Metcalf Construction Company and the Navy argued their positions today in the appeal of Metcalf’s $27-million claim on its contract to design and build military housing in Kaneohe Bay, Hawaii. The appeal focuses on the December 9, 2011 decision by Judge Susan G. Braden of the United States Court of Federal Claims, which addresses the liability issues presented by Metcalf’s claim. See Metcalf Constr. Co. v. United States, 102 Fed. Cl. 334 (2011) (Metcalf I). A second decision issued on December 10, 2012 addresses the damages issues presented in the case. Metcalf Constr. Co. v. United States, 107 Fed. Cl. 786 (2012) (Metcalf II). Regardless of how the Federal Circuit resolves the appeal, the case is bad for federal construction contracting.
Duty of good faith and fair dealing
In Metcalf I, the court found that Metcalf could not establish its claim that the Navy breached its duty of good faith and fair dealing. This conclusion is based entirely on the Court’s interpretation of the applicable standard for proving such a claim. In Judge Braden’s view, “a breach of the duty of good faith and fair dealing claim against the Government can only be established by a showing 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.’” Metcalf I § C.1.b (quoting Precision Pine & Timber, Inc. v. United States, 596 F.3d 817, 829 (Fed. Cir. 2010)).
Despite the factual differences from Precision Pine and significant evidence of overreaching conduct by the Government, Judge Braden concluded that there had been no breach of the duty of good faith and fair dealing. According to the court in Metcalf I, “incompetence and/or the failure to cooperate or accommodate a contractor’s request do not trigger the duty of good faith and fair dealing, unless the Government “specifically targeted” action to obtain the “benefit of [the] contract” or where Government actions were “undertaken for the purpose of delaying or hampering [performance of the] contract[.]” Metcalf I § C.1.b (quoting Precision Pine, 596 F.3d at 829).
As Metcalf argued on appeal, this standard departs from the rule set forth in Malone v. United States, 849 F.2d 1441, 1445-46 (Fed. Cir. 1988). Indeed, the near impossibility of establishing a good faith and fair dealing claim under this standard can be seen in the facts of the case. The Navy’s chief inspector was “a difficult and overzealous Navy employee and . . . there was a retaliatory aspect to some of the non-compliance notices that the Navy issued.” The Navy failed to investigate Metcalf’s notice of differing site conditions for more than a year, which the court held was a breach of its investigation requirements under FAR 52.236-2. After Metcalf completed the project and submitted a claim to recover the significant costs incurred in doing so, the Navy initiated debarment proceedings and debarred Metcalf. In Metcalf’s lawsuit challenging the debarment, United States District Judge Rosemary Collyer described the Navy’s conduct as “shameful.”
Effect of disclaimers on recovery for differing site conditions
Metcalf identified the Navy’s response to its differing site conditions claims as evidence of the Navy’s breach of its duty of good faith and fair dealing. The merits of the differing site conditions claim was not squarely before the trial court. A significant portion of the opinion in Metcalf I is nevertheless devoted to expressing the court’s view that that Metcalf could not establish a differing site condition because the request for proposals warned offerors that the government-furnished soils report was “for preliminary information only.”
This is a troublesome conclusion not just because it was not necessary to resolve the merits of Metcalf’s claim. The trial court’s approach to this issue conflicts with the policy judgment reflected in the requirement to include a differing site conditions clause in all federal construction contracts. The purpose of the differing site conditions clause is to shift the risk of adverse subsurface conditions to the Government so that contractors may exclude the cost associated with that risk from their bids. To do this, contractors must be able to rely on government-furnished soils reports.
The trial court’s opinion is also internally inconsistent. The court found that the soils encountered during construction were materially different from those identified in the government-furnished soils report. The court found that Metcalf gave timely notice and incurred significant delays and additional construction costs as a result of subsurface conditions that it did not anticipate. The court concluded that it was reasonable for Metcalf to rely on the government-furnished soils report “for bidding purposes.” But for purposes of a differing site conditions claim, the court concluded that Metcalf’s reliance was unreasonable.
Issues on appeal
Metcalf’s appeal focuses on the legal standard that the Court of Federal Claims applied to the good faith and fair dealing issue. Metcalf has the support of the Associated Builders and Contractors, the Associated General Contractors, the Design-Build Institute of America, and the American Institute of Architects, all of which filed briefs addressing the legal issues in the case and their effect on the government contracting industry as a whole.
Metcalf’s position and those articulated by the supporting industry groups reflect the right approach to the legal issues and the right approach to the contracting policies behind them. It is hard to escape the conclusion that Metcalf I diminishes the value of both the differing site conditions clause and the duty of good faith and fair dealing. Unless the decision is reversed on appeal, contractors will have no option but to include contingencies in their bids for the possibility that they will encounter adverse subsurface conditions or overzealous, retaliatory, and coercive conduct by the government. Inevitably, good contractors will avoid doing business with the federal government and the cost of procuring goods and services will increase.
Even a complete victory at the Federal Circuit could only partially mitigate the burden that this Navy project has imposed on Metcalf over the last 12 years. Metcalf submitted its first proposal on this project in 2001. Metcalf was not the original awardee, but ultimately won the contract after a series of bid protests at GAO and the Court of Federal Claims. Work started in 2003 and continued through 2007, during which time Metcalf incurred costs of $27 million in excess of the $49-million contract price. Upon submission of its claim to recover those costs, the Navy debarred Metcalf, requiring yet another court battle. Trial on the merits of Metcalf’s claims took place in early 2010, and the Court issued its first decision on the merits in December 2011. It has now been nearly seven years since Metcalf finished the project, and the case still hasn’t been resolved.
Here is the audio recording of the Federal Circuit argument.
UPDATE: The Federal Circuit’s February 11, 2014 decision [pdf] reverses this decision and remands the case to the Court of Federal Claims for reconsideration of Metcalf’s claims. Our discussion of the decision is available here.