Ever since the Federal Circuit’s 2010 decision in Precision Pine & Timber, Inc. v. U.S., the controlling standard for the government’s duty of good faith and fair dealing has been in flux. Prior to Precision Pine, it was well-settled that the duty of good faith implied in government contracts was no different from the duty implied in all other commercial contracts.
Yet, in Precision Pine, a three-judge panel appeared to embrace a much stricter rule under which the government would only be found to have breached its duty of good faith when a contractor was either “specifically” targeted for mistreatment or stripped of contractually guaranteed benefits. Then, in Bell/Heery v. U.S., the Court appeared to confirm this watered down version of the rule when it relied on Precision Pine to find no breach of the implied duty because the contractor had failed to specifically allege that the government had appropriated benefits guaranteed under its contract.
Fortunately for contractors, Precision Pine and Bell/Heery are not the death knell they seemed to be. Earlier this year, the Federal Circuit breathed new life into the long-standing principle that government contractors are entitled to the same implied duty of good faith as private contractors when it issued its decision, Metcalf Construction Co., Inc. v. U.S. In Metcalf, the Court reaffirmed that the question of whether the government has breached its duty of good faith and fair dealing turns on the reasonableness of its actions under the circumstances.
A recent decision by the Board of Contract Appeals suggests that the reasonableness standard preserved by the Federal Circuit in Metcalf will prevail. In Carranza Trucking Co. v. USPS, a trucking company hired to provide transportation services for the USPS violated the terms of its contract when government-issued charge cards were used to purchase fuel in excess of the contractually allotted amount. Yet, when the USPS first learned of these excessive fuel purchases, it waited nearly four months before notifying the contractor. Upon receiving notice, the contractor informed the USPS that it believed the excessive charges to be fraudulent. Nevertheless, the USPS began offsetting its payments under the contract to incrementally recover $285,549 in fuel costs that it believed were charged in violation of the contract. The contractor appealed.
On appeal, the Board held that the USPS’s four-month lapse in notifying the contractor of the excess fuel charges was a breach of the duty of good faith and fair dealing. Interestingly, although the contractor framed the USPS’s lack of notice as a breach of its duty to mitigate damages, the Board re-characterized this inaction as a violation of the government’s obligation to administer its contracts in a cooperative manner and, thus, as a breach of the duty of good faith.
More significant, however, is the Board’s legal basis for its decision. The Board did not rely on the stringent good faith standards articulated in either Precision Pine or Bell/Heery. Instead, it relied on the classic standard recited in Metcalf under which the government’s compliance with the duty of good faith will be judged by the reasonableness of its conduct under the circumstances, not by reference to whether its conduct falls within a narrow and exclusive set of predetermined categories.
Carranza Trucking is a good omen for government contractors because it signals that Boards of Contract Appeals will not be led astray by judging the propriety of the government’s contract against the onerous standards set forth in Precision Pine and Bell/Heery. Rather, if Carranza Trucking is any indication, it appears as though Boards will continue to apply the much more contractor-friendly rule revived by the Federal Circuit in Metcalf and that the duty of good faith and fair dealing has lived to see another day.
