Construction and Procurement Law News, Q3 2019

The Armed Services Board of Contract Appeals’ recent decision in Appeal of Watts Constructors, LLC gave life to a contractor’s claim that the government violated its implied duty of good faith and fair dealing. Under a contract awarded by the U.S. Army Corps of Engineers, Watts Constructors, LLC (“Watts”) was required to complete construction at Fort Carson, Colorado by November 22, 2016. Watts failed to achieve completion by this date, and the parties ultimately agreed to modify the contract to establish December 21, 2017 as the new contract completion date. In doing so, the modification stated that the Government allowed continued performance without waiving its rights, “including the right to assess liquidated damages until contract completion.”

On September 20, 2017, the contracting officer sent Watts a cure notice based on its overall lack of progress and failure to maintain project milestones. On September 30, Watts responded that it would not complete the project until May 25, 2018. On December 20, 2017, the contracting officer notified Watt’s surety that a termination for default appeared imminent. Watts failed to complete the project by December 21, but continued working. During a January meeting, the Government agreed to review a resource-loaded schedule showing how Watts planned to complete construction by May 25. Watts submitted this proposed schedule on January 24.

On January 30, the contracting officer terminated the contractor for default after concluding that Watts’ delay in completion did not arise from unforeseeable causes beyond Watts’ control and without the fault of Watts and its subcontractors. She also rejected the January 24 schedule because she found it was not fully resource loaded, inaccurately listed activities as complete, forecasted durations for tasks that were unrealistic, and failed to provide for the correction of deficiencies.

Watts appealed the termination for default on five grounds, two of which implicate the government’s implied duty of good faith and fair dealing. First, Watts argued that the government breached its duty because the contracting officer abused her discretion and was improperly influenced by the government’s quality assurance representative’s animus toward Watts. Second, Watts alleged that the government breached its duty by over-inspecting Watts’ work.

As an initial matter, the Board rejected the Government’s motion to dismiss both claims due to Watts’ failure to submit them to the contracting officer as “claims.” The Board found that an affirmative defense to a termination for default is not a claim that must be submitted to the contracting officer.

Watts’ first good faith and fair dealing allegation was that the Government’s quality assurance representative (“QAR”) made offensive comments about Watts and its employees, excluded Watts from meetings, and refused to allow Watts to document project information in accordance with its preferred practices. Watts claimed that this conduct demonstrated “animus, improper motive, and an intent to harm Watts, reflecting an abuse of discretion in terminating the contract that breached the implied duty of good faith and fair dealing.” The Board rejected this argument and found that there were no allegations that the contracting officer was influenced by the QAR. Although the QAR’s conduct may have been unpleasant, it was not an abuse of discretion by the contracting officer in terminating the contract for default.

However, the Board did find that the QAR’s interference with Watts’ work, over-inspection of waterproofing, lathe and finish work, and slow, repetitive and redundant inspections did indicate a need for more factual development of Watts’ fifth claim, which precluded summary judgment. In addition to the negative comments, Watts presented evidence that the QAR made Watts scrape glue resin without justification, clean out and brush the interior of an electrical box, and paint wires. The QAR even directed the work of subcontractors without Watts’ knowledge and performed multiple inspections of the same work.

The Board observed that ‘“confusing and vacillating’ inspections, ‘multiple inspections to differing standards,’ or ‘arbitrary and capricious’ inspections leading to additional ‘work not required by the contract,’ have established a basis for contractual recovery under a constructive change theory.” Accordingly, the Board determined that Watts presented adequate evidence of “interference, slow, redundant, and multiple inspections” and denied the Government’s motion for summary judgment on Watts’ fifth claim.

An analysis of whether a breach of the implied duty of good faith and fair dealing has occurred often turns on an intensive factual analysis. As the Court of Appeals for the Federal Circuit explained in the seminal Metcalf Constr. Co., Inc. v. U.S. case (in which a team of Bradley lawyers represented the contractor against the Government), “[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 other party regarding the fruits of the contract.” The Watts Constructors decision demonstrates how important it is to document the day-to-day events that occur over the course of a project that provide evidence of interference or of destruction of reasonable expectations by another party. Here, Watts’ evidence regarding over-inspection was sufficient to form the basis for a breach of the duty of good faith and fair dealing claim against the Government.