Federal Breach of Implied Duty of Good Faith and Fair Dealing

Avoid Legal Landmines When Asserting that the Government Breached of Duty of Good Faith and Fair Dealing When Submitting Government Contract Claims.

Government contractors often struggle with the next steps when the agency does act fairly in providing accurate CPARS ratings. In addition, some contractors are not fully aware of the legal approach when asserting breach of contract allegations in a Contract Disputes Act claim against the government. The government sometimes refers to the expressed contract clauses during litigation in order to eliminate any other contract remedies to businesses that exercise their rights to a breach of implied covenant of good faith & duty of fair dealing. Despite arguments to the contrary, by alleging that government breached its duty of good faith and fair dealing, one is not saying that the government acted in bad faith. 

What is the Implied Covenant of Good Faith and Duty of Fair Dealing? 

When it comes to analyzing breach of good faith contracts, the implied covenant of good faith and fair dealing is a common law principle which suggests that every contract imposes upon each party a duty to cooperate in good faith and deal with each other fairly. Federal contractors should incorporate this legal theory during contract management and dealing with the federal government.

The legal doctrine applies both to commercial contracts and federal government contracts.  The short explanation of the common law contract theory is that each contracting party has an affirmative legal obligation not to hinder performance or prevent the other party from obtaining the fruits of the bargain. See Precision Pine & Timber, Inc. v. United States, 596 F.3d 817, 820 n.1 (Fed. Cir. 2010); Centex Corp. v. United States, 395 F.3d 1283, 1304 (Fed. Cir. 2005).

Every contract, including federal government contracts imposes upon each of the contracting parties the legal duty of good faith and fair dealing in its performance and enforcement.” See Restatement (Second) of Contracts, Section 205 (1981) (“Restatement”), quoted in Alabama v. North Carolina, 560 U.S. 330, 130 S.Ct. 2295, 2312, 176 L.Ed.2d 1070 (2010). Failure to fulfill that legal duty by its very nature constitutes a breach of contract, as does failure to fulfill a duty “imposed by a promise stated in the agreement.” Restatement, section 235.  The U.S. Court of Appeals for the Federal Circuit  has long applied those principles to federal government contracts. See Precision Pine & Timber, Inc. v. United States, 596 F.3d 817, 828 (Fed.Cir.2010); Malone v. United States, 849 F.2d 1441, 1445–46 (Fed.Cir.1988).

The covenant of good faith and fair dealing by its very nature imposes legal obligations on both contracting parties that include the duty not to interfere with the other party’s performance and not to act so as to destroy the reasonable expectations of the other party regarding the fruits of the contract.”  See Centex Corp. v. United States, 395 F.3d 1283, 1304 (Fed.Cir.2005) “Both the duty not to hinder and the duty to cooperate are aspects of the implied duty of good faith and fair dealing.” Id.

When parties enter a contract, they each expect the other to act faithfully and above board. The contract does not have to expressly state this requirement.

• When the government does something that on its face suggests under-handed activity, this can give rise to a breach of good faith and fair dealing.
• A breach of this duty can occur when there is a termination for default or even denial of a contract claim.

Although not all misbehavior is considered a violation of the covenant of good faith and fair dealing, when the government’s actions are “specifically targeted at the contractor contractual rights then there can be a breach.  See First Nationwide Bank v. United States, 431 F.3d1342, 1350–51 (Fed. Cir. 2005).

Duty of Good Faith and Fair Dealing in Your Contract Management Approaches?

Watch for Mistakes Made By the Government’s attorneys: When appealing a Contract Disputes Act case because of an adverse contracting officer’s final decision, the government may attack your claim for breach of the implied duty of fair dealing by assuming that such a claim “is limited to ensuring compliance with the express terms of the contract and, thus, does not create obligations not contemplated in the contract itself.”

The U.S. Court of Federal Claims rejected this argument in the case of MANSOOR INTERNATIONAL DEVELOPMENT SERVICES, INC. V. U.S because the government’s position would eliminate any possibility that breach of the implied covenant of good faith could itself provide the basis for a claim that a contract was breached.

• The court stated that the implied covenant of good faith and fair dealing in government contracts stems from the consensual terms reflected in an expressed contract, but it addresses the parties’ reasonable expectations that may not have been embodied in explicit contractual language.
• Contractors and their attorneys should also be mindful and prepared for the government’s attempt merge this common law duty into the separate issue of the government / contracting officer acting in bad faith

As stated before, contractors must be aware of the common argument from the government lawyers that there was no breach of the implied duty because you “.. cannot identify a contract provision that the government violated.”. The Court of Appeals for the Federal Circuit ruled that such an analysis by the government goes to far.  See Metcalf Const. Co. v. United States, 742 F.3d 984, 994 (Fed. Cir. 2014). Instead, courts find 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.

What is Bad Faith Termination of Contract?

Unlike the common law duty of good fait and fair dealing, bad faith termination of contract very seldom is found by the courts. However, it does occur. Federal government contracting cases have recognized examples of circumstances where the presumption of good faith can be overturned. An example is where the rule that the government cannot terminate a contract for convenience simply to get a “better bargain from another source.” Krygoski Constr. Co. v. United States, 94 F.3d at 1541. 

The Civilian Board of Contract Appeals (CBCA) ruled in  Sigal Construction Corp., 10-1 BCA ¶ 34442, CBCA 508 (May 13, 2010),  that the government’s right to terminate a contract for its own convenience is not unreachable, and that the improper exercise of that power will result in the award of damages for lost profits, just as in private contracting.

The courts have also relaxed the rules for proving “bad faith” in the context of private contracting, including terminations for convenience in federal government subcontracts. Thus, the Court of Appeals of Maryland declined to apply a presumption of good faith when a general contractor terminated a flooring subcontract for convenience and held that the right to terminate for convenience did not amount to a right to terminate “for any reason whatsoever, including a bad reason or no reason.” Questar Builders, 978 A.2d at 671. Rather, the Maryland court ruled, the right to terminate a private contract is “subject to the implied limitation that [it] be exercised in good faith and in accordance with fair dealing.” Id. at 675.

Contract Scope Changes and Contract Disputes Act Claims

Oftentimes, during the contract management phase, the government contracting agency directs contractors to perform additional work. It also orders contractors to do something that would require a change order of amendment to the contract. When the contractor submits a claim, the agency may deny the claim and assert that the contract never included this level of work. This could be a possible breach of good faith rule. 

The approach when making such a claim is to focus on what is promised or disclaimed in the contract. This can be a tricky avenue to pursue. However, such a focus helps the court define what constitutes “lack of diligence and interference with or failure to cooperate in the other party’s performance.”  See Malone v. United States, 849 F.2d 1441, 1445 (Fed.Cir.1988).

Making this allegation is a government contract claim is also tricky because it is rarely possible to anticipate in contract language every possible action or omission by the government or by the contractor that undermines the bargain, the nature of that bargain is central to keeping the duty focused on “honoring the reasonable expectations created by the autonomous expressions of the contracting parties.” Tymshare, Inc. v. Covell, 727 F.2d 1145, 1152 (D.C.Cir.1984).

Contractors must be aware of some critical mistakes made when they seek to allege breach of the implied covenant of good faith and duty of fair dealing.

• Never take orders from the COR or COTR when performing the contract.
• Always seek written permission from the contracting officer before proceeding with scope changes.

Your implied covenant of good faith and fair dealing claim is only as good as you have documentation to prove your case. Taking direction from another government employee can severely harm your case on appeal.

See How We Can Help You With REA and Government Contract Claims

Get help understanding the convenant of good faith and fair dealing, contract management or litigating your government breach of contract cases, call our government contract claims and dispute lawyers at 1-866-601-5518 for a FREE INITIAL CONSULTATION.