TECHNICAL ARTICLE

When an Owners Hard-Line Claims Negotiations are Also

A Breach of Contract
Christopher J. Brasco and Adam M. Tuckman
Abstract: This article will explore the boundaries separating an owners negotiation posture from a breach of the duty of good faith and fair dealing. The reader will gain a fuller understanding of the owners responsibilities in the changes process so that they can more effectively administer the contract change order process. In particular, this article will focus on the evolving legal requirements defining the owners duty of good faith and fair dealing when handling contract changes. It will also inform the reader of the implication of a public owners actions in its varying capacities ranging from public representative to contracting party. Thereafter, the authors will present possible consequences of an owners breach of his or her duty of good faith and fair dealing. The presentation of this topic will relate practical experiences with the administration of contract changes, how the process can be best administered in the interest of all concerned, and the negative consequences of a breach of the duty of good faith and fair dealing. This article was first presented as CDR.974 at the 2012 AACE International Annual Meeting in San Antonio, Texas. Key Words: Breach of contract, change orders, legal issues, and negotiations appropriate for government officials to be cloaked by the presumption of good faith when performing their contractual responsibilities, such as in the process of negotiating and settling claims. A number of cases in the past decade have addressed the legal doctrines underpinning the covenant of good faith and fair dealing as it applies to government actors. These cases support the notion that the government is not afforded a presumption of good faith as it administers a contract and the claims process. As such, the legal reasoning for these holdings becomes immediately relevant to public and private owners alike. This article will further explore the owners duty of good faith and fair dealing in the administration of contracts and in the claims process. The article will first consider the specific duties required of contracting parties under the umbrella of good faith. Next, this article will present cases in which courts have held that the government has breached its duty of good faith to a party in the claims process. The following section explains the evolution of the evidentiary standard applied to the governments duty of good faith and fair dealing, highlighting the cases in which courts have stated that government officials will no longer be presumed to perform their contract

participant on a construction project will invariably find himself or herself in a circumstance where he or she is either preparing, assessing, or litigating contract claims. Under virtually all public procurement laws and regulations, a claimant must certify in writing that it is submitting a claim in good faith. A finding that a claim was submitted with a dishonest purpose can lead to the imposition of significant penalties. From the perspective of a construction professional involved in contract claims, the question naturally arises whether an owner must also adhere to a good faith standard when

administering a contract and negotiating claims. It is generally recognized that standards of good faith and fair dealing are implied in both public and private contracts. Over the course of many decades, a doctrine evolved in the US federal government contract law that limited the governments implied obligation by presuming government officials performed their duties in good faith. Proving that a government official did not act in good faith was said to require, well-nigh irrefragable proof of a specific intent to injure the contractor. In recent years, however, courts have confronted the question whether it is

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administration responsibilities in good faith. Lastly, this article sets forth potential remedies available for a government breach of the duty of good faith and fair dealing during the negotiation and handling of claims. Discussion At the outset, it is important to generally consider the duty of good faith and fair dealing as it has developed in the common law. The duty of good faith and fair dealing is an implied term found in every contract, public or private. See Precision Pine & Timber, Inc. v. United States, 596 F.3d 817, 828 (Fed. Cir. 2010); Centex Corp. v. United States, 395 F.3d 1283, 1304 (Fed. Cir. 2005); Timber Prods. Co. v. United States, __ Fed. Cl. __, 2011 WL 6934815 (Dec. 29, 2011); N. Star Alaska Hous. Corp. v. United States, 76 Fed. Cl. 158 (2007). (The need for mutual fair dealing is no less required in contracts to which the government is party, than in any other commercial arrangement). The US federal courts have recently re-examined their application of the good faith and fair dealing doctrine in the context of the governments contract administration. As discussed herein, the recent trend is that good faith is no longer always presumed, with the governments actions being measured against the standards of good faith and fair dealing applicable to private contracting parties. The Implied Duty of Good Faith and Fair Dealing Defined The implied duty of good faith and fair dealing prevents a contracting party from interfering with the benefits its counterpart reasonably expects to receive from the contract. The implied duty of good faith and fair dealing includes the obligations to act with honesty, to cooperate by not hindering or interfering with its counterparts performance, and to not willfully render imperfect performance of contractual obligations. See Malone v. United States, 849 F.2d 1441, 1445 (Fed. Cir. 1988); White Buffalo Constr., Inc. v. United States, __ Fed. Cl. __, 2011 WL 4402355 (Sept. 22, 2011). The Court of Appeals for the Federal Circuit in Precision Pine explained that a government violation of

the duty of good faith amounts to a, bait and switch (596 F.3d at 829). The court explained that the bargained-for exchange (the bait) cannot be subsequently spoiled by improper government administration (the switch). Examples of Governmental Breaches of the Implied Duty of Good Faith and Fair Dealing By virtue of their evolving application of the doctrine of good faith and fair dealing, courts have recently held the government liable for a breach of the implied duty of good faith and fair dealing in a wide variety of circumstances. In the context of the claims process, courts have recognized that the implied duties of good faith and fair dealing may bar the government from employing unfair bargaining tactics to secure an unjust settlement or result in litigation. See John Cibinic, Jr. Ralph C. Nash, Jr., and James F. Nagle, Administration of Government Contracts 298-312 (4th. ed. 2006); Restatement (Second) Of Contracts 205. The commentary accompanying 205 of the Restatement specifically considers the duty of good faith and fair dealing in the handling of contract claims. The commentary generally describes actions that may amount to unfair bargaining and consequently, a breach of the implied duty of good faith and fair dealing, as follows: The obligation of good faith and fair dealing extends to the assertion, settlement and litigation of contract claims and defenses. The obligation is violated by dishonest conduct such as taking advantage of the necessitous circumstances of the other party to extort a modification of a contract for the sale of goods without legitimate commercial reason. Other types of violation have been recognized in judicial decisions: harassing demands for assurances of performance, rejection of performance for unstated reasons, willful failure to mitigate damages, and abuse of a power

to determine compliance or to terminate a contract (internal references omitted). Consistent with 205 of the Restatement, courts in the US Federal Circuit have recently held that the government breaches the duty of good faith and fair dealing when it unfairly uses its authority as a government owner in an effort to obtain one-sided contract modifications or claims settlements. For instance, in Rumsfeld v. Freedom NY, Inc., 329 F.3d 1320 (Fed. Cir. 2003), the Court of Appeals for the US Federal Circuit held that the government could not condition the payment of due and owing progress payments upon the execution of a contract modification. During the course of a troubled contract, the government in Freedom NY withheld an approved progress payment from a financially-distressed contractor solely to pressure the contractor into signing a modification that released the government from separate claims of the contractor. In reaching the conclusion that the government improperly coerced the contractor to waive its claims, the court explained that [t]he contract did not allow the government to withhold progress payments simply to pressure the contractor into giving up its rights under the contract. The government could not have had a good faith belief that withholding for this purpose was permissible. Moreland Corp. v. United States, 76 Fed. Cl. 268 (Fed. Cl. 2007) is another case where the government was found to have breached the implied duty of good faith and fair dealing by improperly administering the claims process. Moreland involved a challenge to the governments lease termination based on the developers alleged failure to repair structural defects. The Court of Federal Claims concluded that the government had breached its duty of good faith and fair dealing by refusing to settle the developers meritorious claims for extra labor costs so that the government could gain leverage in negotiating its separate claim that the developer was responsible for structural repairs. The court also found that the government lacked good faith in claiming that the developer was

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responsible for the costs of a structural loading study presented as necessary to analyze the alleged structural concerns, when the government had actually intended to use the study to determine whether it could safely install extracontractual backup HVAC systems. Underlying the Moreland courts decision was its view that the duty of good faith and fair dealing reciprocally binds the developer and the government in the claims process. The court reasoned that the obligation to act in good faith flowed from the government as a matter of fairness to the developer: The [Contract Disputes Act] requires contractors to certify that their claims are made in good faith, that all supporting data are accurate and complete to the best of the contractors knowledge and belief and that the amount requested accurately reflects the contract adjustment for which the contractor believes the government is liable. Certainly, a reciprocal obligation to act in good faith should apply to the government a contracting officer is obligated to put his own mind to the problems and render his own decisions. Such decisions must be personal and independent, and even the appearance of coercion must be avoided. The contracting officers outright denial of meritorious contractor claims to gain some advantage over the contractor will not be condoned by this Court. (Internal citations and quotations omitted). The government has also been found to be in breach of the implied duty of good faith and fair dealing by requiring a contractor to go through unnecessary obstacles in the claims process. In Orlosky, Inc. v. United States, 68 Fed. Cl. 296 (2005), the contractor performed electrical work for the United States Navy at its Air Weapons Station at San Nicholas Island. Toward the completion of the project, the contracting officer informed the contractor that the Navy was terminating the contract for

convenience and requested a proposal for an equitable adjustment to cover the termination costs. On the same day that the contractor wrote to confirm the termination, a letter was crossing in the mail from another Navy official who declared the contract usably complete, effective six months earlier. The contractor requested the Navy to clarify whether the Navy considered the contract terminated or completed, but no clarification was provided. As a result, the contractor proceeded with the expense of preparing and submitting the request for an equitable adjustment. Thereafter, the Navy led the contractor through a four and one-half year period of negotiations, two Defense Contract Audit Agency audits, and proposal resubmissions. All of this occurred when the Navy was not actually terminating the contract for convenience. The court concluded, based on the Navys requiring the contractor to partake in an unnecessary claims process, that the Navy was liable for a breach of the duty of good faith and fair dealing, maintaining that: [t]he Navys reversal of its termination for convenience violated its obligations of good faith and fair dealing. The Navy should have clarified whether the termination was for convenience or acceptance of the project as usably complete. The Navy, through its negligence, caused plaintiff to incur unnecessary costs in complying with the Navys request for an REA for a non-existent termination for convenience; this is a breach of defendants duty to cooperate. Good Faith/Fair Dealing Not Presumed The government no longer enjoys the presumption of good faith and fair dealing when administering construction contracts. In recent cases holding the government responsible for a breach of the duty of good faith and fair dealing, the trend in the courts has been to no longer presume the government acts in good faith in all instances when government officials interact with private

parties. For over 50 years, it was wellestablished that government officials would enjoy a presumption that they acted, conscientiously and in good faith in the discharge of their duties, in any matter calling their actions into question. Libertatia Assocs., Inc. v. United States, 46 Fed. Cl. 702, 706 (2000) (citing Spezzaferro v. Federal Aviation Admin., 807 F.2d 169, 176 (Fed. Cir. 1986)); Knotts v. United States, 492 F. Supp. 630 (Ct. Cl. 1954). Overcoming this presumption necessitated well-nigh irrefragable proof of animus on the part of the government or a specific intent to injure the contractor. See, e.g., Kalvar Corp. v. United States, 543 F.2d 1298 (Ct. Cl. 1976); Librach v. United States, 147 Ct. Cl. 605 (1959); Slattery v. United States, 46 Fed. Cl. 402, 405 (2000). Since the early 2000s, however, a number of decisions in the US federal circuit have raised the question whether government officials will always be entitled to a presumption of good faith, and whether well-nigh irrefragable proof is the proper benchmark for overcoming the presumption when it is applicable. After a decade of cases addressing this issue, a majority of courts have signaled that government officials will not be presumed to act in good faith when performing their contract administration responsibilities. Instead, courts have weighed the evidence of a lack of good faith under a preponderance of the evidence test, which is considerably less onerous than the well-nigh irrefragable proof standard. Presumption May Not Be Applied Early indicators are that the presumption of good faith would not be applied in cases challenging government conduct. In the early 2000s, the Court of Federal Claims issued two opinions that signaled the shifting views of courts regarding the governments accountability when considering claims that the government breached the duty of good faith and fair dealing. In Libertatia Assocs., Inc. v. United States, 46 Fed. Cl. 702, 706 (2000) and Abcon Assocs., Inc. v. United States, 49

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Fed. Cl. 678 (2001), separate judges in the Court of Federal Claims adopted the view that the, well-nigh irrefragable proof, standard was not the appropriate burden of proof to impose on contractors in all circumstances where a lack of good faith is alleged. Instead, these cases present the courts understanding that the government may be held liable for a duty of good faith without the contractor having to present irrefragable proof of bad faith. In the 2000 Libertatia Assocs. decision, the Court of Federal Claims questioned whether contractors should be held to the well-nigh irrefragable proof standard because it had become an almost impossible burden of proof for a contractor to meet. The court viewed the irrefragable proof standard as exceed[ing] even the certainty required by proof beyond a reasonable doubt, the higher standard used in criminal proceedings. Id.When exploring the bounds of the well-nigh irrefragable proof standard, the court concluded that requiring such a high burden of proof to overcome the presumption of good faith unfairly shielded the government from liability, stating: Applying the standard of irrefragable proof meaning impossible to refute would appear to insulate government action from any review by courts no matter how egregious. Such an absolute standard would not serve the interests of justice between the government and its citizens. The courts are certainly not called on to allow government actors to treat contractors with bad faith or a specific intent to injure in any case where the bad faith is not, in effect, admitted by the government. (Emphasis in original). The court then reached its decision that the government acted in bad faith based upon a lesser standard of proof, one that required only, adequate evidence of some specific intent to injure the plaintiff (emphasis added).

Following Libertatia Assocs., the Court of Federal Claims in Abcon Assocs. declined to apply the well-nigh irrefragable proof standard to a contractors claim that its default should be excused because of the governments breach of the duty of good faith and fair dealing. The contractor alleged that the assessment of liquidated damages and failure to negotiate or pay requests for equitable adjustments amounted to a material breach of the contract and caused the contractors default. The court explained that irrefragable proof was not required in that circumstance because the theory of the contractors challenge was not that the termination decision was made in bad faith. Rather, in assessing the proper burden of proof to be applied, the court focused on whether the government failed to administer the contract properly, stating that, the implied duties of good faith, fair dealing, and cooperation can be breached by a failure of a government agency to negotiate and make payment, and a showing of bad faith is not required. As a result, the court analyzed the contractors evidence of the duty of good faith and fair dealing under a preponderance of the evidence standard. Burden of Proof Issue Revisited The Federal Circuits Am-Pro decision in 2002 revisited the burden of proof for overcoming the presumption of good faith to require clear and convincing evidence. In a landmark decision one year after Abcon, the Court of Appeals for the Federal Circuit in Am-Pro Protective Agency, Inc., 281 F.3d 1234 (Fed. Cir. 2002) reassessed the well-nigh irrefragable proof standard and how it aligned with contemporary burdens of proof. In the Am-Pro case, a contractor providing security guard services to the US Department of State under an option contract alleged that it had withdrawn claims for extra compensation from a prior contract under duress from the contractor officer. The contractor alleged that the contracting officer threatened to

outright deny its claims and terminate further contract options to protect her interpretation of the contracts payment terms. The Court of Federal Claims granted the government summary judgment, reasoning that the contractor evidence of duress was insufficient to overcome the presumption that the contracting officer carried out her duties in good faith. Recognizing the confusion stemming from the well-nigh irrefragable standard, the US Federal Circuit on appeal attempted to simplify the burden of proof necessary to overcome the presumption by resorting to the burdens of proof generally recognized by modern courts. The Federal Circuit concluded that, given the traditionally high hurdle for a challenger seeking to prove that a government official acted in bad faith, the well-nigh irrefragable proof standard equated with the clear and convincing evidence standard. The Am-Pro court described the clear and convincing evidence standard as a somewhat lighter burden than that imposed by requiring proof beyond a reasonable doubt [It is] evidence which produces in the mind of the trier of fact an abiding conviction that the truth of a factual contention is highly probable. Thus, the holding in Am-Pro that clear and convincing evidence was the proper standard for negating the presumption of good faith essentially dispelled the concern of the Court of Federal Claims in Libertatia that the government could be shielded from liability by a burden of proof that exceeded the beyond a reasonable doubt standard applied in criminal cases. The Am-Pro courts reasoning also indicates that the presumption of good faith may only apply to limited government functions. The Federal Circuit in Am-Pro reaffirmed that a doctrine affording government officials a presumption that they acted in good faith is a settled principle in government contracts law. Yet, the Federal Circuits opinion appeared to qualify the good faith presumption by adding the proviso that it was a strong presumption, at least insofar as it arises in the context of

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Table 1 The Court of Federal Claims Analysis in Tecom of the Legal Standards Applicable to the Duty of Good Faith and Fair Dealing quasi-criminal wrongdoing by government officials acting in the course of their public duties. Further, when declining to adopt the preponderance of the evidence standard as the evidentiary burden for overcoming the presumption, the court explained that a more stringent burden of proof is necessary because the presumption of good faith applies only in the situation where a government official allegedly engaged in fraud or in some other quasi-criminal wrongdoing. Court Decision The Court of Federal Claims in Tecom holds that government officials are not afforded a presumption of good faith in claims of a breach of the implied duty of good faith and fair dealing. Although the Am-Pro decision clarified the burden of proof for overcoming the presumption of good faith, the Federal Circuit left indications that courts were not to apply the presumption in all circumstances where a lack of good faith is alleged. The Federal Circuits discussion of the good faith presumption in Am-Pro led many lower courts to conclude that government officials are not to be afforded the presumption of good faith in the performance of obligations incident to contract administration. In addition, a number of courts after Am-Pro have stated that a claim the government breached the covenant of good faith and fair dealing is not subject to any heightened burden of proof, but rather the preponderance of the evidence standard. In Tecom, Inc. v. United States, 66 Fed. Cl. 736 (2005), a judge in the Court of Federal Claims interpreted Am-Pro as endorsing a limitation on the circumstances when courts should presume government officials have acted in good faith. The court in Tecom reasoned that the nature of the particular misconduct alleged to have been performed by the government official determines whether the presumption applies, as well as which type of proof must be presented to overcome the presumption. The court envisioned a continuum of three possible types of actions in which government officials dealings with private parties may be challenged: Fraud or quasi-criminal wrongdoing in the exercise of official duties. A lack of good faith when employing discretion granted formally by law, regulation, or contract. And, Wrongful actions taken by any party to a contract. proof and should be treated like any other claim for breach of contract. The court set forth two important policy justifications for not applying the presumption of good faith in ordinary breach of contract actions. The court reasoned that presuming government officials act in good faith in the performance of contractual obligations would create a conflict with the universally recognized principle that the duty of good faith and fair dealing is applied to private parties as well as the government. Furthermore, the court explained that the presumption of good faith conduct of government officials has no relevance to a breach of contract case because proof of fraud or quasi-criminal wrongdoing has never been required to prove a breach of the implied covenant of good faith and fair dealing. Since fraud or quasi-criminal wrongdoing is not at issue in such a claim, the court reasoned there is no concern that an officials reputation will be erroneously tarnished, which is a fundamental reason courts apply a good faith presumption and require a heightened standard of clear and convincing evidence to prove bad faith. Other Courts Follow Telcom Conclusion A majority of courts since Tecom have followed its conclusion that a breach of the implied duty of good faith is distinct from allegations of bad faith conduct. Courts have largely followed the conclusion in Tecom that the good faith

For each circumstance, the court addressed whether the presumption of good faith applies, and what burden of proof the contractor must satisfy in order to prevail on its claim. Table 1 summarizes the court's conclusions. The Tecom court concluded that claims of a breach of the duty of good faith and fair dealing implied in contracts, unlike allegations of bad faith, do not require a heightened standard of

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presumption and a heightened burden of proof do not apply when it is alleged that the government failed to administer a contract in good faith. Several courts have explicitly stated their approval with the Tecom analysis and did not apply a presumption of good faith to actions maintaining a breach of the implied duty of good faith. See the following: Kenney Orthopedic, LLC v. United States, 88 Fed. Cl. 688, 703 (2009) (A claim that the government breached the implied covenant of good faith does not require a showing of bad faith); San Carlos Irrigation and Drainage Dist. v. United States, 84 Fed Cl. 786, 803 n. 10 (2008) (Judge Wolskis discussion in Tecom sets forth a compelling analysis of the law); Erinys Iraq Ltd. v. United States, 78 Fed. Cl. 518, 529 (2007) (citing Tecom); H & S Mfg., Inc. v. United States, 66 Fed. Cl. 301 n. 19 (2005) affd 192 Fed. Appx. 965 (2006); Helix Elec., Inc. v. United States, 68 Fed. Cl. 571, 587 n. 30 (2005); And, A resounding endorsement of the Tecom decision is presented in H & S Mfg., Inc. v. United States, in which the court commented that [t]he governments long touted desideratum that irrefragable proof is needed to demonstrate the absence of good faith in the administration of government contracts has been given its last rites. 66 Fed. Cl. at 301 n. 19.

Timber Prods. Co. v. United States, __ Fed. Cl. __, 2011 WL 6934815 (Dec. 29, 2011) (whether the governments alleged wrongful actions amount to a breach of the implied duties is determined under a reasonableness standard); Firemans Fund Ins. Co. v. United States, 92 Fed. Cl. 598 (2010) (government breaches the duty not to hinder and the duty to cooperate when it acts unreasonably under the circumstances); Scott Timber, Inc. v. United States, 86 Fed. Cl. 102 (2009) (contractor not required to demonstrate malice or bad faith to succeed in a breach of the duty of good faith and fair dealing claim) (same); and, Orlosky Inc. v. United States, 68 Fed. Cl. 296 (2005) (same).

Likewise, courts have also impliedly supported the Tecom analysis by only applying the good faith presumption and a heightened standard of review to instances where the governments alleged wrongful conduct amounts to bad faith in making formal discretionary decisions (i.e., procurement decisions and bid evaluations). See the following: Savantage Fin. Servs., Inc. v. United States, 595 F.3d 1282 (Fed. Cir. 2010) (government presumed to have acted in good faith when issuing a solicitation and no evidence presented to show that the solicitation requirements were designed with a specific intent to injure the bid protestor); Precision Pine, 596 F.3d at 829 (when the governments alleged breach of the implied duty of good faith involves actions by a government actor not a party to the contract, the contractor must prove the government specifically targeted the contractor and reappropriated benefits guaranteed by the parties contract); Centex Corp. v. United States, 395 F.3d 1283, 1305 (Fed. Cir. 2005) (government breached the duty of good faith when Congress abolished a tax law with the purpose and effect of depriving [the contractor]

of a substantial measure of the fruits of the contract .); Galen Med. Assocs., Inc. v. United States, 369 F.3d 1324 (2004) (clear and convincing evidence of bad faith required to overcome the presumption that a committee selecting the bid with the best value failed to do so in good faith); Mori Assocs, Inc. v. United States, __ Fed. Cl. __, 2011 WL 6409124 (Dec. 21, 2011) (applying the clear and convincing evidence standard in a bid protest case); Pyramid Real Estate Servs., LLC v. United States, 95 Fed. Cl. 125, 140 (2010) (Department of Housing and Urban Development presumed to have evaluated bids for real estate asset management services in good faith); Madison Servs., Inc. v. United States, 94 Fed. Cl. 501 (2010) (contractor failed to produce clear and convincing evidence of fraud, misrepresentation of material facts, or other acts of bad faith); and, ViroMed Labs., Inc. v. United States, 87 Fed. Cl. 493, 504 (2009) (bid protestor did not present clear and convincing evidence that the government amended a solicitation with the intent of steering the contract to another bidder).

Other courts have also implicitly concurred with the good faith and fair dealing analysis in Tecom. In several contract cases involving allegations of a government breach of the implied duty of good faith and fair dealing, the Court of Federal Claims did not apply a presumption of good faith to the government officials conduct; instead the courts weighed the evidence under a preponderance of the evidence standard to determine whether the governments actions were reasonable under the circumstances. See the following:

However, since Tecom, the Court of Federal Claims has, at least on two occasions, employed the presumption of good faith to the governments administration of a contract. In Info. Sys. & Networks, Corp. v. United States, 81 Fed. Cl. 740 (2008), the contractor alleged that the government breached the covenant of good faith and fair dealing by misleading the contractor into performing contract changes when a modification was not formally executed, and in its decision to terminate the contract for convenience. The court cited to the presumption of good faith and applied the clear and convincing evidence standard to determine whether the contractor satisfied its burden of showing any bad faith or intentionally oppressive conduct. Ultimately, the court reached the conclusion that the contractor, failed to produce evidence that

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defendants actions in either failing to approve the ECP, terminating the contract, or otherwise administering the contract, were prompted by some specific intent to injure plaintiff. Similarly, in Metcalf Constr. Co. v. United States, __ Fed. Cl. __, 2011 WL 6145128 (Dec. 9, 2011), the contractor alleged that the government violated the duty of good faith and fair dealing by taking various actions that interfered, delayed, and imposed extra-contractual obligations upon the work. As in Info. Sys. & Networks, Corp., the court in Metcalf examined the contractors allegations under the lens of the presumption of good faith for actions specifically targeted to interfere with the contractors contractual rights and expectations. The precedential value of these cases to circumstances involving alleged wrongful contract administration is questionable, however, as the courts applied the presumption of good faith by citing to decisions addressing the governments discretionary and sovereign conduct as a government, not as a contracting partner. See Timber Prods. Co, 2011 WL 6934815 at * 23 (a more exacting standard of proof is not required when examining government conduct arising directly out of the governments contract). Remedies Available Remedies are available for a government breach of the implied duty of good faith and fair dealing in the negotiation and settlement of claims. In addition to understanding the legal standards that courts apply to allegations of a government breach of the duty of good faith and fair dealing, construction professionals administering government contracts or claims should be aware of the potential remedies that are available in these circumstances. The governments breach of the duty of good faith and fair dealing will have significant consequences. Courts have remedied these breaches by: Discharging a contractor from further performance; Overturning a termination for default;

Invalidating a contract modification unfairly obtained by the government; and, Awarding claims preparation costs.

Further Performance Discharged Failing to perform in good faith has been held to be a material breach of the contract which discharges the contractor from further performance. A contractor may be discharged from further performance of a contract when the government is found to have breached the implied duty of good faith and fair dealing. In Malone v. United States, 849 F.2d 1441 (Fed. Cir. 1988), the Federal Circuit held that a contracting officers willful interference with the contractors performance violated the duty of good faith and fair dealing. The contracting officer misled the contractor to perform roughly 70 percent of the work relying upon an inapplicable workmanship standard, which the contracting officer later rejected. The contracting officer also refused for several months to answer the contractors request for clarification of the proper workmanship standard. Finding this conduct to be a material breach of the contract, the court stated that the contractor had, a legal right to avoid the contract, discharges [the contractors] duty to perform, and relieves [the contractor] of the default termination and its consequences. Overturning a Termination for Default A termination for default may be overturned if the contractors failure to perform resulted from the governments lack of good faith. As stated in Malone, a termination for default will not be upheld where the government breaches the duty of good faith and fair dealing during the administration of the contract. Malone v. United States, 849 F.2d at 1446; see also Moreland Corp. v. United States, 76 Fed. Cl. 268 (2007); Libertatia Assocs., Inc. v. United States, 46 Fed. Cl. 702 (2000). The contractor will be relieved of the default termination in such a circumstance even when the contractor was technically in default of the contract. Moreland Corp., 76 Fed. Cl. at 293.

Courts have expressed that a lack of good faith will lead to the reversal of a termination because it cannot be determined if the governments complicity in the contractors failure to perform was the reason for the default. Libertatia Assocs., 46 Fed. Cl. at 712 (In view of the courts finding of bad faith on the part of the government, it is difficult if not impossible to assess whether the administration of the contract and the resulting termination for default was arbitrary and capricious because the evidence of default itself is tainted by bad faith); see also, Abcon Assocs., 49 Fed. Cl. at 690 91 (converting a termination for default to one for convenience due to the governments breach of the duty of good faith).

An Unenforceable Modification A contract modification secured in an unfair negotiation is rendered unenforceable. A contractor may seek to void a contract modification which was negotiated without the requisite good faith on the part of the government. In Freedom NY, Inc. v. Rumsfeld, discussed above, in Part II.B, the contractor alleged that the government pressured the contractor into signing a modification by withholding due and owing progress payments. The Federal Circuit concluded that conditioning payment of approved contract funds upon releasing claims amounted to duress and a lack of good faith and fair dealing. As a result, the court held that the contract modification, including the contractors waiver of certain claims against the government, was not binding upon the contractor. Recoverable Damages Claim costs are recoverable damages when the government breaches the duty of good faith and fair dealing in the claims process. Courts have also awarded contractors claims preparation costs that were incurred because of the governments breach of the duty of good faith and fair dealing. In Orlosky Inc. v. United States, discussed in Part II.B.

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above, the court determined that the contractor engaged in a claims process unnecessarily protracted by the governments lack of good faith in administering the contract. The contractor was forced to prepare a needless request for equitable adjustment and partake in an, obstacle course of claim verification and proposal resubmissions. Finding that the contractors efforts in claims process resulted from the governments negligence and failure to cooperate, the court awarded the contractor its claim preparation costs. Conclusion The covenant of good faith and fair dealing is implied in every contract and imposes reciprocal obligations on the owner and the contractor. In US federal

government contract law, the governments obligation to act in good faith is also well-established. However, the legal standard governing challenges to government behavior has been undergoing a considerable transition in the last decade. In several recent cases, courts have limited the presumption of good faith once enjoyed by government actors. Stripped of the good faith presumption, public owners stand on equal footing with private owners with respect to their duties to administer contracts in good faith. Thus, recent US federal contract cases expanding the government accountability in the claims process are equally informative to private owners. Accordingly, when administering the claims process, it is

important for construction professionals to remain cognizant of the evolution in the law of good faith and fair dealing as outlined in this article. Appreciating the acceptable boundaries of the owners administration of the contract and the claims process will best inform the construction professionals actions when evaluating a contractors claims rights.

ABOUT THE AUTHORS

Christopher J. Brasco is with the firm of Watt, Tieder, Hoffar & Fitzgerald, LLP. He can be contacted by sending email to: cbrasco@wthf.com. Adam M. Tuckman is also with the firm of Watt, Tieder, Hoffar & Fitzgerald, LLP. He can be contacted by sending email to: atuckman@wthf.com.

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