Metcalf Construction Company v. United States
742 F.3d 984, 2014 WL 519596, 2014 U.S. App. LEXIS 2515 (2014)
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Rule of Law:
The implied duty of good faith and fair dealing in government contracts prevents a party's acts or omissions that, though not expressly proscribed, are inconsistent with the contract's purpose and deprive the other party of its contemplated value, and this duty is not narrowly restricted to actions "specifically targeted" to reappropriate benefits when the challenged conduct arises from obligations under the contract itself.
Facts:
- In 2002, the United States Navy awarded Metcalf Construction Company (Metcalf) a contract to design and build 188 housing units at Marine Corps Base Hawaii.
- Before the Navy issued its initial request for proposals (RFP), a government-commissioned report found that the soil at the construction site had a "slight expansion potential."
- A revised RFP stated that the requirements in the "soil reconnaissance report" were "for preliminary information only," and the resulting contract incorporated Federal Acquisition Regulation (FAR) 52.236-2, which concerns differing site conditions.
- The government clarified in a pre-bid question-and-answer document that the contract would be amended if the contractor's post-award independent investigation turned up soil conditions significantly different from those described in the government’s report.
- In early 2003, Metcalf's independent soil investigation by Geolabs, Inc. found the soil's swelling potential was "moderate to high," not "slight," and recommended a course of action to account for this condition.
- The Navy subsequently denied that there was any material difference between the pre-bid and post-award soil assessments and concluded no additional compensation was warranted, leading Metcalf to proceed with implementing changes at its own risk to avoid further delays.
- The government's RFP also represented that chlordane was present in the soils around building foundations but that "Remediation actions are not required since the levels are acceptable."
- Metcalf later found higher levels of chlordane than the pre-bid representation, leading to discussions and delays, for which the Navy eventually afforded a 286-day extension and reimbursed $1,493,103, but Metcalf sought additional compensation.
Procedural Posture:
- Metcalf Construction Company (Metcalf) filed a claim for damages with the Navy’s contracting officer, alleging material breach of contract and the implied duty of good faith and fair dealing.
- The contracting officer denied Metcalf's claim.
- Metcalf brought suit against the United States in the Court of Federal Claims under the Contract Disputes Act, 41 U.S.C. § 609 (2006).
- The government counterclaimed for liquidated damages under a provision of the contract.
- The Court of Federal Claims conducted a two-phase trial.
- The Court of Federal Claims issued a decision on liability, concluding that Metcalf had "failed to establish liability under all claims alleged," with the exceptions that the Navy violated FAR 52.236-2(b) by failing to investigate expansive soil in a timely manner and breached by not issuing a proper notice to proceed.
- The Court of Federal Claims issued an opinion on damages and the government's liquidated-damages counterclaim, awarding Metcalf $272,191.59 in damages for the notice-to-proceed breach but denying other damages, and finding the government entitled to $2,637,507 in liquidated damages.
- The Court of Federal Claims entered final judgment for the government in the amount of $2,401,315.41 (liquidated damages minus Metcalf's damages, plus interest).
- Metcalf appealed this judgment to the United States Court of Appeals for the Federal Circuit.
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Issue:
Does the implied duty of good faith and fair dealing in a government contract require a contractor to demonstrate that the government's actions were "specifically targeted" to reappropriate contract benefits or violate an express provision, or does it apply more broadly to acts inconsistent with the contract's purpose and reasonable expectations?
Opinions:
Majority - Taranto, Circuit Judge
No, the implied duty of good faith and fair dealing in a government contract does not require a contractor to demonstrate that the government's actions were "specifically targeted" to reappropriate contract benefits or violate an express provision. The Court of Federal Claims misread the precedent of Precision Pine, which did not establish a specific-targeting requirement applicable across the board, especially where the challenged conduct arises from obligations under the contract itself rather than independent governmental duties. The implied duty prevents a party's acts or omissions that, though not expressly forbidden by the contract, are inconsistent with its purpose and deprive the other party of the contemplated value, honoring the reasonable expectations created by the contract's allocation of risks and benefits. Furthermore, the trial court misinterpreted contract provisions related to differing site conditions (FAR 52.236-2), failing to recognize that the government's pre-bid representations and clarifications meant Metcalf did not bear the risk of significant errors in those assertions, even if required to conduct its own post-award investigations. The "preliminary information only" disclaimer was insufficient to shift this risk. Similarly, the trial court erred by holding that the contract required written approval for all design changes, regardless of whether they remained within performance requirements, based on an incorrect reading of the contract's precedence and variation clauses.
Analysis:
This decision significantly clarifies the scope of the implied duty of good faith and fair dealing in federal government contracts, particularly in distinguishing it from the narrower "specific targeting" standard of Precision Pine. It reaffirms that the government, like any contracting party, cannot act inconsistently with the contract's purpose or deprive the contractor of the reasonably contemplated value, even without violating an express term. The ruling also underscores that government disclaimers regarding site conditions must be clear and explicit to effectively shift the risk of differing conditions onto the contractor, reinforcing the purpose of the FAR's differing site conditions clause.
