United States: O Ye Of Little Faith: Breaching The Duty Of Good Faith And Fair Dealing While Complying With The Express Terms Of A Government Contract

In contracts – and especially in government contracts, where one is expected to "turn square corners" – we often analyze breach of contract in light of the jots and tittles of a contract's express terms.  And, in bringing a Contract Disputes Act (CDA) claim against the Government based upon an alleged breach, one's focus usually (and rightly) is on the express terms of the contract.  In a recent decision, however, the Court of Appeals for the Federal Circuit reminded us that a contract can be breached even if the parties scrupulously adhere to every one of the contract's written terms.

In Agility Public Warehousing Co. KSCP v. Mattis, 852 F.3d 1370 (Fed. Cir. 2017), the Federal Circuit considered an appeal involving a logistics contract for delivering food and non-food goods overseas.  Before the Armed Services Board of Contract Appeals, the contractor had argued that the Government breached the express terms of the contract by using the contractor's trucks for storage and failing to consider requested exceptions to the contract's 29-day cap on the number of days for which the Government would pay transportation fees.  The contractor also argued the Government breached the contract's implied duty of good faith and fair dealing by failing to cooperate in the contractor's performance, and imposed constructive changes upon the contract.  The Board ruled that the Government had not breached the contract's express terms and, therefore, the Board "need not decide whether the government constructively changed contract performance or whether it breached its implied duty of cooperation" because "whether the government breached the contract comes down to contract interpretation."

Although the Federal Circuit upheld the Board's ruling that the Government did not breach the contract's express terms, it vacated the Board's judgment on the breach of implied duties and constructive changes.  Citing its precedent in Metcalf Constr. Co. v. United States, 742 F.3d 984 (Fed. Cir. 2014), the Federal Circuit held that a "breach of the implied duty of good faith and fair dealing does not require a violation of an express provision in the contract."  The court accepted the contractor's argument that, even if the Government strictly adhered to the text of the contract, it may have breached implied contractual duties by "inter alia, interfering with Agility's ability to perform its duties under the contract by unnecessarily delaying the return of Agility's trucks and not increasing its on-site food storage capabilities" or "simultaneously impos[ing] a cap and engag[ing] in conduct that made it impossible for Agility to perform within that cap."  The Board's decision on the breach of express terms, in other words, was not dispositive of the contractor's remaining claims.  Without deciding the merits of the claims, the court held that the Board erred by failing to analyze the alleged breach of implied duties (as well as the constructive changes claim) and remanded to the Board for further proceedings.

The implied duty of good faith and fair dealing (which embraces the duty to cooperate and not to hinder the other party's performance) does not "expand" a party's contractual duties or create duties inconsistent with the express terms of the contract.  It does, however, require the parties to cooperate in performance and not act in a way that destroys the other party's reasonable expectations of the benefits provided by the bargain.  The Federal Circuit cited with approval the Restatement's examples of breaches of the implied duty, including "evasion of the spirit of the bargain, lack of diligence and slacking off, willful rendering of imperfect performance, abuse of a power to specify terms, and interference with or failure to cooperate in the other party's performance."  Restatement (Second) of Contracts § 205 cmt. d.

Although the Agility court did not address the issue, it is worth adding that a failure to act in good faith is not necessarily the same as acting in bad faith.  See, e.g., Metcalf Constr., 742 F.3d at 993 (holding that "specific targeting" of a contractor is not required to show a breach of the duty of good faith and fair dealing); CanPro Investments Ltd. v. United States, 130 Fed. Cl. 320, 350 (2017) ("[A plaintiff] is not required to plead and prove bad faith on the part of the [Government] to succeed on its claim for breach of the implied duty of good faith and fair dealing."); Tecom, Inc. v. United States, 66 Fed. Cl. 736, 770 (2005) (holding that bad intent is not a necessary element in showing a breach of the implied duty to cooperate and not hinder performance); see also SupplyCore, Inc., ASBCA No. 58676, 16-1 BCA ¶ 36,262 ("A showing of bad faith is not required to demonstrate a breach of the duty [of good faith and fair dealing].").  This distinction is important because the burden of proof for showing a Government official acted in bad faith is notoriously high.

In the end, it is not easy to prevail on a claim of breach of the duty of good faith and fair dealing, and it is not clear whether Agility will prevail on the merits of its claim when the Board takes it up again on remand.  The Federal Circuit's reaffirmation of the continuing validity of this legal theory, however, means contractors that have been demonstrably harmed by their Government customer's unreasonable actions may have a path to recovery under the CDA, even if they cannot identify a particular contract clause that the Government has violated.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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