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Basic Contract Principles of Good Faith and Fair Dealing Prevail

By Gabriella Khorasanee, JD on February 19, 2014 | Last updated on March 21, 2019

Metcalf Construction Company's bid was chosen for a Navy contract to build military housing in Oahu, Hawaii. Initially, the contract stated that Metcalf would build 188 units by March 2005, however after many modifications, the final agreement required 212 units by October 17, 2006 for an amount just below $50 million.

In the pre-request report, the Government included preliminary soil test results that could have impacted the building project, and noted that further testing was required once the project was started.

After Metcalf did its own testing, the results were far more serious than anticipated, which resulted in delays, additional costs, and changes to design.

The Problem

The project was completed on March 2, 2007, almost five months after the deadline, at a final cost of almost $76 million, about $26 million more than the Government paid. At the end of March, Metcalf contacted the Navy's contracting officer and filed a claim for damages, which was denied. Then, Metcalf sued in the Court of Federal Claims, pursuant to the Contract Disputes Act, and the Government counterclaimed, seeking liquidated damages for the late completion of the project.

The Court of Federal Claims

The court issued two separate decisions, one for liability, and the other for damages. The court found that Metcalf was not entitled to damages resulting from the Government's breaches, and that in addition the Government's breaches did not nullify the liquidated damages claim. Metcalf appealed the trial court's disposition of the breach of the duty of good faith and fair dealing, and the government's liquidated damages counterclaim.

Basic Contract Principles Apply

The Federal Circuit found that the trial court interpreted Federal Circuit precedent too narrowly. Instead, the Federal Circuit reiterated, that even with Government contracts, there exists a duty of good faith and fair dealing, that does not "expand a party's contractual duties beyond those in the express contract," and added that the implied duties are "limited by the original bargain."

Furthermore, the Federal Circuit noted that the trial court wrongly interpreted the allocation of risk, and a design change clause. Since the damages were based on erroneous findings, both the liability and damages findings were vacated, and remanded.

With this decision, the Federal Circuit reminds us that contract principles apply to everyone alike -- even the Federal Government.

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