That’s Not Fair! Implied Duty of Good Faith & Fair Dealing in Federal Construction Contracts
Date: September 22, 2016
A Compulsory Claim No More?
A mutual duty of good faith and fair dealing, which assumes that each party to a contract will act honorably and fairly during the performance of its respective promise, is implied in every contract in the U.S. legal system since at least the late 19th century. In construction projects, this duty is especially important, because concurrent performance, cooperation and diligence are critical to meeting contractual obligations. The duty’s use and application in disputes, however, has been interpreted and applied in different ways.
Because this duty is so important to a construction relationship, it is unsurprising that many disputes include a claim for its breach. Federal construction project claims are no different. But courts’ analysis and application of the duty differ with the myriad facts and circumstances of each contract. In 2010, the U.S. Court of Appeals for the Federal Circuit set a rigorous standard for when a duty of good faith and fair dealing claim is triggered in government contracts with its decision in Precision Pine & Timber, Inc. v. United States, 596 F.3d 817 (Fed. Cir. 2010). In Precision Pine, the court held that the duty is breached when “the government enters into a contract that awards a significant benefit in exchange for consideration [and then] eliminates or rescinds that contractual provision or benefit through a subsequent action directed at the existing contract.” Id. at 829 (citations omitted). Put more succinctly, whether “government action is specifically designed to reappropriate the benefits the other party expected to obtain from the transaction, thereby abrogating the government’s obligations under the contract” is the proper analysis. Id. (citations omitted).
Revisiting the Hard-to-Prove Precision Pine Standard
In 2014, the U.S. Court of Appeals for the Federal Circuit again reviewed the implied duty of good faith and fair dealing in Metcalf Constr. Co. v. United States, 742 F.3d 984, 991 (Fed. Cir. 2014). In Metcalf, the U.S. Navy put out to bid a design-build project for housing units at a Marine Corps base on the island of Oahu, Hawaii. Prior to bidding, the government provided soil reports to contractors but required that each contractor conduct further site investigation on its own. However, in a written publication, the government also explained that differing soil conditions would be dealt with via change order and that while the site contained a contaminant called Chlordane, remediation was not necessary.
After winning the contract, Metcalf Construction Company’s site analysis revealed expansive soils that significantly differed from the government reports. Metcalf removed the native soil at an additional cost without a contract modification and in the process, also found Chlordane contamination to be at a level higher than the government had reported. Metcalf later stopped its soil removal operation and, instead, began post-tensioning concrete to deal with the expansive soils. The government agreed to amend Metcalf’s contract to approve post-tensioning, but did not agree to an increase in cost.
After completing the project several months past its deadline, Metcalf sued for damages, arguing that the government breached its duty of good faith and fair dealing when it refused to accept contract modifications for expansive and contaminated soils. The trial court disagreed and rejected the bulk of Metcalf’s claim for damages, finding that the government had not specifically targeted and reappropriated Metcalf’s benefit of the bargain as required under Precision Pine. On review, the Court of Appeals overturned the trial court, finding that Precision Pine “does not impose a specific-targeting requirement applicable across the board or in this case.” Metcalf, 742 F.3d at 993. The Court of Appeals refocused the duty analysis on the contract terms and the parties’ actions, holding that “(t)he implied duty of good faith and fair dealing is limited by the original bargain: it prevents a party’s acts or omissions that, though not proscribed by the contract expressly, are inconsistent with the contract’s purpose and deprive the other party of the contemplated value.” Id. at 991 (citation omitted).
Is Metcalf the Standard?
Since Metcalf, the U.S. Court of Federal Claims has again considered a duty of good faith and fair dealing claim in Weston/Bean Joint Venture v. United States, 123 Fed. Cl. 341, 385 (2015). In Weston/Bean, a joint venture (WBJV) began dredging the Miami River for the Army Corps of Engineers (Corps) on September 30, 2004. The Corps’ contract with WBJV included one area of dredging, as well as 14 other optional areas (Acceptance Sections) that the Corps could choose to add to the scope of work. The Corps also had the right to suspend work to account for fluctuations in federal appropriations. By late 2005, WBJV had dredged Acceptance Sections 1-6, and the Corps stopped authorizing additional sections. As a result, WBJV demobilized and shipped some of its equipment to Europe. However, WBJV’s contract also included a provision requiring it to remobilize within 60 days of the Corps exercising an option for an additional Acceptance Section. Two years later, the Corps did exercise additional Acceptance Sections. In response, WBJV requested a 120-day extension to its 60-day deadline due to structural problems at the site and site permitting issues, which the Corps rejected. WBJV did not resume dredging operations until 210 days after the 60-day remobilization date had passed.
In court, among other arguments, WBJV claimed that the Corps breached its duty of good faith and fair dealing when it “issued unrealistic remobilization orders and steadfastly refused to grant [WBJV’s] request for an extension of time to remobilize.” Id. The court disagreed, and relied once more on the holding in Precision Pine left untouched by the Metcalf decision, noting “the implied duty of good faith and fair dealing cannot expand a party’s contractual duties beyond those in the express contract or create duties inconsistent with the contract’s provisions.” Id., citing Precision Pine, F.3d at 831. “Imposing a duty on the Corps that it waive the 60 day remobilization period based on WBJV’s asserted difficulties meeting that deadline would be contrary to the express provisions of the contract, which provide no right to such a waiver and impose an absolute obligation on WBJV to remobilize.” Id. at 385.
When to Make the Claim
These three cases have winnowed the standard for a duty of good faith and fair dealing claim in government construction contracting cases and offer guidance for sound contracting practices and when to bring a claim for breach of the duty. When forming the contract, consider the importance of clearly expressing the terms of the deal so they are easy to follow and enforce. When performing under the contract, stick to the bargain. If one party refuses to act in accordance with the agreement, the duty of good faith and fair dealing is an available remedy. To pursue that remedy, expect that the express terms and conditions of the agreement will control. A party’s refusal to relax or disregard those terms is not a violation of the duty on its face. The body of law that circumscribes the duty of good faith and fair dealing focuses a court’s inquiry on whether a party to an agreement acted or failed to act in a way that undermined the terms or nature of that party’s promise; the law does not afford an aggrieved party the opportunity to rewrite the terms of a deal that turned out to be unfair.
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