A Brief Note on the Government’s Duty of Good Faith and Fair Dealing: An In-House Counsel Update.

In their capacity as Jack-of-All-Trades, in-house counsel for federal government contractors (as well as government counsel and private practitioners) must be cognizant of the recent movements in the court system regarding the government’s implied duty of good faith and fair dealing. Such is necessary for in-house to properly advise contract capture teams, contract managers, and project operators on how the current standard impacts the contractual and legal risks of pending pursuits and ongoing projects, as well as how the standard impacts any requests for equitable adjustments (REA) and claims based thereon. This note will explore recent case law in this area and offer in-house counsel a few takeaways.

Two of the primary responsibilities of in-house counsel of federal government contractors are to review solicitations for contractual and legal risks and to assist the pursuit team in its determination of the best methods to mitigate such risks. In the federal government construction industry, typical mitigation strategies include, for example, obtaining builder’s risk insurance to mitigate the risk of damage to a construction project prior to the government’s acceptance of the project. The risk of government imposed liquidated damages (LDs) is often mitigating by flowing the LDs down to the subcontractor for its portion of work. Familiar, too, are in-house counsel with risks associated with government directed changes, increases in taxes, or subcontract issues, and their concomitant mitigation processes that are addressed in established FAR clauses or the subcontract terms and conditions.

One risk, however, that is difficult to mitigate is the risk associated with the government’s breach of its duty of good faith and fair dealings owed to its contractors. The fact of the matter is that in-house counsels tend to deal with this risk when it arises, instead of attempting to mitigate it in advance, because it is a rather difficult risk to anticipate. Indeed, contractors, when preparing their proposals, do not, for the most part, think, “Well, hey, we need to add a contingency for when the government fails to cooperate, hinders our performance, or does something because they don’t like us.” Certainly in fixed price construction contracts, where every effort is made to reduce price, a contingency for such an amorphous risk may jeopardize any chance of winning the contract.

The difficulty inherent in this risk is that, as its name suggests, it is not an express contractual duty, but an implied duty. It is a risk not addressed by a specific FAR clause. Nevertheless, in-house counsel should have a general understanding of the current decisions and the relevant debates within the contract community on this issue in order to properly advise their clients of its ramifications to particular contracts.

It is by now incontrovertible that the government has a duty to cooperate with its contractors, to not hinder contract performance, and to not unnecessarily delay contract performance. The long standing rule in analyzing violations of the government’s breach of its duty of good faith and fair dealing was whether the government’s actions were reasonable. See, e.g., C. Sanchez & Son, Inc. v. United States, 6 F.3d 1539 (Fed. Cir. 1993) (The government must avoid actions that unreasonably cause delay or hindrance to contract performance.); Caesar Constr., Inc., ASBCA No. 41059, 91-1 BCA ¶ 23,639 (government’s failure to remove snow piles which resulted in water seepage constituted a breach of its implied duty not to impede the contractor’s performance); M.A. Santander Constr.,Inc., ASBCA No. 35907, 91-3 BCA ¶ 24,050 (interference excused default).

The reasonableness standard, however, was dealt a severe blow in 2010 by the Federal Circuit in the decision of Precision Pine & Timber, Inc., v. U.S., 596 F.3d 817 (Fed. Cir. 2010). Therein, the court held that to establish a breach of the government’s implied duty of good faith and fair dealing, there must be a showing that the government specifically targeted the contractor and that the government re-appropriated a benefit guaranteed by the contract. To put it mildly, Precision caused a great deal of confusion in the government contract community. (For a thorough discussion thereon, please see Postscript: Breach of the Duty of Good Faith and Fair Dealings, 24 N&CR ¶22 for a detailed discussion on the decision and Postscript II: Breach of the Duty of Good Faith and Fair Dealing, 26 N&CR ¶ 9).

However it now appears that, as a result of the recent Federal Circuit decision in Metcalf Construction Co., Inc. v. United States, 2013-5041 (Fed. Cir. Feb. 11, 2014), the confusion caused by Precision Pine and its followers has been clarified, and that the old standard of reasonableness is back, if it ever went away. In Metcalf, the court held that the contractor did not have to show that the government had specifically targeted it or that the government’s action breached an express term of the contract. Instead, the more pragmatic “reasonableness” test was reemphasized as the standard. Note, however, that inasmuch as both Precision Pine and Metcalf were decided by three-judge panels, more decisions will undoubtedly provide further clarification of this this issue. But, as for now, reasonableness is the test.

So, what are the takeaways for in-house counsel after Metcalf? First, be familiar with the current standard for determining how courts will analyze contractor allegations that the government breached its duty of good faith and fair dealing. Second, be able to apply the reasonableness test to the facts of a particular contractual issue. Contract managers and operators are quite apt to allege a government breach when facing resistance from the government during contract performance: for example, when they deem the government’s response to submittals to be untimely; when the government has a different interpretation of what the work requires or how it is done; when the government refuses extensions, and so on. The allegation of government breach is easily raised, so in-house counsel must be able to apply the current law to the facts of the alleged dispute. Third, be able to determine when the government’s actions support an REA, a claim or, ultimately, warrant litigation. And forth, be able to converse with outside counsel on the issue in the event the matter is litigated.

AUTHOR: David Newsome, Senior Legal Counsel, KBR

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