Federal Circuit Confirms that Government Has a Broad Duty of Good Faith and Fair Dealing and Declines to Shift Risk of Differing Site Conditions to Contractors

By Stuart B. Nibley and John P. Estep, K&L Gates, Washington D.C.

In what many will consider a victory for federal government contractors, the U.S. Court of Appeals for the Federal Circuit recently (i) clarified the standard for determining when there is a breach of the implied duty of good faith and fair dealing and (ii) held that certain contractual disclaimer language was insufficient to preclude a contractor from alleging a claim based on differing site conditions.

In Metcalf Construction Company, Inc. v. United States, 2013-5041 (Fed. Cir. Feb. 11, 2014), a contractor was awarded a contract with the Navy to build housing units at a Marine base. The contractor almost immediately ran into soil-condition issues, including “expansive soil” that would expand when wet. Upon completion of the project, the contractor brought suit in the Federal Court of Claims, alleging, among other claims, a breach of the implied duty of good faith and fair dealing under the contract.

In defending against the claim, the government relied on certain contractual disclaimer language. Specifically, a pre-bid government-commissioned report found that soil at the site had “slight expansion potential.” The RFP stated that the government’s report was “for preliminary information only” and that the awardee would be required to perform its own soil investigation. Further, in responses to contractor questions, the government stated that it would only issue a change order for soil issues if the contractor’s own investigation found a “major disparity” from the government report. Despite the fact the contractor’s investigation later found that the soil had “moderate to high” expansion potential, the government refused to issue a change order.

The trial court ruled in the government’s favor, holding that the contractor was not entitled to damages for the expansive-soil related breach in part because the alleged government action was not “specifically targeted” to preclude the contractor from benefiting under the contract.

Implied Duty of Good Faith and Fair Dealing
In vacating the decision, the Federal Circuit found that the trial court took an “unduly narrow view” of the duty of good faith and fair dealing. The trial court’s decision relied on language in Precision Pine & Timber, Inc. v. United States, 596 F.3d 817 (Fed. Cir. 2010), which directed that the government “may be liable” when its action is “specifically designed to reappropriate the benefits the other party expected to obtain from the transaction.” (emphasis added). While the trial court interpreted this language to impose a mandatory specific-targeting requirement, the Federal Circuit clarified that Precision Pine imposes no such requirement. Rather, the implied duty applies more broadly to situations where a party acts to destroy “the reasonable expectations of the other party regarding the fruits of the contract.”

Application of Disclaimer Language to Claim for Differing Site Conditions
In addition to addressing the good faith standard, the Federal Circuit criticized the trial court’s interpretation of the disclaimer language relied upon by the government. The government had argued that the contractor should not have relied upon the government’s soil condition report because the report was “for preliminary information only” and the contractor was required to conduct its own investigation. The trial court agreed, noting that the contractor “was on notice that it could not rely on the ‘information only’ report.” While the Federal Circuit acknowledged the report’s “preliminary” nature, the court noted that the language did not say the contractor “bears the risk if the ‘preliminary’ information turns out to be inaccurate.” Consistent with its “longstanding background presumption” against broad disclaimers for changed conditions, the Federal Circuit stated that the disclaimer language could not be “fairly” read to shift the risk for differing site conditions to the contractor.

On balance, Metcalf Construction should benefit contractors. The decision clarifies that Precision Pine did not create an extra hurdle to bringing a claim for breach of the implied duty of good faith and fair dealing, while emphasizing the court’s traditional disdain for contractual disclaimers in the context of changed conditions. That said, no single case can predict the outcome of future claims, the success (or failure) of which often turns on the specific contractual language employed by the parties.

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