Contract & Gavel_1424126LargeThe Federal Circuit has long recognized that the “duty of good faith and fair dealing in [the] performance and enforcement” of a contract, as described in the Restatement (Second) of Contracts, applies to agreements with the Government. The application of that rule in specific cases can be difficult, and the court’s 2010 ruling in Precision Pine & Timber, Inc v. United States, made its application more difficult because the court’s language discussing the duty resulted in some confusion in subsequent cases. The Federal Circuit’s recent decision in Metcalf Construction Co. v. United States clarifies the law regarding when a claim of breach of the duty of good faith and fair dealing can be presented—and is potentially helpful for government contractors aggrieved by adverse decisions of a contracting officer during performance.

Metcalf involves a “differing site conditions” claim in which a construction company complains that it was forced to bear higher costs than could have been expected to perform a contract. Metcalf asserts that the solicitation inaccurately described the soil conditions on which military housing needed to be built. When post-award testing was conducted during the performance period (pursuant to the contract), and the problems with the site became known, the plaintiff raised them with the contracting officer. The agency would not modify the contract in the allegedly reasonable manner requested by the plaintiff, which provided the basis for the breach of good faith and fair dealing claims.

The Court of Federal Claims rejected the contractor’s breach of the duty good faith and fair dealing claim, “[r]elying almost entirely” on Precision Pine. Precision Pine involved a type of contract provision not found in Metcalf–a provision that assigned to the contractor the risk of delays in timber harvesting that resulted from a suspension ordered by the agency “to comply with a court order.” (The trees at issue were the subject of environmental litigation in which the Government was a litigant.) Given that the type of delays which were the subject of the Precision Pine plaintiff’s good faith and fair dealing claim had been addressed in the contract—and the company had agreed to bear the risk of such delays—the Federal Circuit held that

there was no breach because of two grounds combined: the challenged delays “were (1) not ‘specifically targeted[’ at the contracts,] and (2) did not reappropriate any ‘benefit’ guaranteed by the contracts, since the contracts contained no guarantee that . . . performance would proceed uninterrupted.

The Federal Circuit’s “specific target[ing]” language was the primary source of confusion after Precision Pine. The “specific targeting” discussion was rooted in the court’s earlier “Guarini” cases (Centex and First Nationwide), which involved contractual promises by the Government that carefully assigned the risks of certain regulatory changes to the parties—and assured favorable tax treatments for acquirers of certain regulated financial institutions. In the “Guarini” cases, the court held that the Government breached its duty of good faith and fair dealing when Congress passed legislation “specifically targeted at [eliminating] the plaintiffs’ contract right” to the favorable tax treatment. Because enacting tax legislation is clearly a sovereign act, the only way such an action could constitute a breach of the duty of good faith and fair dealing was if it was specifically targeted at the plaintiffs. Essentially, the Government was depriving its counter-party of the benefit of its bargain through subsequent legislation.

The Federal Circuit’s use of the “specific targeting” language outside the “sovereign acts” context in Precision Pine raised questions regarding whether the “breach of good faith and fair dealing” legal standard had changed and a more strict standard would be applied to future cases–i.e., that specific targeting was required to find a breach of the duty. In Metcalf, the Court of Federal Claims purported to apply the Precision Pine ruling, opining that “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, thereby abrogating the government’s obligations under the contract.’”

In the Federal Circuit’s Metcalf decision, the court clarified the standard by explaining that specific targeting is not always required. The type of assignment of risk provision at issue in Precision Pine was not found in the Metcalf contract. To the contrary, the contract recognized that additional post-award testing would occur and that, depending on what was found, it anticipated Metcalf would negotiate for a contract modification. “[T]he essential basis of Precision Pine was that the challenged conduct was not contrary to the contract bargain,” i.e., the Government’s actions were consistent with the risk assignment of the contract and thus could not constitute a bait-and-switch. As there was no comparable risk-assignment provision in the Metcalf contract, “the general standards for the duty [of good faith and fair dealing] appl[ied, and] the trial court erred in relying on Precision Pine for a different, narrow standard.