In a recent decision, the U.S. Court of Appeals for the Federal Circuit ("CAFC") the supervising court for the Court of Federal Claims and the Boards of Contract Appeals, among others) 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 disputes with the federal government and also provides authority and rationale useful to contractors in disputes with any project owner, public or private.
In October 2002, Metcalf Construction, a small business based in Hawaii, was awarded a $48 million contract to design and build 212 housing units for the U.S. Navy on a Marine Corps base in Hawaii. Saying the project did not go smoothly is an understatement. Metcalf's performance was hindered and delayed by unanticipated soil conditions and other issues made worse by 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.
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 administration of the contract, contending that the Navy's conduct amounted to a breach of the duty of good faith and fair dealing – an implied clause included in 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; that 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; that the project was "plagued" by the Contracting Officer's "lack of knowledge and experience;" and that a "difficult and overzealous" Navy inspector performed his duties in a "retaliatory" manner. Yet, the CFC rejected Metcalf's claim and awarded damages of $2.4 million to the government for project delay. Relying on an earlier decision called Precision Pine, the CFC said that 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.
Metcalf appealed to the CAFC, 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 that the CFC misinterpreted certain provisions of Metcalf's contract.
The CAFC agreed with Metcalf, vacating the CFC's decision and damage award for the government and remanding 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 implied in every federal government contract 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, Metcalf's claim was governed by the "general" and the broader standards announced in other decisions – essentially a "reasonableness" standard. The court also announced the important concept 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 CFC's 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."
Metcalf affirms the federal government's duty of good faith and fair dealing, which some feared had been read its last rites by Precision Pine. By limiting the narrow Precision Pine standard to certain factual settings and confirming the general applicability of the "reasonableness" standard, the CAFC ensured that the government will be held accountable for unreasonable contract administration. Metcalf also reaffirms that the standard Differing Site Conditions clause allocates the 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 equally applicable to contract disputes with public and private owners alike.
Eric A. Frechtel, along with Robert J. Symon, served as counsel for Metcalf Construction.
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