Every government contract contains implied duties, such as the duty to cooperate and the duty of good faith and fair dealing. Such implied duties generally prohibit one party from interfering with the other’s performance or taking actions that undermine the other’s expected benefit of the bargain.

Implied duties offer important protections when an issue is not clearly addressed in the text of the agreement. But courts have been reluctant to apply them in a way that overrides express contract language. A party generally does not breach the duty of good faith and fair dealing, for example, simply by exercising a right that is expressly provided in the contract.

But the government does not have carte blanche. Even if there is express language that gives the government a certain right, the government cannot exercise that right unreasonably or in a way that interferes with the contractor’s performance. In Agility Public Warehousing Company KSCP v. Mattis, No. 2016-1265 (Fed. Cir. Apr. 4, 2017), for example, the Federal Circuit explained that the government can breach the duty of good faith and fair dealing even if its conduct is otherwise consistent with the express terms of a contract.

The Facts

The contract at issue in Agility was for delivery of food, clothing, and medicine to U.S. military personnel in the Middle East (Kuwait, Qatar, and Iraq). Agility made the deliveries using both refrigerated and non-refrigerated trucks, and charged different prices for each. Refrigerated trucks were initially charged at $2,050/day for a 3-day trip, plus an additional $645/day for each day beyond the 3-day minimum.  Non-refrigerated trucks were initially charged at $1,600/day for a 3-day trip, plus $475/day for each day beyond the 3-day minimum.

Agility used a hub-and-spoke system to make the deliveries. The loaded trucks traveled from Kuwait to Iraq, where they then delivered to various hub-site dining facilities (DFACs) and spoke site mobile kitchen trailers (MKTs). The contract contemplated that the trucks would travel to each site with a military escort and would return shortly after being unloaded (subject to escort availability). Modification 1 to the contract expressly provided that the trucks would not be used for storage purposes at any of the sites.

In practice, the prohibition on using Agility’s trucks for storage was disregarded by the MKT sites, which were located in rural areas and did not have refrigeration. The MKTs used the refrigerated trucks to store perishables and significantly extended the length of the trips. The result was that the government paid significant sums for refrigerated truck trips under Agility’s pricing structure. For some trips, the government paid anywhere from $60,000 to nearly $100,000 for the use of a single truck.

To mitigate the charges, the government sought to negotiate a new modification to limit the number of trip days for which the government would pay. The government proposed a draft Modification 27 that included a 29-day cap on “customer caused delays.” The modification also authorized Agility to use additional personnel on each trip to improve logistics and shorten the trip length. Agility initially objected to the 29-day cap because it was “unqualified” and asked whether it could submit exceptions to the 29-day cap. In response, the government did not remove the 29-day cap or revise the modification, but the contracting officer indicated that exceptions to the 29-day cap would be considered “in the form of a claim.” Agility accepted that response and signed the modification.

Agility continued performing under the new modification and the contract was subsequently extended twice. During the negotiations for each extension, Agility complained about the 29-day cap and requested that it be removed. The government refused to remove the cap, but indicated that it would consider “alternative proposals” based on actual cost data and the historical average trip length.

Agility accepted the extensions but submitted claims for trips extending beyond 29 days. The contracting officer denied Agility’s claims because the average trip length were decreasing and because Agility had not offered any evidence showing that the amounts Agility received under the 29-day cap were “unfair, unreasonable, or inequitable.”

The ASBCA decision

Agility appealed to the ASBCA, arguing that the government breached the contract (i.e., Modification 1) by using refrigerated trucks for storage. Agility also argued that the government breached its promise to consider exceptions to the 29-day cap, breached its duty of good faith and fair dealing, and constructively changed the contract by increasing the number of extended trips after the 29-day cap was imposed.

The ASBCA held a 10-day hearing and ultimately denied Agility’s claim. The contracting officer testified that the purpose of the 29-day cap was to shift the risks of extended trips and to change the initial open-ended fee structure to a shared risk fee structure. When the cap was introduced, the average trip length was 15 days, so the 29-day cap allocated the risks of “customer caused delays” to the government for roughly double the average trip length, but limited the government’s maximum per trip exposure to approximately $18,000. The contracting officer admitted telling Agility that exceptions to the 29-day cap would be considered “in the form of a claim” because “a contractor is always entitled to submit a claim” if it feels it is due additional money. Agility’s general manager—who negotiated and signed the modification containing the 29-day cap—did not testify at the hearing.

In August 2015, the ASBCA issued a decision denying Agility’s appeal. Based largely on the contracting officer’s testimony, the ASBCA held that the purpose of Modification 27 was to modify the prohibition in Modification 1, which essentially required the government to pay for all storage delays. In the ASBCA’s view, the government’s understanding (and intent) with the 29-day cap was to set a liability limit for “customer caused delays,” which included use of the trucks as storage. Because Agility was aware of the government’s interpretation of the 29-day cap and accepted it anyway, the ASBCA held that Agility was bound the by that interpretation. The ASBCA also held that it need not decide Agility’s other arguments (including the alleged breach of the duty of good faith and fair dealing) because all of Agility’s arguments were essentially a matter of contract interpretation.

The Federal Circuit decision

Agility appealed to the Federal Circuit, which reversed the ASBCA’s decision in part. The court agreed with the ASBCA on Agility’s counts for breach of express contract and breach of promise to consider claims. The ASBCA correctly held that Modification 27 modified the prohibition in Modification 1 on using trucks for storage. The court also noted that the contracting officer only ever promised to consider claims, which the government did. It “accepted the claims filed by Agility, considered the claims, and then denied the claims for failing to meet the requirements under which the government would grant an exception.” The contracting officer testified at the ASBCA that a claim may have been granted only if Agility could show that the 29-day cap caused such economic hardship that it threatened Agility’s ability to perform.

But the court reversed the ASBCA with respect to Agility’s counts for breach of the duty of good faith and fair dealing and constructive change. In the court’s view, although the government was not expressly liable under the contract for trips longer than 29 days, the government was still obligated to cooperate with Agility in good faith to minimize trip delays.

Although the duty of good faith does not expand contractual rights, the court explained that a party can breach the duty of good faith, even if it does not breach an express contract provision. Even though the government’s denial of Agility’s claims were consistent with the 29-day cap in Modification 27, the court concluded that a specific contractual right does not preclude a finding that the government breached the duty of good faith:

[T]he government abided by the express terms of the contract under Mod. 27. But the government may have breached its implied duty of good faith and fair dealing by, inter alia, interfering with Agility’s ability to perform its duties under the contract by unnecessarily delaying the return of Agility’s trucks and not increasing its on-site food storage capabilities. . . . In other words, if the government simultaneously imposed a cap and engaged in conduct that made it impossible for Agility to perform within that cap, the government may have breached its implied duties to Agility.  Indeed, [the contracting officer’s] acknowledgment that circumstances might warranty payments above and beyond the 29-day cap appears to be a tacit recognition of this possibility.

The same rationale applied to Agility’s claim for constructive change. Agility argued that the 29-day cap was based on the expectation that the government would work to minimize the number of instances in which a refrigerated truck was used as storage at a MKT site. Instead, according to Agility, the number of such instances increased, rather than decreased, after the 29-day cap was put in place.

The court found that the ASBCA did not consider those contentions. The court therefore reversed and remanded the case to the ASBCA for further consideration of both the duty of good faith and constructive change claims.


More on this topic—

Three principles that limit the government’s right of termination (May 2017)

The Federal Circuit’s decision in Metcalf Construction fixes good faith and fair dealing (Feb. 2014)