Decision may be helpful for contractors dealing with government entities
Most contractors have worked on projects that were delayed for reasons outside their control. Many of those contractors have been frustrated by the harsh positions public owners often take. A recently issued federal appellate opinion may provide a sense of relief to contractors that have encountered delays caused by a public owner. In Metcalf Constr. Co. v. United States, Case No. 2013-5041, the U.S. Court of Appeals for the Federal Circuit determined that a more relaxed standard was to be used in deciding whether a public owner has breached the implied duty of good faith and fair dealing. The court also held that a public owner may not be able to rely on a broad disclaimer to avoid liability for inaccurate information contained in a government-supplied report.
Metcalf Construction Company is a well-established general contractor in Hawaii. In 2002, Metcalf was awarded a $50 million contract by the U.S. Navy to design and build housing units at a Marine Corps base. Prior to accepting bids, the Navy provided potential contractors with a report indicating that the soil at the site had a “slightly expansive potential.” In addition to being expansive, the soil also contained the chemical chlordane, but the Navy indicated that no remediation was required because the chemical existed at an “acceptable” level. The initial RFP cited the report as relevant, but the Navy stated that it was “for preliminary information only.” A provision in the resulting contract required the contractor to obtain an independent soil investigation, with the agreement that the Navy would issue a change order for the contractor’s increased cost and time if a “major disparity” existed.
Metcalf encountered problems with the soil almost immediately after beginning performance. In January 2003, Metcalf hired a geotechnical firm to perform testing and issue a report. According to the report, the swelling potential of the soil was “moderate to high,” rather than “slight.” Therefore, the firm advised Metcalf to proceed with a more expensive course of action. Metcalf promptly notified the Navy, resulting in prolonged discussions which delayed construction for roughly one year. Due to the possibility of liquidated damages, Metcalf decided that waiting any longer was too risky and began excavating the soil and replacing it with non-expansive fill. The Navy further hindered Metcalf’s progress by ordering it to begin testing the soil for chlordane and removing any soil that was contaminated. In August 2004, the Navy almost wholly denied Metcalf’s claim for additional compensation. By then, Metcalf was roughly 200 days behind schedule. Altogether, Metcalf’s cost of construction of the project was approximately $76 million, but the Navy paid Metcalf less than $50 million.
THE SUIT
Metcalf brought suit in the Court of Federal Claims alleging the government breached the contract and the implied duty of good faith and fair dealing. The government counterclaimed for liquidated damages based on Metcalf’s late completion of the project. The trial court determined that by failing to timely investigate the expansiveness of the soil and by failing to issue Metcalf a proper notice to proceed at the beginning of the project, the government had breached the contract. However, the trial court found that the government’s breaches did not nullify liquidated damages based on Metcalf’s late delivery. Therefore, final judgment was entered against Metcalf in the amount of $2,401,315.41 ($2,637,507 in liquidated damages minus Metcalf’s damages for the Navy’s breaches in the amount of $272,191.59, plus interest). Metcalf appealed to the U.S. Court of Appeals for the Federal Circuit.
THE APPEAL
The appellate court determined the trial court had applied the wrong standard when evaluating whether the Navy’s conduct violated the implied duty of good faith and fair dealing, which is applicable to all contracts with the federal government. The standard applied by the trial court imposed liability only if it was established that the government “specifically designed to reappropriate the benefits [that] the other party expected to obtain from the transaction, thereby abrogating the government’s obligations under the contract.” In other words, to establish liability, Metcalf would have been required to show that the Navy specifically set out to reappropriate the benefit Metcalf was entitled to receive under the contract, such as the payment. The appellate court found that standard to be too narrow, stating that “specific targeting” was only one of many ways the government could breach the implied duty. The correct standard focuses on the parties’ expectations: “The covenant of good faith and fair dealing . . . imposes 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.” Centex Corp. v. United States, 395 F.3d 1283, 1304 (Fed. Cir. 2005). Thus, the appellate court vacated the trial court’s judgment and remanded the case for evaluation of the Navy’s conduct using the correct standard.
Regarding the soil conditions, the court determined that although Metcalf was required to investigate site conditions after work began, it did not bear the risk of significant errors in the Navy’s pre-contract assertions about the condition of the soil. The court explained that a contract provision which required the contractor to obtain an independent geotechnical report, but allowed for an equitable adjustment if problematic conditions are discovered, was intended to take some of the gamble out of bidding on jobs. The provision enabled contractors to avoid submitting artificially high bids to insure against unfavorable subsurface conditions. The court emphasized that the government cannot rely on broad disclaimers to avoid liability when a contractor relies on reports the government furnished. The statement in the RFP that the report was “for preliminary information only . . . merely signals that the information might change[.]” It does not mean that the contractor bears the risk if the preliminary information proves to be inaccurate.
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For More InformationChristopher A. Scifres is an associate with Ford Nassen, which is nationally recognized in the construction industry and one of the largest construction law firms in Texas. Mr. Scifres practices construction law with a focus on the litigation and resolution of construction disputes. In addition, he regularly assists clients in preparing and negotiating contracts and other procurement documentation. Reach him at cascifres@fordnassen.com or 214.523.5100.
Modern Contractor Solutions, MAY 2014
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