Limits on the Implied Duty of Good Faith and Fair Dealing

Construction and Procurement Law News, Q2 2015

Client Alert

In Tug Hill Construction Inc., the Armed Services Board of Contract Appeals (“Board”) recognized the limits of the implied duty of good faith and fair dealing. In this case, the government entered into a firm, fixed-price contract with Tug Hill Construction Inc. (“Tug Hill”), a contractor, for construction work at Fort Bliss, Texas. The contractor sought additional compensation for utility system work in excess of the original price under the contract. The Board sided with the government and held that Tug Hill was not entitled to additional compensation, and denied the appeal.

The owner of the project was the U.S. Army Corps of Engineers (“USACE”). The scope of work under the USACE’s task order included the demolition of certain sections of existing utility systems, which were privately-owned, and the construction of new primary electric, water, sewer, communications, and natural gas utilities systems. The new utilities were to then be connected back to the existing main utility systems. The scope of work included the coordination of the project utility requirements with the owners of the privatized utility systems.

The delivery order contained a Special Notice providing that the contractor was responsible for negotiating and finalizing the utility system work with the utility providers. It also stated that the contractor should include in its cost proposals the costs of work typically performed by the utility owners. In short, the USACE hired Tug Hill to coordinate, negotiate, and finalize the utility systems work with the utility providers. Tug Hill was aware of this Special Notice. Nonetheless, Tug Hill contended that the USACE breached its implied covenant of good faith and fair dealing by refusing to assist Tug Hill with negotiations with the utility providers after it was awarded the delivery order.

The implied duty of good faith and fair dealing essentially prevents a party’s acts or omissions that, although not expressly proscribed by the contract, are inconsistent with its purpose and deprive the other party of the contemplated value of the contract. However, the implied duty cannot expand a party’s contractual duties beyond those in the express contract. The Board concluded that the implied duty did not require the USACE to help Tug Hill perform this work, nor to help it obtain lower prices from the utility providers. Not helping Tug Hill negotiate with the utility providers was not inconsistent with the delivery order’s purpose and did not deprive the contractor of the contemplated value of the delivery order.

Part of the Board’s reasoning was that the language of the Special Notice was unambiguous—Tug Hill agreed to perform the delivery order work for a fixed price without having first negotiated the work with the utility providers. Tug Hill, not the USACE, assumed the risk that the work would cost more than bid in its proposal. Tug Hill also asserted a “superior knowledge” claim and a constructive change claim against the government, both of which the Board rejected.

This case touches on an important duty that both parties have in their administration of government contracts, and a duty that has come to light in several recent decisions—the implied duty of good faith and fair dealing. This case, however, recognizes the limits of that duty, in that this duty cannot expand any party’s contractual duties beyond those expressed or implied in the contract. Because the contractor here knowingly entered into an unambiguous contract allocating certain risk to the contractor, it could not rely on the government to assume that risk. In a lump sum pricing situation with a public body, one way to prevent the surprise Tug Hill encountered is to inquire, in writing, about any basic assumptions your company is making in bidding. Here, the pre-bid question, “will the government use its influence to assist in obtaining the services from the providers” might have saved considerable time and treasure.