A recent Federal circuit case, Metcalf Const. Co, Inc. v. United States, No. 2013-5041 (Fed Cir. Feb. 11, 2014), explains in some detail the covenant of good faith and fair dealing.  The covenant is important because it impose reasonable duties on both the government and the contractor.

The formulation of the covenant, which applies to federal contracts, is:  “every contract imposes upon each party a duty of good faith and fair dealing in its performance and enforcement.”  Restatement (Second) of Contracts Sec. 205 (1981).  Failure to abide by that duty constitutes a breach of contract, as does failure to fulfill a duty imposed by a promise stated in the agreement. Restatement Sec. 235.  This covenant imposes both a duty not to hinder and a duty to cooperate.  Precision Pine  Timber v. U.S. , 596 F 3d 817, 820 n. 1.

The Navy awarded Metcalf a contract to design and build housing units in Hawaii.  Performance was delayed because of “expansive soil” (swelling) and the presence of chlordane (a chemical contaminant).  Metcalf argued that the Navy had breached the covenant when it denied its damages for the delay. The Navy relied on representations in the solicitation.  However, the Federal Circuit found that the trial court had used the wrong standard, and the solicitation did not free the Navy of its obligations.

Specifically, the trial court stated that in order to invoke the covenant, the government had to “specifically target” the contractor and take action to obtain the benefit of the contract, or where government actions were undertaken to delay or hamper the contractor.  The Federal Circuit rejected that formulation, saying that no authority supports the trial court’s holding that specific targeting is required generally or in Metcalf’s circumstances.

Secondly, the Federal Circuit held that in order to allege breach, there is not need for the government to breach an express contractual duty.  The court pointed out that the covenant exists as a supplement to express contractual covenants—which must be complied with as well.

These two holdings, that the government need not specifically target a contractor, and that the implied duty of fair dealing does not require the government to breach an express contractual duty, may be helpful to contractors in clarifying when the covenant applies.

If the government breaches the duties in the covenant (good faith and fair dealing), and you can demonstrate your damages, you are more likely to have your claim allowed.

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