The Court of Appeals for the Federal Circuit recently ruled in favor of a construction contractor appealing a Court of Federal Claims decision concerning claims arising from a $50 million U.S. Navy housing project. The key issue before the Federal Circuit was whether the trial court had applied the correct legal standard in deciding the contractor’s claim for breach of the implied duty of good faith and fair dealing. In a decision that should prove very helpful to contractors in future litigation, the Federal Circuit held that the trial court applied the wrong legal standard based on an “unduly narrow view” of the duty of good faith and fair dealing.
Like all contracts, federal contracts impose on each party a duty of good faith and fair dealing in the performance and enforcement of the contract. The implied duty is context-specific and depends in part on the terms of the contract. As the Federal Circuit explained:
In short, while the implied duty exists because it is rarely possible to anticipate in contract language every possible action or omission by a party that undermines the bargain, the nature of that bargain is central to keeping the duty focused on honoring the reasonable expectations created by the autonomous expressions of the contracting parties. (Internal quotations omitted.)
Based on a misreading of Federal Circuit precedent, the trial court held 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 “specifically designed to reappropriate the benefits [that the contractor] expected to obtain from the transaction, thereby abro- gating the government’s obligations under the contract.” (Emphasis added; internal quotations omitted.) The trial court further added that “incompetence and/or the failure to cooperate or accommodate a contractor’s request do not trigger the duty of good faith and fair dealing, unless the Government specifically targeted action to obtain the benefit of the contract or where Government actions were undertaken for the purpose of delaying or hampering performance of the contract.” (Emphasis added; internal quotations omitted.)
The Federal Circuit dismissed the trial court’s interpretation of the implied duty of good faith and fair dealing as too narrow. The Federal Circuit held that there is not a “specific-targeting requirement applicable across the board or in this case.” Instead, whether specific targeting is required for breach of the implied duty depends on the contract and circumstances at issue. This is because “the implied duty of good faith and fair dealing depends on the parties’ bargain in the particular contract at issue.” The Federal Circuit further held that a breach of the “implied duty of good faith and fair dealing does not require a violation of an express provision in the contract.”
Metcalf Constr. Co., Inc. v. United States, 2013-5041 (Fed. Cir. Feb. 11, 2014)