Federal Circuit Court Clarifies Standard for Establishing Government’s Breach of the Implied Duty of Good Faith and Fair Dealing in Addressing Claim for Differing Site Conditions

Metcalf Constr. Co. v. United States
742 F.3d 984 (Fed. Cir. 2014)

This action arose out of the design and construction of military housing units at a U.S. Navy facility in Hawaii.  Pre-bid documents for the project supplied by the government provided test information regarding soil conditions on the site.  The government also included a disclaimer that this information was “for preliminary information only” and the resulting contract required that the contractor conduct its own independent soil investigation.

Metcalf Construction Company (the “Contractor”) was awarded the contract.  When the Contractor conducted its independent soil investigation it discovered that the soil was not as represented.  The Contractor notified the government and discussions ensued.  In those discussions, the Contractor recommended a different design and construction approach to account for the newly uncovered conditions, while the government generally insisted on following construction requirements set out in the original contract.  After a year’s delay, the Contractor decided that the cost of waiting for the government to approve the design changes had become too high, and it began to implement those changes without a contract modification.  As a result, the Contractor spent approximately $26 million over the original contract amount to remedy the soil conditions and finish the project.

When the government denied liability for the additional costs, the Contractor sued claiming that the government breached the implied duty of good faith and fair dealing.  The contracting officer rejected the Contractor’s claim.  The Contractor proceeded at the Court of Claims, where it also lost.  The Court of Claims adopted the “specific targeting” standard from the Federal Circuit’s 2010 decision in  Precision Pine & Timber, Inc. v. United States (“Precision Pine”).   Applying that standard, the Court of Claims held that the Contractor failed to show that the government’s conduct was “specifically targeted” to reappropriate the benefits that the Contractor expected to obtain from the transaction, thereby abrogating the government’s obligations under the contract.  The Court of Claims also held that the government’s pre-bid site representations were nullified by the Contractor’s obligation to investigate during performance.  The Contractor appealed.

On appeal, the Federal Circuit Court overturned the trial court.  The Court found that the trial court’s decision rested on an “unduly narrow view” of the duty of good faith and fair dealing inherent in every contract.   The Court reasoned that the trial court misread Precision Pine, which “does not impose a specific-targeting requirement applicable across the board or in this case” and “does not purport to define the scope of good-faith-and-fair-dealing claims for all cases, let alone alter earlier standards.”  Rather, the Court clarified that the specific targeting standard applies when the challenged government conduct “occur[s] in implementing a separate government authority and duty independent of the contract”.  Because the Contractor’s claim did not arise in such “dual-authority circumstances,” the Court concluded that the more general bargain-impairment grounds for breach of the duty applied and that the trial court erred in relying on Precision Pine.

With respect to the government’s pre-bid representations, the Court concluded that the trial court further erred by “treat[ing] the contract as placing on [the Contractor] the risk and costs of dealing with newly discovered conditions different from those stated by the government before the contract became binding.”  It reasoned that “[n]othing in the contract’s general requirements that [the Contractor] check the site as part of designing and building the housing units, after the contract was entered into, expressly or impliedly warned [the Contractor] that it could not rely on, and that it instead bore the risk of error in, the government’s affirmative representations about the soil conditions.”  To the contrary, the court found that the government made those representations for bidders’ use in estimating costs and therefore in submitting bids that, if accepted, would create a binding contract.  The Court noted that the “for preliminary information only” disclaimer did not change its conclusion, as this “merely signal[ed] that the information might change” and “does not say that [the Contractor] bears the risk if the ‘preliminary’ information turns out to be inaccurate.”

Consequently, the Court vacated the trial court’s decision that the Contractor failed to establish liability and remanded the case for further proceedings using the general broader standards for breach of the implied duty of good faith and fair dealing.

To view the full text of this decision, courtesy of Lexis ®, click here.

Robert A. Gallagher
Jeffery R. Mullen

This entry was posted in Differing Site Conditions, Good Faith & Fair Dealing, Government Contract and tagged . Bookmark the permalink.