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The Metcalf v. US case, the one I keep whining about on this blog, was finally decided, and kudos to the Court of Appeals for the Federal Circuit on a wisely worded decision. On February 11, 2014, the Court of Appeals overturned the horrible Court of Claims decision on both the differing site conditions claims and the claim for breach of the covenant of good faith and fair dealing. 2014 WL 519596 (Fed. Cir. 2/11/14). In case you are new to the blog and haven’t read every entry, I’ll remind you of the background facts: the lower court ruling that was overturned had such broad, negative implications for the construction industry that the DBIA, the AIA, the AGC and the ABC all submitted amicus or “friend of the court” briefs urging that the case be overturned. The two primary issues in the lower court’s ruling were its interpretation of the differing site conditions clause in the Federal Acquisition Regulations and its interpretation of the covenant of good faith and fair dealing, implied in every Federal contract.
The controversy arose out of the demolition, design and construction of 212 officer’s quarters on the Naval Base at Kaneohe Bay on Oahu, Hawaii. NAVFAC, which was administering the project, had included a soils report in the Request for Proposals that indicated that the soils were “not expansive.” During the pre-proposal period, one of the proposers asked for a clarification regarding the soils report, and NAVFAC responded that any disparity from the soils report would be dealt with via Change Order. At this time, there was also a question regarding the Chlordane levels represented in the Request for Proposals, and NAVFAC responded that no Chlordane remediation was required under the contract. Even though the actual conditions were different than what was represented in the RFP, the contracting officer refused to agree to a change order. The lower court agreed with NAVFAC and its contracting officer. Despite the lower court’s ruling that these representations could be relied on for the basis of pricing the project, the lower court held that because of the requirement in the contract to verify the Owner’s information, Metcalf was not entitled to a change order for these changed conditions. Essentially, the lower court’s interpretation shifted all of the risk of any site conditions to the design-builder based on the requirement in all design-build contracts that there be an independent investigation of the conditions. I know what you are thinking: Seriously . . . and you would be correct in your incredulous response. Had this ruling been allowed to stand, it would have had a devastating impact on performing design-build projects across the country, which is why DBIA and AIA teamed up and submitted an amicus brief highlighting the problems with this ruling.
Thankfully, the Court of Appeals overturned the lower court’s ruling, agreed with the DBIA’s and the AIA’s amicus brief, and held that Metcalf was entitled to a change order on the differing site conditions issues, stating:
“These rulings about an important allocation of risk were based on a misinterpretation of the contract. Nothing in the contract’s general requirements that Metcalf check the site as part of designing and building the housing units, after the contract was entered into, expressly or implicitly warned Metcalf that it could not rely on, and that instead it bore the risk of error in, the government’s affirmative representations about the soil conditions. To the contrary, the government made those representations in the RFP and in pre-bid questions-and-answers for bidders’ use in estimating costs and therefore in submitting bids that, if accepted, would create a binding contract. The natural meaning of the representations 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.” [I added the emphasis on that last part – it makes me happy to read it.]
The Court of Appeals also agreed with the amicus briefs submitted by the AGC and ABC and overturned the lower court’s denial of Metcalf’s claim that NAVFAC breached the implied covenant of good faith and fair dealing. We don’t know whether there was actually a breach of the CGFFD. I figured since acronyms are all the rage and my kids have told me it’s not OK for me to use theirs (WTF), I would create my own. The Court of Appeals remanded the case for the lower court to determine whether NAVFAC’s conduct in conducting overzealous investigations, delay of the decision on the differing site conditions for over 300 days, and the Contracting Officer’s incompetence was a breach of the covenant because the lower court applied the wrong standard to these facts. My guess is that under the standard set by the Court of Appeals, the answer will be a resounding YES.
“The government suggests a much more constraining view when it argues, for example, that there was no breach of the implied duty because “Metcalf cannot identify a contract provision that the Navy’s inspection process violated.” Gov’t Br. 16. That goes too far: 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 covenant is implied as a supplement to the express contractual covenants, to prevent a contracting party from engaging in conduct which (while not technically transgressing the express covenants) frustrates the other party’s rights to the benefits of the contract.”’
The standard applied by the Court of Appeals at its essence requires the government to act in a commercially fashion and not interfere with the reasonable expectations of the entities with whom it contracts. Poor administration of any contract can be quite costly, but this doctrine becomes particularly important in design-build, where the project’s success depends on collaboration between all parties, including the owner. If the case doesn’t settle, it will be interesting to see how the standard set out by the Court of Appeals is applied by the lower court.Many commentators (myself included) were reading the other cases interpreting the CGFFD and positing that the doctrine was dead; however, this case certainly brings it off life support. To be fair, if NAVFAC’s conduit in this case didn’t violate the CGFFD, would be difficult to imagine a fact situation that would. The Court of Appeals contrasted the Metcalf facts with the facts in a decision made earlier in the year and one that the Federal Government cited to the Court as supportive of its case. In Bell/Heery v. U.S., 739 F.3d 1324 (Fed. Cir. 2014), the Court of Appeals held that the Federal Bureau of Prisons did not violate the CGFFD when costs for a project increased based on the permitting requirements imposed by the New Hampshire Department of Environmental Sciences. Bell/Heery based its bid on an assumed method of clearing the land, entailing a single step cut to fill operation; however, the NHDES would not allow Bell/Heery to perform the work using this method, and their restrictions substantially increased the cost of the work. The Court of Appeals held that under the contract Bell/Heery was responsible for obtaining the permit and designing the project so that the permit requirements were met. The Court of Appeals also held that the BOP was not responsible for the actions or requirements of the NHDES, and Bell/Heery could not maintain a claim based on a breach of the CGFFD based on the unreasonable actions of an outside agency. It appears that the line drawn by the Court of Appeals is that the CGFFD will not be in play when the actions are based on either an outside agency or another agency within the Federal Government, such as the facts in the Precision Pine & Timber v. US, 596 F.3d 817 (Fed. Cir. 2010); however, when the actions are those of the agency or the contracting officer involved in the project, the federal government must act in a commercially reasonable fashion and cannot take actions that interfere with the ability of the federal contractor to perform the work.
On the shameless promotion front, if you missed either of my webinars for DBIA, you can find them on the education tab at www.dbia.org. I have 2 more scheduled for this year. I will be including updates of recent case law in each of the webinars. If you have survived the blog post until this point, you really should tune in. I’m much more charming in person.