AGC Urges Court to Preserve Traditional Requirements for Good Faith and Fair Dealing

On March 25, AGC of America filed a friend-of-the-court brief in the U.S. Court of Appeals for the Federal Circuit in defense of the traditional requirements for good faith and fair dealing, insofar as they apply to the federal government. Those requirements grow out of an “implied covenant” that the courts have construed federal contracts to include for over 150 years.  Repeatedly, the courts have also held that the covenant requires the government to administer its contracts reasonably and not resort to subterfuges or evasions, even if the government believes it would be justified in doing so.  In the process, the brief explains, the courts have provided the “parties who contract with the Unites States government a vital measure of security and reliability.”  The lower court ruling in the pending case alarmed the association and AGC of America decided to get involved in the appeal; otherwise the case could redefine the implied covenant of good faith and fair dealing and severely limit a contractor’s “ability to assess risk, and, hence, to calibrate potential costs.” The threat of a significant change in the law dates back to 2010, when the Federal Circuit decided a case involving timber sales that subsequent changes in federal enforcement of the Endangered Species Act had the effect of delaying.  The Federal Circuit ultimately held that the changes in federal enforcement and resulting delay had violated the government’s duty to cooperate with the contractor, and not hinder its performance, only if “specifically designed” to deprive the timber company of the benefit of its contractual bargain. In the currently pending case, the lower court held that the Federal Circuit had thereby changed the basic standard that applies to all claims that the government has breached its covenant of good faith and fair dealing.  In the pending case, it was not enough for the contractor to show that the government had been unreasonable.  Quite to the contrary, the lower court held that “incompetence and/or the failure to cooperate or accommodate a contractor’s request do not trigger the duty of good faith and fair dealing, unless . . . ‘specifically targeted’” to deny the contractor the benefits of its contract, or “for the purpose of delaying or hampering” the contractor’s performance.  In substance if not form, the lower court turned what had long been a duty to cooperate, and not to hinder performance, into a far more limited duty not to act in bad faith. The factual record of the pending case is complex. AGC of America did not take a position on that record or suggest exactly how the Federal Circuit should ultimately resolve the case.  The lower court did, however, make factual findings that breathe some real life into the legal question presented.  The court did, for example, find that the government had engaged in “overzealous” and “retaliatory” inspections, that it had coercively withheld payments and that it had rejected work for being just 1/64th of an inch outside of specifications. The name of the case is Metcalf Construction Company, Inc. v. United States, Docket# 13-5041.  The government has not yet filed its brief on the appeal and the Federal Circuit has yet to set the date for the oral argument.  AGC of America is expecting a decision very late in the current year, or early next year, and will keep members posted. Should you have any questions, please contact AGC General Counsel Mike Kennedy at kennedym@agc.org.