soils had a “slight expansion potential” but warned that it was “for preliminary information only.” On this particular project, the characteristics of the soil was important because expansive soils swell when wet, which can lead to cracks in concrete foundations and other damage which can affect the cost of construction.
After being awarded the contract, and pursuant to the terms of the design-build contract which required the contractor to conduct its own independent soil investigation, Metcalf hired a soils consultant who found that the soil’s swelling potential was “moderate to high” rather than “slight” as indicated in the Navy’s pre-bid soils reconnaissance report. Metcalf informed the Navy of its consultant’s findings and its recommended course of action.
By mid-2004, Metcalf, concerned with the project schedule and still waiting for the Navy to approve its consultant’s recommended course of action, began over-excavating the soil and replacing it with non-expansive fill although it had not yet received a change order from the Navy. In August 2004, the Navy notified Metcalf that there were no material differences between the pre-bid and post-bid soil assessments and that no additional compensation would be approved. By then, however, Metcalf had already poured millions of dollars into the project addressing the expansive soil problem and was already 200 days behind schedule.
The Federal Circuit Decision
In 2007, Metcalf filed suit in the U.S. Court of Federal Claims arguing that it had incurred $4.8 million in additional costs due to the expansive soil problem and the Navy cross-claimed for liquidated damages on the ground that Metcalf had not timely completed the project.
Metcalf argued before the trial court that the Navy breached the duty of good faith and fair dealing implied in contracts by failing to consider in good faith Metcalf’s post-bid soil assessment and to fairly compensate Metcalf for its additional costs related to the unforeseen site conditions.
However, the trial court ruled against Metcalf, holding that “a breach of the duty of good faith and fair dealing claim against the Government can only be established by showing that it ‘specifically designed to reappropriate the benefits [that] the other party expected to obtain from the transaction, thereby abrogating the government’s obligations under the contract.'” (emphasis in original).
In other words, when making a breach of duty of good faith and fair dealing claim against the federal government, the burden is on the claimant to show that the federal government’s action was specifically targeted to take advantage of the other party to the contract. Federal contractors and their attorneys were up in arms.
The Federal Circuit Court of Appeals Decision
Fast forward three years (appeals can take awhile). On appeal, the U.S. Court of Appeals for the Federal Circuit found that the trial court’s view of the duty of good faith and fair dealing was too narrow and that “specific targeting is not a general requirement” necessary to prove a breach of duty of good faith and fair dealing claim. Moreover, explained the Court, the duty of good faith and fair dealing does not require that the government have violated “an express provision in the contract.” (emphasis in original).
Rather, the Court explained, “[t]he covenant of good faith and fair dealing . . . imposes obligations on both contracting parties that include the duty not to interfere with the other party’s performance and not to act so as to destroy the reasonable expectations of the party regarding the fruits of the contract.” (emphasis in original). “Both the duty not to hinder and the duty to cooperate are aspects of the implied duty of good faith and fair dealing.”
Applied to the case, the Court explained that because the pre-bid soils reconnaissance report was expressly stated to be “for preliminary information only,” and that because the contract itself required that Metcalf conduct an independent soil analysis, Metcalf “did not bear the risk of significant errors in the pre-contract assertions by the government about the subsurface site conditions.”
The Metcalf decision clarifies what many contractors considered to be an overly restrictive view of good faith and fair dealing claims on federal projects and clarifies that proof of specific targeting by the federal government is not required.