Federal Circuit Clarifies Scope of the Implied Duty of Good Faith in Government Contracts | Practical Law

Federal Circuit Clarifies Scope of the Implied Duty of Good Faith in Government Contracts | Practical Law

In Metcalf Construction Company, Inc. v. United States, the US Court of Appeals for the Federal Circuit reversed a decision by the Court of Federal Claims and clarified the scope of the federal government's implied duty of good faith and fair dealing when dealing with its contractors.

Federal Circuit Clarifies Scope of the Implied Duty of Good Faith in Government Contracts

by Practical Law Commercial
Published on 13 Feb 2014 • USA (National/Federal)
In Metcalf Construction Company, Inc. v. United States, the US Court of Appeals for the Federal Circuit reversed a decision by the Court of Federal Claims and clarified the scope of the federal government's implied duty of good faith and fair dealing when dealing with its contractors.
On February 11, 2014, in Metcalf Construction Company, Inc. v. United States, the US Court of Appeals for the Federal Circuit clarified that to prove a breach of the implied duty of good faith and fair dealing, a government contractor is not required to show that the government:
  • Violated an express provision in the contract.
  • Specifically targeted to reappropriate a benefit that the contractor expected to gain from the contract.
(No. 2013-5041 (Fed. Cir. Feb. 11, 2014).)

Background

Metcalf Construction Company, Inc. entered into a contract with the US Navy to build housing units by a certain date. However, the project was not completed by the deadline and the final cost of construction exceeded what was agreed to in the contract. Metcalf argued that the delays and increased construction costs were caused by:
  • Site conditions that were materially different from the conditions disclosed in the contract.
  • The Navy imposing requirements not found in the written contract.
  • An uncooperative government inspector who hindered the project.
Metcalf alleged that the construction project cost $76 million, but that the government paid it less than $50 million. Metcalf sued the government for damages in the Court of Federal Claims under the Contracts Disputes Act (41 U.S.C. § 7104) and alleged that the Navy had materially breached the contract and the implied duty of good faith and fair dealing. The Court of Federal Claims ultimately held that Metcalf failed to establish that the government had breached this implied duty.

Outcome

The Federal Circuit vacated the Court of Federal Claims' decision and found that the Court of Federal Claims applied the wrong legal standard for determining if the government has breached the implied duty of good faith and fair dealing. This implied duty:
  • Is part of every contract, including contracts with the federal government.
  • Imposes obligations on both contracting parties, including the duty:
    • to cooperate with the other party;
    • not to hinder or interfere with the other party's performance; and
    • not to act so as to destroy the other party's reasonable expectations regarding the fruits of the contract.
The Court of Federal Claims held that the government had not breached the implied duty of good faith and fair dealing because:
  • 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.
  • The government's incompetence or failure to cooperate or accommodate a contractor's request does not trigger the duty of good faith and fair dealing, unless the government specifically targeted action to reappropriate the benefit of the contract.
The Federal Circuit found that the Court of Federal Claims used an unduly narrow view of the duty of good faith and fair dealing and misapplied the law when it required proof of specific targeting. It clarified that in a claim for a breach of the implied duty of good faith and fair dealing, proof of specifically targeted action is not a general requirement.
The Federal Circuit also rejected the government's argument that Metcalf's claims fail because Metcalf could not identify a contract provision that the Navy violated. As the court explained, a breach of the implied duty of good faith and fair dealing does not require a violation of an express provision in the contract.