In a welcome decision for federal contractors, the U.S. Court of Appeals for the Federal Circuit recently narrowed the application of the rigorous standard it had adopted for demonstrating breaches of the implied duty of good faith and fair dealing in Metcalf Construction Company v. United States, 742 F.3d 984 (2014).

The implied covenant of good faith and fair dealing is inherent in every contract and imposes a duty on each party 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.” Centex Corp. v. United States, 395 F.3d 1283, 1304 (Fed. Cir. 2005). Traditionally, the Federal Circuit applied a “reasonableness” standard to determine whether the government had breached the duty of good faith and fair dealing. Under this standard, a contractor was required to demonstrate that the government’s actions were unreasonable based on the context of the contract and its surrounding circumstances. See Scott Timber Co. v. United States, 333 F.3d 1358 (Fed. Cir. 2003).

However, the Federal Circuit articulated a new test in Precision Pine & Timber, Inc. v. United States, stating that a breach of the duty occurs when the government’s actions “specifically targeted” the contractor and “reappropriated[d] any ‘benefit’ guaranteed by the contracts.” 596 F.3d 817, 829 (Fed. Cir. 2010). The Federal Circuit’s adoption of the “specifically-targeted” standard created confusion as to the validity of the prior “reasonableness” standard and made it very difficult for government contractors to demonstrate that the government had breached the implied duty of good faith and fair dealing.

In the wake of Precision Pine, judges from the U.S. Court of Federal Claims have applied both tests. See, e.g., D’Andrea Bros. LLC v. United States, 109 Fed. Cl. 243, 256 n.11 (2013) (applying the “reasonableness” standard to plaintiff’s claim for breach of the implied covenant of good faith and fair dealing inherent in a Cooperative Research and Development Agreement that granted plaintiff an exclusive license to use the Army’s HooAH! trademark for sales of energy bars);Westlands Water District v. United States, 109 Fed. Cl. 177, 204 (2013) (applying the “specifically targeted” standard to plaintiff’s claim that the Government breached the alleged implied duty inherent in water services contracts by failing to provide drainage for the Westlands Water District).

In 2012, the Federal Circuit had the opportunity to clarify the applicable standard in Scott Timber Co. v. United States, but it refrained from rejecting either test, concluding that they “are easily reconcilable” and “not inconsistent.” 692 F.3d 1365, 1375 (2012). Finally, in Metcalf, the Federal Circuit clarified the limits of Precision Pine. The Circuit Court vacated the U.S. Court of Federal Claims’ judgment on liability, which applied the Precision Pine standard to plaintiff’s claim that the Government breached the implied duty of good faith and fair dealing under a contract to build military housing, and the damages award. The Circuit Court concluded that Precision Pine “does not impose a specific-targeting requirement applicable across the board or in this case” and that the case “does not purport to define the scope of good-faith-and-fair-dealing claims for all cases, let alone alter earlier standards.” Id. at 993. Rather, the specific-targeting standard applies when the challenged Government conduct “occur[s] in implementing a separate government authority and duty independent of the contract . . . .” Id. Because the plaintiff’s claim in Metcalf did not arise in such “dual-authority circumstances,” the Court found that the trial court erred in applying Precision Pine. Id. Consequently, the court vacated the trial court’s decision and remanded for application of the general broader standards for breach of the duty of good faith and fair dealing articulated in Centex and Malone. Id. at 997.

Whether the Federal Circuit adheres to the reasoning in Metcalf and how the Court of Federal Claims interprets this case in future decisions remains to be seen. Certainly, Precision Pine remains good law. Indeed, the Federal Circuit has already applied the specifically-targeted test following Metcalf in Century Exploration New Orleans, LLC v. United States, 2014WL 982762, at *10 (Fed. Cir. Mar. 14, 2014). However, by delineating the parameters of Precision Pine, Metcalf represents, at a minimum, a step in the right direction for federal contractors.