Introduction

Part one of this article, featured in the Spring 2013 newsletter, presented decisions holding the Federal Government accountable for failing to conduct itself in accordance with its duty of good faith and fair dealing. Particular emphasis was placed on the doctrine as it applies in the administration of contracts and in the claims process.  As the previous edition addressed, the duty of good faith and fair dealing is an implied term found in every contract, public or private.  See Precision Pine & Timber, Inc. v. United States, 596 F.3d 817, 828 (Fed. Cir. 2010).  Among the obligations found under the umbrella of good faith and fair dealing are the duties to act with honesty, to cooperate by not hindering or interfering with its counterpart’s performance, and to not willfully render imperfect performance of contractual obligations. See Malone v. United States, 849 F.2d 1441, 1445 (Fed. Cir. 1988); White Buffalo Constr., Inc. v. United States, 101 Fed. Cl. 1 (2011).  Our first installment also highlighted the significant consequences attached to a finding that the Government has transgressed its duty of good faith by considering remedies that courts have awarded to contractors.

In this follow-up piece, we examine the extent of the Government’s accountability under the doctrine of good faith and fair dealing.  Integral to the question of accountability is a consideration of the evidentiary standards applied to contractor claims that the Government has failed to administer its contracts in accordance with the strictures of good faith and fair dealing.  Government officials had long enjoyed a presumption that they performed their duties in good faith.  Proving that a government official did not act in good faith was often said to require “well-nigh irrefragable proof” of a specific intent to injure the contractor.  In recent years, however, courts have confronted the question of whether it is always appropriate for government officials to enjoy the protection of rigorous standards of proof in claims challenging the Government’s actions under the doctrine of good faith and fair dealing.  The modern trend in the law is to no longer presume that Government officials act in good faith when administering a contract.

The Government No Longer Enjoys A Blanket Presumption Of Good Faith And Fair Dealing When Administering Construction Contracts

Marking a departure from a blanket protection, many courts have more recently concluded that the presumption of good faith should not apply in all instances when Government officials interact with private parties.  Courts had long applied a presumption that Government officials acted “conscientiously and in good faith in the discharge of their duties” in any matter calling their actions into question. Libertatia Assocs., Inc. v. United States, 46 Fed. Cl. 702, 706 (2000) (citing Spezzaferro v. Federal Aviation Admin., 807 F.2d 169, 176 (Fed. Cir. 1986)); Knotts v. United States, 492 F. Supp. 630 (Ct. Cl. 1954).  Overcoming this presumption necessitated “well-nigh irrefragable proof” of animus on the part of the Government or a specific intent to injure the contractor.  See, e.g., Kalvar Corp. v. United States, 543 F.2d 1298 (Ct. Cl. 1976); Librach v. United States, 147 Ct. Cl. 605 (1959); Slattery v. United States, 46 Fed. Cl. 402, 405 (2000).  Since the early 2000s, however, a number of decisions in the Federal Circuit have questioned whether Government officials will always be entitled to a presumption of good faith, and whether “well-nigh irrefragable proof” is the proper benchmark for overcoming the presumption when it is applicable.  After a decade of cases addressing this issue, a majority of courts have maintained that Government officials will not be presumed to act in good faith when performing their contract administration responsibilities.  No longer permitting the Government to stand behind the shield of the good faith presumption, courts also have “leveled the playing field” between the Government and private contracting parties by considering the evidence of the Government’s lack of good faith under a “preponderance of the evidence” test.

Early Indicators That The Presumption Of Good Faith Would No Longer Be Applied In Cases Challenging Government Conduct When Administering Contracts

In the early 2000s, the Court of Federal Claims issued two opinions that signaled the shifting views of courts regarding the Government’s accountability when considering claims that the Government breached the duty of good faith and fair dealing.  In Libertatia Assocs., Inc. v. United States, 46 Fed. Cl. 702, 706 (2000) and Abcon Assocs., Inc. v. United States, 49 Fed. Cl. 678 (2001), separate judges in the Court of Federal Claims adopted the view that the “well-nigh irrefragable proof” standard was not the appropriate burden of proof to impose on contractors in all circumstances where a lack of good faith is alleged.  Instead, these cases present the courts’ understanding that the Government may be held liable for a breach of the duty of good faith without the contractor having to present “irrefragable proof” of bad faith.

In the 2000 Libertatia Assocs. decision, the Court of Federal Claims questioned whether contractors should be held to the “well-nigh irrefragable proof” standard because it had become an almost impossible burden of proof for a contractor to meet.  The court viewed the “irrefragable proof” standard as “exceed[ing] even the certainty required by proof ‘beyond a reasonable doubt,’ the higher standard used in criminal proceedings.”  Id.  When exploring the bounds of the “irrefragable proof” standard, the court concluded that requiring such a high burden of proof to overcome the presumption of good faith unfairly shielded the Government from liability, stating:

Applying the standard of “irrefragable proof” meaning “impossible to refute” would appear to insulate government action from any review by courts – no matter how egregious.  Such an absolute standard would not serve the interests of justice between the government and its citizens.  The courts are certainly not called on to allow government actors to treat contractors with bad faith or a specific intent to injure in any case where the bad faith is not, in effect, admitted by the government.  (Emphasis in original).

The court then reached its decision that the Government acted in bad faith based upon a lesser standard of proof, one that required only “adequate evidence of some specific intent to injure the plaintiff…” (emphasis added).

Having been shaken at its core, the Government’s presumption of good faith and fair dealing began to further crumble.  Following Libertatia Assocs., the Court of Federal Claims in Abcon Assocs. declined to apply the “well-nigh irrefragable proof” standard to a contractor’s claim that its default should be overturned because of the Government’s breach of the duty of good faith and fair dealing.  The contractor alleged that the Government’s assessment of liquidated damages and failure to negotiate or pay requests for equitable adjustments amounted to a material breach of the contract and caused the contractor’s default. The court explained that “irrefragable proof” was not required in that circumstance because the theory of the contractor’s challenge was not that the termination decision was made in bad faith.  Rather, in assessing the proper burden of proof to be applied, the court focused on whether the Government failed to administer the contract properly, stating that “the implied duties of good faith, fair dealing, and cooperation can be breached by a failure of a government agency to negotiate and make payment, and a showing of bad faith is not required.”  As a result, the court analyzed the contractor’s evidence of the duty of good faith and fair dealing under the same standard that applies to any alleged breach of contract – the preponderance of the evidence standard.

The Federal Circuit’s Am-Pro Decision In 2002 Considered The Burden Of Proof For Finding The Government In Breach Of Its Duty Of Good Faith And Fair Dealing And Required “Clear And Convincing Evidence”

In a landmark decision one year after Abcon, the Court of Appeals for the Federal Circuit in Am-Pro Protective Agency, Inc. v. United States, 281 F.3d 1234 (Fed. Cir. 2002) reassessed the “irrefragable proof” standard and how it aligned with contemporary burdens of proof.  In the Am-Pro case, a contractor providing security guard services to the Department of State under an option contract alleged that it had withdrawn claims for extra compensation from a prior contract under duress from the contracting officer.  The contractor alleged that the contracting officer threatened to outright deny its claims and terminate further contract options to protect her interpretation of the contract’s payment terms.  The Court of Federal Claims below granted the Government summary judgment, reasoning that the contractor’s evidence of duress was insufficient to overcome the presumption that the contracting officer carried out her duties in good faith.

Recognizing the confusion stemming from the “irrefragable proof” standard, the Federal Circuit on appeal attempted to simplify the burden of proof necessary to overcome the presumption afforded to Government actors by referring to the burdens of proof generally recognized by modern courts.  The Federal Circuit concluded that, given the traditionally “high hurdle for a challenger seeking to prove that a government official acted in bad faith,” the “well-nigh irrefragable proof” standard equated with the “clear and convincing” evidence standard.  The Am-Pro court described the “clear and convincing evidence” standard as “a somewhat lighter burden than that imposed by requiring proof beyond a reasonable doubt … [It is] evidence which produces in the mind of the trier of fact an abiding conviction that the truth of a factual contention is highly probable.”  Thus, the holding in Am-Pro that “clear and convincing” evidence was the proper standard for negating the presumption of good faith squarely addressed the concern of the Court of Federal Claims in Libertatia — specifically, whether the Government could be shielded from liability by a burden of proof that exceeded the “beyond a reasonable doubt” standard applicable in criminal actions.

The Am-Pro court’s reasoning also indicated that the presumption of good faith may only apply to limited Government functions. The Federal Circuit in Am-Pro reaffirmed that a doctrine affording government officials a presumption that they acted in good faith would adhere in government contracts law.  Yet, the Federal Circuit’s opinion appeared to qualify the good faith presumption by adding the proviso that it was a strong presumption, “at least insofar as it arises in the context of quasi-criminal wrongdoing by government officials acting in the course of their public duties.”  Further, in declining to adopt the “preponderance of the evidence” standard as the evidentiary burden for overcoming the presumption, the court explained that a more stringent burden of proof is necessary because the presumption of good faith “applies only in the situation where a government official allegedly engaged in fraud or in some other quasi-criminal wrongdoing.”

The Court Of Federal Claims In Tecom Holds That Government Officials Are Not Afforded A Presumption Of Good Faith When Administering A Contract

Although the Am-Pro decision clarified the burden of proof for overcoming the presumption of good faith, the Federal Circuit left indications that courts were not to apply the presumption in all circumstances where a lack of good faith is alleged.  The Federal Circuit’s discussion of the good faith presumption inAm-Pro led many lower courts to conclude that government officials are not to be afforded the presumption of good faith in the performance of obligations incident to contract administration.  In addition, a number of courts after Am-Pro have stated that a claim the Government breached the covenant of good faith and fair dealing is not subject to any heightened burden of proof, but rather the “preponderance of the evidence” standard.

In Tecom, Inc. v. United States, 66 Fed. Cl. 736 (2005), a judge in the Court of Federal Claims interpretedAm-Pro as endorsing a limitation on the circumstances when courts should presume government officials have acted in good faith.  The court in Tecom reasoned that the nature of the particular misconduct alleged to have been performed by the government official determines whether the presumption applies.  Similarly, the degree to which the Government benefitted from a presumption of good faith would also vary and determine the evidentiary burden necessary to overcome that presumption.   The court considered three separate theories challenging the Government’s conduct: (1) fraud or quasi-criminal wrongdoing in the exercise of official duties; (2) a lack of good faith when employing discretion granted formally by law, regulation, or contract; and (3) wrongful actions taken by any party to a contract.  For each circumstance, the court addressed whether, and to what extent, the presumption of good faith applies, and what burden of proof the contractor must satisfy in order to prevail on its claim.  The following chart summarizes the court’s conclusions

The Court of Federal Claims’ Analysis in Tecom of the Legal StandardsApplicable to the Duty of Good Faith and Fair Dealing
Nature of Allegation Against Government OfficialsWhether Presumption of Good Faith AppliesBurden of Proof Needed to Overcome the Presumption
Fraud or quasi-criminal wrongdoingStrong presumption of good faith conductRebutted by clear and convincing evidence
Lack of good faith when employing discretion in formal official actsStrong presumption of good faith conductOvercome by a lack of substantial evidence or gross error in decision-making
Breach of the covenant of good faith and fair dealing implied in contractsNo presumption of good faith conductPreponderance of the evidence showing unreasonableness under the circumstances

The Tecom court concluded that claims of a breach of the duty of good faith and fair dealing implied in contracts, unlike allegations of bad faith, do not require a heightened standard of proof and should be “treated like any other claim for breach of contract.”  The court set forth two important policy justifications for not applying the presumption of good faith in ordinary breach of contract actions.  First, the court reasoned that presuming government officials act in good faith in the performance of contractual obligations would create a conflict with the universally recognized principle that the duty of good faith and fair dealing is applied to private parties as well as the Government.    Second, the court explained that the “presumption of good faith conduct of government officials has no relevance” to a breach of contract action because proof of fraud or quasi-criminal wrongdoing has never been required to prove a breach of the implied covenant of good faith and fair dealing.  Since fraud or quasi-criminal wrongdoing is not at issue in such a claim, the court reasoned there is no concern that an official’s reputation will be erroneously tarnished, which is a fundamental reason courts apply a good faith presumption and require a heightened standard of clear and convincing evidence to prove bad faith.

Courts Since Tecom Have Followed Its Conclusion That A Breach Of The Implied Duty Of Good Faith Is Distinct From Allegations Of Bad Faith Conduct

Courts have largely followed the conclusion in Tecom that the good faith presumption and a heightened burden of proof do not apply when it is alleged that the Government failed to administer a contract in good faith.  Several courts have explicitly stated their approval of the Tecom analysis and did not apply a presumption of good faith to actions maintaining a breach of the implied duty of good faith.  See Kenney Orthopedic, LLC v. United States, 88 Fed. Cl. 688, 703 (2009) (“A claim that the Government breached the implied covenant of good faith does not require a showing of bad faith”); San Carlos Irrigation & Drainage Dist. v. United States, 84 Fed Cl. 786, 803 n. 10 (2008) (“Judge Wolski’s discussion in Tecom … sets forth a compelling analysis of the law”); Erinys Iraq Ltd. v. United States, 78 Fed. Cl. 518, 529 (2007) (citing Tecom); H & S Mfg., Inc. v. United States, 66 Fed. Cl. 301 n. 19 (2005), aff’d 192 Fed. Appx. 965 (Fed. Cir. 2006); Helix Elec., Inc. v. United States, 68 Fed. Cl. 571, 587 n. 30 (2005); A resounding endorsement of the Tecom decision is presented in H & S Manufacturing, Inc. v. United States, in which the court commented that “[t]he Government’s long touted desideratum that ‘irrefragable proof’ is needed to demonstrate the absence of good faith in the administration of government contracts has been given its last rites.”  66 Fed. Cl. at 301 n. 19.

Other courts have also implicitly concurred with the good faith and fair dealing analysis in Tecom.  In several contract cases involving allegations of a Government breach of the implied duty of good faith and fair dealing, the Court of Federal Claims did not apply a presumption of good faith to the Government official’s conduct; instead the courts weighed the evidence under a “preponderance of the evidence” standard to determine whether the Government’s actions were reasonable under the circumstances. See Timber Prods. Co. v. United States, 103 Fed. Cl. 225 (2011) (whether the Government’s alleged wrongful actions amount to a breach of the implied duties is determined under a reasonableness standard); Fireman’s Fund Ins. Co. v. United States, 92 Fed. Cl. 598 (2010) (Government breaches the duty not to hinder and the duty to cooperate when it acts unreasonably under the circumstances);Orlosky, Inc. v. United States, 68 Fed. Cl. 296 (2005) (same).

However, at least one judge sitting on the Court of Federal Claims has departed from the approach to the doctrine of good faith and fair dealing adopted in Tecom by affording the Government the benefit of a presumption of good faith when administering a contract.  In Metcalf Constr. Co. v. United States, 102 Fed. Cl. 334 (2011), the contractor alleged that the Government violated the duty of good faith and fair dealing by taking various actions that interfered with, delayed, and imposed extra-contractual obligations upon the work.  The court in Metcalf examined the contractor’s allegations under the lens of the presumption of good faith for actions specifically targeted to interfere with the contractor’s contractual rights and expectations.

Whether the court in Metcalf properly applied the doctrine of good faith and fair dealing is presently being considered on appeal before the U.S. Court of Appeals for the Federal Circuit.  The trial court’s decision can be seen as a marked retreat from recent decisions over the past decade aimed at leveling the playing field among the Government and contractors.  Viewed in this light, the appeal in Metcalf is a prime opportunity for the Federal Circuit to conclusively adopt the approach taken in Tecom and hold the Government fully accountable for its actions when discharging contractual obligations.  It is expected the Federal Circuit will render a decision in Metcalf during the first half of 2014.

Conclusion

In Federal government contract law, the Government’s obligation to act in good faith is well-established.  The practical import of this obligation, however, is measured by the ability of private, contracting parties to successfully challenge the actions of Government officials.  The legal standards circumscribing the Government’s contract administration have undergone considerable transition in the last decade.  Unless and until the Federal Circuit modifies the current state of the law, modern courts have overwhelmingly agreed that a presumption of good faith does not apply to Government officials performing contract administration duties — thus placing the Government on equal footing with its private contracting partners.  Our readers would be well-advised to be on the look-out for further developments concerning this important doctrine in future editions of our firm’s newsletter.