Like all contracting parties, the federal government is bound by an implied duty of good faith and fair dealing in all of its contractual undertakings. Contractors commonly rely on this implied duty as a basis for seeking additional compensation where the government’s representatives have hindered performance under a contract without breaching one of the contract’s express provisions. Historically, the United States Court of Appeals for the Federal Circuit applied a “reasonableness” test in assessing allegations that the government breached this implied duty, finding a breach of this implied duty where the government’s actions were considered to be unreasonable under the specific circumstances of a particular contract.

 

In 2010, however, the Federal Circuit articulated a more stringent test for assessing allegations that the government breached this implied duty in Precision Pine & Timber, Inc. v. United States, 596 F.3d 817 (Fed. Cir. 2010). In that case, the government had allegedly frustrated the plaintiff’s performance by suspending the contractor’s operations. The evidence produced at trial reflected that the express terms of the contract at issue contemplated suspension of the contractor’s operations under certain circumstances and, further, that the government was compelled to suspend the contractor’s operations by a court order issued in an unrelated third-party litigation. In its analysis of the plaintiff’s allegations that the government breached its implied duty of good faith and fair dealing, the Federal Circuit chose not to rely on the “reasonableness” test, and instead utilized the “specific targeting” test. Applying that test, the court found that the government had not breached its duty of good faith and fair dealing because the government’s actions were not “specifically targeted at the plaintiff[s] contract rights” and “did not reappropriate any ‘benefit’ guaranteed by the contract.”   The court reasoned that there could not have been a breach because the implied duty of good faith and fair dealing “cannot expand a party’s contractual duties beyond those in the express contract or create duties inconsistent with the contract’s provisions.”

 

Following Precision Pine, there was much confusion and debate regarding whether the “specific targeting” test had displaced the “reasonableness” test. Many, including the government, interpreted the Federal Circuit’s ruling in Precision Pine as narrowing the cause of action against the government for breach of the duty of good faith and fair dealing to situations where a contractor could prove that the government breached an express contract provision with the intent to deprive the contractor of the intended benefit of the parties’ bargain.

 

In Metcalf Construction Company, Inc. v. United States, the United States Court of Appeals for the Federal Circuit (“Federal Circuit”) revisited the issue and clarified the standards applicable to allegations that the federal government breached its duty of good faith and fair dealing.

 

Background

 

In October 2002, Metcalf Construction Company, Inc. (“Metcalf”), a small business based in Hawaii, was awarded a $48 million contract for the design and construction of 212 housing units for the U.S. Navy on a Marine Corps base in Hawaii. Metcalf alleged that its performance under the contract was hindered and delayed by unanticipated soil conditions and other issues that were exacerbated by the Navy’s failure to administer the contract fairly and according to its terms. By the time the project was finally accepted as complete, Metcalf was nearly two years behind schedule and had incurred additional costs allegedly totaling $27 million. After the Navy’s Contracting Officer denied a certified claim for the increased costs, Metcalf appealed to the United States Court of Federal Claims to recover its losses, contending that the Navy’s conduct amounted to a breach of the Navy’s implied duty of good faith and fair dealing under the parties’ contract. The Navy denied the allegations and counter-sued Metcalf for liquidated damages based upon Metcalf’s delay in completing the project.

 

The Lower Court Ruling

 

The Court of Federal Claims denied Metcalf’s appeal in large part, granting the Navy’s claim for liquidated damages and ruling that the Navy did not breach its duty of good faith and fair dealing. With specific regard to the latter, the Court of Federal Claims’ decision rested on a very narrow view of the government’s implied duties. Specifically, relying almost entirely on Precision Pine, the Court of Federal Claims 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 it ‘specifically designed to reappropriate the benefits [that] the other party expected to obtain from the transaction, thereby abrogating the govern-ment’s obligation under the contract.’” Further highlighting its narrow view, the Court of Federal Claims added that “incompetence and/or 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.’”

 

The Federal Circuit’s Rejection Of The Lower Court Ruling

 

Metcalf appealed the Court of Federal Claim’s ruling to the Federal Circuit, arguing that the “specifically targeted” standard articulated in Precision Pine applies only in limited factual circumstances, where acts of a separate government agency or authority, like a court order issued in a separate case, impact the contract at issue. Metcalf asserted that in the specific circumstances presented, where the conduct of the government’s representatives administering the contract formed the basis of the alleged breach, the Court of Federal Claims should have applied the “reasonableness” standard. The Federal Circuit agreed with Metcalf and held that the Court of Federal Claims misread the standard articulated in Precision Pine. The court went on, in two important ways, to resolve the confusion the Precision Pine decision had created.

 

First, the appeals court made clear that Precision Pine did not establish a new rule that precludes a contractor from establishing a breach of the government’s implied duty of good faith and fair dealing unless it can demonstrate that the government’s conduct was “specifically targeted” to reappropriate benefits from the contractor. The Federal Circuit found that the Court of Federal Claims had erred by imposing such a standard based upon its reading of Precision Pine, noting that that case “does not impose a specific-targeting requirement applicable across the board,” and “does not purport to define the scope of good-faith-and-fair-dealing claims for all cases, let alone alter earlier standards.” The Federal Circuit went on to make clear that Precision Pine’s “specific targeting” analysis applies only in the rare circumstance where a contracting agency’s ability to facilitate a contractor’s performance is at odds with “the authority of other government entities.”

 

Second, the Metcalf court clarified that a contractor is not required to show the government’s breach of an express contract provision to prevail on a claim that the government breached its duty of good faith and fair dealing. The government raised this argument at the Court of Federal Claims, citing as support Precision Pine’s statement that implied duties “cannot expand a party’s contractual duties beyond those in the express contract.” The court rejected that argument, explaining that “a breach of the implied duty of good faith and fair dealing does not require a violation of an express provision of the contract.” Instead, it simply requires evidence that the government has violated a reasonable expectation of the contractor that is rooted in the original contract bargain.

 

Overall, the ruling in Metcalf has been hailed as a victory for contractors. The Federal Circuit’s decision in Precision Pine has not been overruled, however, and that decision may still be cited by the government’s attorneys in certain situations in an effort to limit the government’s exposure to claims that it has breached its implied duty of good faith and fair dealing.