Like all contracting parties, the Government is bound by an implied duty of good faith and fair dealing in all of its contracts, and contractors commonly rely on this implied duty as a basis for seeking compensation where the Government somehow hinders successful contract performance without actually breaching an express contract provision.  The Federal Circuit’s recent decision in Metcalf Construction Co., Inc. v. United States (Feb. 11, 2014) vacated an earlier Court of Federal Claims (COFC) ruling that could have significantly narrowed a contractor’s ability to prove a breach of this implied duty by requiring the contractor prove that the Government took a “specifically targeted” action as part of the breach of the duty.  In rejecting the lower court’s narrow view of the duty of good faith and fair dealing, the Federal Circuit preserved an important mechanism for contractors to obtain relief when the Government’s actions (or inactions) prevent the contractor from successfully performing a contract.

In Metcalf, the contractor brought a claim for increased costs on a U.S. Navy construction project caused by differing soil conditions necessitating additional excavation, more expensive building materials, and unforeseen environmental remediation work.  After the contracting officer denied the certified claim, the contractor appealed to the COFC and argued that the Navy breached the contract and the duty of good faith and fair dealing.  The Navy counter-claimed for liquidated delay damages.  The COFC denied the appeal in large part, holding that the Navy did not breach the contract or the duty of good faith and fair dealing and granting the Navy’s request for liquidated damages.  In ruling on the duty of good faith, the court relied on the Federal Circuit’s prior ruling in Precision Pine & Timber, Inc. v. United States to hold that a failure to cooperate did not violate the duty of good faith unless the Government took “specifically targeted” action to obtain the benefit of the contract or hamper contract performance.

On appeal, the Federal Circuit vacated the lower court’s decision, holding in part that the COFC relied upon an incorrect standard for evaluating breach of the duty of good faith and fair dealing.  The Federal Circuit held that the COFC misread the standard stated in Precision Pine to require that “a breach of the duty of good faith and fair dealing claim against the Government can only be established by a showing that [the government action was] ‘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.’”

The Federal Circuit rejected the lower court’s narrow interpretation ofPrecision Pine, and instead held that there is no “specifically-targeting” action prerequisite establishing breach of the duty of good faith and fair dealing.  The court ruled that while “specifically-targeted” action may result in liability for breach of the duty, such targeted action was not required to result in liability.  Instead, the Federal Circuit remanded for reconsideration using the broader standard for the duty of good faith and fair dealing as established in prior case law, such as Centex Corp. v. United States, which held that the parties have a general “duty not to act so as to destroy the reasonable expectations of the other party regarding the fruits of the contract.” 

Although it remains to be seen how the COFC will apply the standard stated by the Federal Circuit, it is clear that the Government can violate the duty of good faith and fair dealing without any “specifically-targeted” action, as would have been required if the COFC decision had been allowed to stand.  This decision is welcome news for contractors as it clearly recognizes their ability to seek damages for the Government’s failure to cooperate.