Issue 2 of 2014

by Robynne Parkinson
Robynne Parkinson is an attorney with Thaxton Parkinson PLLc and a member of the DBIA National Board of Directors. She is also the co-chair of the DBIA National Legislative and Legal committee. More information about the Metcalf decision and other design-build cases can be found on Robynne’s blog at www.designbuildlaw.blogspot.com

The United States Federal Court of Claims decision in Metcalf v. U.S., 107 Fed. Cl. 786 (2012), dramatically altered the risk for differing site conditions in a design-build project, which is why DBIA led the charge to urge the Court of Appeals for the Federal Circuit to overturn the decision. The conduct of the naval Facilities Engineering Command (NAVFAC) during the project at issue in the Metcalf decision was certainly concerning to the construction industry.

To review, the controversy arose out of the demolition, design and construction of officer’s quarters on the U.S. naval Base at Kaneohe Bay on Oahu, Hawaii. NAVFAC, which was administering the project, had included a soils report in the Request for Proposals that indicated that the soils were “not expansive.” During the pre-proposal period, one of the proposers asked for a clarification regarding the soils report, and NAVFAC responded that any disparity from the soils report would be dealt with via change order. There was also a pre-proposal question regarding the Chlordane levels represented in the Request for Proposals, and NAVFAC responded that no Chlordane remediation was required under the contract. Even though the actual conditions were different than what was represented in the RFP, the contracting officer refused to agree to a change order. The Court of Claims judge agreed with the contracting officer, incorrectly holding that a design-builder’s independent review of the site conditions after the award negated any reliance on the information provided during the proposal process. not surprisingly, Metcalf appealed this decision.

With only 15 pages in an amicus brief with which to convince the Court of Appeals, DBIA focused its energies on reconsidering the differing site conditions clause because if the lower court’s ruling were to go undisturbed, it would have been disastrous for the design-build delivery method. Fortunately, the Court of Appeals reversed the lower court ruling on February 11th of this year and confirmed the previous case law which held that the design-builder does not automatically assume the risk for differing site conditions under the Federal Acquisition Regulations. Metcalf v. U.S., 742 F.3d. 984 (Fed. Cir. 2014). However, the Court of Appeal’s ruling goes further than simply affirming the case law with respect to differing site conditions. The Court’s ruling on the covenant of good faith and fair dealing has potentially broadened the availability of this course of action for federal contractors. The reasoning behind the covenant of good faith and fair dealing implied in every federal contract is that contracting parties have a right to assume that neither party will act in a way that will unnecessarily increase the cost of the contract and all parties will conduct themselves in a commercially reasonable fashion.

The lower court held that the covenant was not breached in this case despite its factual findings that NAVFAC conducted overzealous investigations, unreasonably delayed a decision on the differing site conditions for more than 300 days, and assigned an incompetent contracting officer to the project. Essentially, the lower court ruled that unless Metcalf could prove that NAVFAC breached an express provision of the contract, Metcalf could not claim a breach of the covenant of good faith and fair dealing. Although it did not go so far as to rule that NAVFAC’s actions were unreasonable as a matter of law, the Court of Appeals held that the lower court used the wrong standard in determining whether the government breached the covenant. In ruling that a claim for a breach of the covenant does not require proof of a breach of an express contractual provision, the Court of Appeals noted, “That goes too far: a breach of the implied duty of good faith and fair dealing does not require a violation of an express provision in the contract. . . . ‘[T]he covenant is implied as a supplement to the express contractual covenants, to prevent a contracting party from engaging in conduct which (while not technically transgressing the express covenants) frustrates the other party’s rights to the benefits of the contract.’”

The Court of Appeals contrasted the Metcalf facts with the facts seemed to severely limit the covenant, including Bell/Heery v. U.S., 739 F.3d 1324 (Fed. Cir. 2014) and Precision Pine & Timber v. US, 596 F.3d 817 (Fed. Cir. 2010). Whereas in Metcalf the objectionable actions were those of the contracting officer, in both the Bell/Heery and Precision Pine cases, the actions were of either third parties or of a separate governmental agency over which the contracting officer had no control. The standard applied by the Court of Appeals, at its essence, requires the government to act in a commercially reasonable fashion and not interfere with the reasonable expectations of the entities with whom it contracts.

Before the Court of Appeals decision, the case law appeared to trend toward severely restricting the covenant of good faith and fair dealing as a stand-alone cause of action. Poor administration of any contract can be quite costly. Federal contractors should be able to set the price for a contract in reliance on the government acting in a commercially reasonable fashion and not unnecessarily driving up the cost of the project through the kind of overzealous contract administration that existed in the Metcalf case. Likewise, the government should be able to rely on its contractors to provide accurate and timely information and not administer the contract in a deceptive or unfair manner. These expectations have particular importance in a design-build project because the success of the delivery method depends heavily on teaming, collaboration, communication and trust among all parties. If communications between the owner, the constructor and the designer break down, the project is likely to fail. The Court of Appeals ruling puts some teeth into these important obligations between the parties and will provide helpful guidance to all parties in future contracts.