Afterthoughts: Good Faith & Fair Dealing

What responsibilities are included in the duty of good faith and fair dealing/ what should be included?

The Restatement of Contracts lists some examples but without trying to go into the specifics of that list, I always said that the duty of good faith and fair dealing was at the center a requirement that the two parties would reasonably respond to each other’s problems.
If you go back to the Civil War and look at the case law, we talked about the duty of cooperation and the duty not to hinder contractor’s performance. Those were the original duties that our legal background is full of. When we started to talk about the broader duty of good faith and fair dealing, these two duties, the duty of cooperation and duty not to hinder, were turned into subsets. But from my point of view these two have always been the keystones.

 

What is happening in the window of cases where the high presumption of good faith is overcome, proving a breach, but there is not bad faith?

Up until the last few years, I don’t think there was ever a judicial decision putting the presumption into the equation. No one ever talked about the presumption that the government official acted in good faith. The question was, “Was that conduct reasonable?” We have always had a reasonableness standard. The court looked at the conduct to see if it was the type of conduct you would reasonably expect of a contracting party.

 

A lot of the precedence in the good faith & fair dealing line of cases is built on unusual/irregular contracts/government actions (i.e. Winstar, Timber Sales). How does that affect the adjudication of these issues?

The way I describe it is that we’ve got these two lines of cases that are not procurement cases.

Winstar dealt with savings and loans. The government entered into contract arrangements for contractors to take over insolvent savings and loans. Congress didn’t like one provision in the contracts so it passed a law saying that that provision – the “use goodwill to meet capital requirements” provision – was invalid. The case went all the way to the Supreme Court as a breach of contract case. One of the arguments presented by the government was that it was not liable for sovereign acts and the Congressional action was a sovereign act, not a contractual act. The Court rejected that argument. And the reason that they rejected the argument was because it wasn’t a public and general act – an act that affected the entire public. The court held that the act affected a group of savings and loans but it was specifically targeted at those savings and loans. So from this case we got the “specifically targeted” logic. Also out of this case we got the bait and switch logic. In that situation the government had offered the contractor something – in that instance that they could use good will to meet their capital requirements – and then they had taken it away by statute. So it looked like a bait and switch situation.

The other line of cases are the timber sales cases. We have the decision in Precision Pine (which is now giving us fits). The judge writing the decision isn’t aware of the 100 years of precedence on the duty of cooperation. And the judge decides that the typical violation is the bait and switch situation, which is true in the Winstar case but not in procurement situations. So to prove a violation, the decision holds that you have to show that the action was specifically targeted at the contractor. It also seems to require that you show some bad motive on the government’s part. There never had been a hint of motive playing a role in these cases. Before the question was “Was it a reasonable action?” So that judge took those two elements out of Winstar and put them into the timber line of cases. And now they are migrating into procurement cases.

We now have Metcalfe and Versar. We’re waiting to see if the Federal Circuit will go along with that logic, which I think is a radical change in procurement case law. Or maybe they will say it is unique to the timber cases.

 

You have submitted an amicus brief to the Federal Circuit on the Metcalfe case. Will you briefly highlight the key arguments you are presenting to the court?

This brief does three things.

1) It lays out the history of the duty of cooperation and traces it back to Civil War.  So it’s explaining that motive was never an issue.

2) It points out to the court that in both Winstar (the savings & loan cases) and the timber sale cases, the action of the government that initiated the arguable lack of cooperation came not from the contracting party (the government department) but from some other third party within the government.  In Winstar, it’s Congress.  In timber sales, there were environmental issues.  The parties had to clean up environmental problems with EPA before they would be allowed to cut the timber.  It may be logical to use the specifically targeted and motive logic when third parties, within the government, interfere.  But it doesn’t make sense when dealing with action by the contracting party now administering the contract.

3) It discusses that the construction industry (this case deals with a construction contract) is a relatively low profit margin industry, because it is highly competitive.  So that means that companies that win government contracts have pretty low prices, and those low prices, to some extent, are based upon the logic that the government acts reasonably when it makes changes or takes actions that affect the contract and the contractor will be able to get a reasonable equitable adjustment to cover those changes.   If court rules that reasonableness is not the standard, they [the contractors] will have to do something to account for this change.  And what they will have to do is either raise their bid prices or they may decide to exit market.  In either case, the government will be hurt.

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