Recently, the Civilian Board of Contract Appeals (CBCA) held that a federal government contractor does not have to demonstrate that the government acted in bad faith in order to recover for a breach of the duty of good faith and fair dealing. See Sigma Servs., Inc. v. Department of Housing and Urban Development, CBCA No. 2704, 12-2 BCA ¶ 35,173.

One Sentence Takeaway

To recover for breach of the duty of good faith and fair dealing, a contractor need only show the other party acted with a lack of good faith – i.e. deprived the contractor of the fruits of the contract; bad faith is not required.

Background

Sigma Services, Inc. contracted with the Department of Housing and Urban Development to perform marketing and management services on HUD properties in Arizona, Nevada, and Idaho. The HUD properties consisted of two types: new acquisition properties and transition properties. When bidding the job, Sigma estimated that the transition properties were more profitable because they would require fewer services, thus resulting in lower costs. As HUD intended to award the contract to two different contractors, Sigma based its bid on an equal distribution of the property types between the two contractors.

Sigma and one other contractor were awarded indefinite quantity, fixed-unit rate contracts with a one year base followed by four option years. Each contract contained a 90-day transition period during which HUD evaluated each contractor’s performance. HUD then used this performance evaluation to divide the properties between the contractors. Despite HUD rating Sigma’s performance favorably, Sigma received fewer transition properties than the other contractor.

Sigma submitted a certified claim to the contracting officer for lost revenue and costs associated with HUD’s unequal transition property distribution. The contracting officer denied Sigma’s claim and Sigma filed an appeal. The appeal alleged HUD breached its contract with Sigma by breaching the implied duty of good faith and fair dealing. More specifically, Sigma argued that HUD breached the implied duty of good faith and fair dealing by refusing to respond to Sigma’s requests for its contractual share of the transition properties.

The CBCA’s Decision

On appeal, HUD moved to dismiss Sigma’s claim for breach of the implied duty of good faith and fair dealing because Sigma failed to allege bad faith. Sigma responded that it was unnecessary to allege bad faith in order to recover. Rather, Sigma only needed to allege that HUD acted with a lack of good faith.

The CBCA agreed with Sigma, first finding that the duty of good faith and fair dealing is inherent in every contract and then finding Sigma did not have to allege bad faith in order to recover. Instead of bad faith, the CBCA found that Sigma’s allegations of a lack of good faith met the pleading requirements for breach of the duty of good faith and fair dealing.

In reaching this decision, the CBCA distinguished between bad faith, which is a claim separate and apart from the breach of the duty of good faith and fair dealing, and claims based on a party’s lack of good faith. Simply put, allegations for the breach of the duty of good faith and fair dealing are premised on the opposing party denying the complaining party the fruits of the contract. Examples of such breaches include lack of diligence, negligence, or a failure to cooperate. Breaches of the duty of good faith and fair dealing may also result from a party’s subterfuges and evasion, even where party believes its conduct to be justified. In other words, a party’s intent does not necessarily govern whether the duty was breached. By contrast, bad faith is motivated by malice and does not necessarily deprive the complaining party of the fruits of the contract, but does require specific bad intent.

Accordingly, as Sigma met the standards for breach of the implied duty of good faith and fair dealing by pleading a lack of good faith, the CBCA denied HUD’s motion to dismiss.

Practical Implications

  • Implied in Every Contract – The duty of good faith and fair dealing is implied in every contract. Thus, this claim is potentially available each time a dispute arises over a contract subject to CBCA jurisdiction.
  • Lower Standard of Proof – To recover for breaches of this duty, a party need only show a lack of good faith. This is a substantially lower standard than establishing another party acted in bad faith as, generally, a party’s intent does not govern whether a breach occurred.

Conclusion

The Sigma Services decision illustrates an additional remedy available from the CBCA in situations where an express breach of the contract may not have occurred but where the government may nevertheless have deprived the contractor of the fruits of the contract. Due to the broad applicability of the breach of the duty of good faith and fair dealing, this duty acts as a catch-all claim for damages that might otherwise be difficult to categorize or recover. And, by holding bad faith is not required, the CBCA reiterated the broad applicability of the duty to contract claims.