Holding the Government Accountable for Unreasonable Contract Administration

In a recent decision, the U.S. Court of Appeals for the Federal Circuit clarified important legal principles concerning the federal government’s duty of good faith and fair dealing and its responsibility for differing site conditions. Metcalf Construction Company, Inc. v. United States controls future disputes with the federal government and also provides authority and rationale useful to contractors in disputes with any public or private project owner.

In October 2002, Metcalf Construction was awarded a $48 million contract to design and build 212 housing units for the U.S. Navy on a Hawaii Marine Corps base. Construction was hindered and delayed by unanticipated soil conditions and the Navy’s failure to administer the contract fairly and according to its terms. By the time the Navy finally accepted the project as complete in March 2007, almost two full years after the original completion date, Metcalf had incurred costs in excess of $76 million—leaving the contractor with losses of approximately $27 million.

The Trial

Metcalf filed a lawsuit in the U.S. Court of Federal Claims (CFC) to recover most of its losses. At trial, Metcalf presented numerous examples of the Navy’s poor contract administration, contending the conduct amounted to a breach of the duty of good faith and fair dealing (an implied duty written into all government contracts). In its decision, the CFC made several findings in Metcalf’s favor, including that:

• the Navy failed to promptly investigate Metcalf’s contention that the “expansiveness” of the project soils constituted a differing site condition, entitling Metcalf to a 260-day time extension;
• the Navy employed“hard-nosed” tactics by forcing Metcalf to withdraw and compromise claims and fire personnel to trigger the release of progress payments and retainage;
• the project was “plagued”by the contracting officer’s “lack of knowledge and experience;” and
• a “difficult and overzealous” Navy inspector performed his duties in a “retaliatory” manner.

Yet, the CFC rejected Metcalf’s claim and actually awarded damages of $2.4 million to the government for project delay. Relying on an earlier decision called Precision Pine, the CFC stated Metcalf was required to show that the Navy “specifically designed to reappropriate the benefits” Metcalf expected from the contract and“specifically targeted” action to obtain the “benefit of the contract” or “for the purpose of delaying or hampering” contract performance.

The Appeal

Metcalf appealed to the U.S. Court of Appeals for the Federal Circuit, arguing that the “specifically designed/specifically targeted”standard applies only in a unique factual context—where acts of a separate government agency or authority, like new legislation or a court order in a separate case, impact the contract at issue. Metcalf asserted that in the more ordinary context presented in its case, where the conduct of the government officials administering the contract forms the basis of the breach, the CFC should have applied a “reasonableness” standard. Metcalf also argued the CFC misinterpreted certain provisions of its contract.

In response, the Federal Circuit vacated the CFC’s decision and damages award for the government and remanded the case back to the CFC for further proceedings using the “correct standard.” In addition to reaffirming the existence of a mutual duty of good faith and fair dealing, and that failure to fulfill the duty constitutes a breach of contract, the court explained that Precision Pine “does not impose a specific-targeting requirement applicable across the board or in this case.”Rather, the court found Metcalf’s claim was governed by the “general” and the“familiar broader” standards announced in other decisions (essentially a“reasonableness” standard). The court also stated that a breach of the duty of good faith and fair dealing does not require a violation of an express contract provision.

Additionally, the court determined that the CFC misinterpreted certain contract provisions, most notably rejecting the determination that Metcalf assumed the risk and costs of differing site conditions because of contractual obligations to investigate the site during performance. Regarding the standard Differing Site Conditions clause incorporated into federal construction contracts, the court explained: “It exists precisely in order to‘take at least some of the gamble on subsurface conditions out of bidding’: instead of requiring high prices that must insure against the risks inherent in unavoidably limited pre-bid knowledge, the provision allows the parties to deal with actual subsurface conditions once, when work begins, ‘more accurate’ information about them can reasonably be uncovered.” The court held that the “natural meaning” of the Navy’s pre-bid representations concerning soil conditions “was that, while Metcalf would investigate conditions once the work began, it did not bear the risk of significant errors in the pre-contract assertions by the government about the subsurface site conditions.”

Takeaways

Metcalf resuscitates the federal government’s duty of good faith and fair dealing. By limiting the narrow Precision Pine standard to certain factual settings and confirming the general applicability of the “reasonableness” standard, the Federal Circuit ensured the government will be held accountable for unreasonable contract administration. Metcalf also reaffirms that the standard Differing Site Conditions clause allocates risk of additional costs to the government and makes clear that pre-bid representations about subsurface conditions are not nullified by a contractor’s obligation to conduct a site investigation or by broad liability disclaimers—concepts that are applicable to contract disputes with both public and private owners.

Reprinted with permission from Construction Executive, www.ConstructionExec.com, a publication of Associated Builders and Contractors Services Corp. Copyright 2014. All rights reserved.