Long Live Reasonableness: Reinforcing Implied Duty of Good Faith and Fair Dealing in Government Contracts
Last month, in CanPro Investments Ltd. v. United States, COFC No. 16-268C (April 2017), the Court of Federal Claims (“COFC” or “Court”) denied the Government’s motion for reconsideration and reaffirmed its prior decision that CanPro Investments Ltd. (“CanPro”) may continue to litigate its claim for breach of the implied duty of good faith and fair dealing against the General Services Administration (“GSA”). CanPro alleged that the Government breached the implied duty by receiving an unreasonable number of visitors at the building it leased from CanPro – and despite their being no specific contractual provision regulating the number of permitted visitors. This decision is important because it reinforces the implied duty as a mechanism to protect a party’s reasonable expectations arising from a government contract.
Pertinent Factual and Procedural Background
In 2012, GSA leased certain office space in Boca Raton, Florida from CanPro for a local Social Security Administration (“SSA”) office. Although the lease included a release provision under which CanPro waived any claims arising from “the Government’s normal and customary use of the leased premises,” CanPro understood from GSA that visitors to the SSA during “peak times” would not exceed 250 per day. After the SSA’s West Palm Beach location closed, CanPro experienced an “overwhelming amount of visitors” to its Boca Raton building which, in turn, resulted in CanPro incurring significant additional expenses.
Following unsuccessful discussions between the parties, in November 2014, CanPro filed a certified claim with the GSA contracting officer alleging, among other things, that “GSA ‘materially breached’ the lease and the ‘implied covenant of reasonable use’ by scheduling and accommodating approximately 500 visitors daily.” CanPro demanded $250,000 and termination of the lease. Almost five months later, the contracting officer issued a final decision denying the claim in its entirety, emphasizing that the lease failed to contain a specific clause limiting the number of daily visitors. CanPro appealed to the Court.
Shortly after filing its complaint, CanPro faced a motion to dismiss. The Court ultimately granted the majority of the Government’s motion, leaving intact only CanPro’s claim for breach of the implied duty of good faith and fair dealing “premised on the allegation that the SSA’s use of the leased space is unreasonable and beyond the use intended by the parties.” Op. on Mot. to Dis. at 29 (reported at 130 Fed. Cl. 320 (2017)). The Government moved for reconsideration, which the Court denied in April 2017.
Analysis of the Court’s Decision on the Motion to Dismiss
Pertinently, the Court rejected the Government’s arguments to dismiss CanPro’s breach claim based on the implied duty of good faith and fair dealing, which as the Court noted “can also be phrased as ‘the implied duty not to hinder and the implied duty to cooperate.’” Op. on Mot. to Dis. at 25 (quoting Precision Pine & Timber, Inc. v. United States, 596 F.3d 817, 827 (Fed. Cir. 2010)).
First, the Government argued that CanPro’s continued ability to perform its obligations under the lease by providing the space means that neither GSA nor SSA has acted to hinder or “interfere with CanPro’s performance of the lease.” Op. on Mot. to Dis. at 25. In finding this argument unpersuasive, the Court recognized that “Government actions that are unreasonable under the circumstances” can violate the duty not to hinder, and the Government’s “failure to provide assistance at the request of a contractor has amounted to a breach of the duty to cooperate.” Id. (citations omitted). Thus, although CanPro was able to continue performing its obligations under the lease, its allegations were “sufficient to plausibly demonstrate that its performance has been hindered.” Op. on Mot. to Dis. at 25.
Second, the Government contended that, because GSA continues to pay the contractually specified rent, neither GSA nor SSA acted to deprive CanPro of its expectations under the lease. Id. at 26. The Court found this argument to be unduly restrictive, recognizing that the implied duty of good faith and fair dealing broadly “prevents a party’s acts or omissions that, though not proscribed by the contract expressly, are inconsistent with the contract’s purpose and deprive the other party of [its] contemplated value.” Op. on Mot. to Dis. at 26 (quoting Metcalf Constr. Co. v. United States, 742 F.3d 984, 991 (Fed. Cir. 2014)). The Court concluded that the Government’s actions may have “den[ied] CanPro its reasonably expected value of consideration due to the significant increased costs it has incurred.” Op. on Mot. to Dis. at 26
Third, the Court dismissed as misplaced the Government’s contention that “the presumption that Government officials act in good faith” requires a plaintiff to “allege and prove facts constituting malice” to succeed on a claim for breach of the implied duty. Id. at 27. In doing so, the Court professed that “‘[t]he presumption of good faith conduct of government officials has no relevance’ to the implied duty of good faith and fair dealing [because] [t]he presumption only arises where conduct ‘approaching fraud or quasi-criminal wrongdoing’ is involved.” Id. (quoting Tecom, 66 Fed. Cl. at 771).
Analysis of the Court’s Decision on Reconsideration
In its reconsideration motion, the Government argued that “[a]n implied duty of good faith and fair dealing must attach to a specific substantive obligation.” Op. on Mot. for Recon. at 4 (internal quotations and citations omitted). The Court concluded that this argument lacked merit because “[r]equiring the implied duty of good faith and fair dealing to literally ‘attach’ to a specific contractual duty, rather than be grounded in contractual provisions generally to ensure that the reasonable expectations of the parties are respected . . . would render the implied duty wholly superfluous.” Id. (citing Centex Corp. v. United States, 395 F.3d 1283, 1306 (Fed. Cir. 2005)). The Court emphasized that “[a]n aggrieved party need only show interference with its ‘reasonable expectations . . . regarding the fruits of the contract.’” Op. on Mot. for Recon. at 4 (quoting Centex, 395 F.3d at 1304, and citing Restatement (Second) of Contracts § 205 cmt. a). “In sum, the existence of a provision addressing the ‘normal and customary use’ of the premises (whatever it may be), the incorporation of building specifications into the lease, and basic common sense—or any of these, standing alone—indicate that defendant cannot plausibly argue that the parties reasonably expected an unlimited number of daily visitors to the SSA office.” Op. on Mot. for Recon. at 6 (emphasis added).
The implied duty is not dead. Despite the Civilian Board of Contract Appeals’ recent opinion in TranBen, Ltd. v. Department of Transportation, CBCA 5448 (Jan. 26, 2017) that offered a restrictive interpretation of the implied duty, the CanPro decisions reinforce the strength of the implied duty as a mechanism to protect a party’s reasonable expectations arising from a government contract.
Reasonable expectations are protected. The Court’s decisions emphasize that an aggrieved party need only show interference with its reasonable expectations regarding the fruits of the contract to mount a claim for breach of the implied duty not to hinder and to cooperate. A specific contractual provision need not be breached to set forth a viable claim under the implied duty, and bad faith (or a lack of good faith) need not be demonstrated. As a result, this doctrine helps to instill fairness and to ensure that parties act in a reasonable manner under government contracts. Of course, contractors still should consider including any important requirements (or expectations) in the contract itself. It often is easier to argue that an express contract provision has been breached versus an implied duty arising from that contract.
Unreasonable impediments can be actionable. These decisions demonstrate that the Government should not be able to defeat a claim for breach of the implied duty merely by asserting that its actions have neither caused the contractor to be unable to perform nor resulted in the Government stopping payment for the contractor’s performance. Even though a contractor is able to continue performance or has been paid, allegations of unreasonable impediments caused by the Government can be sufficient to plausibly demonstrate that the contractor’s performance has been hindered or that the contractor has not reaped the expected benefits under the contract.
The implied duty has limits. Although these decisions follow the Federal Circuit’s 2014 Metcalf Construction opinion, contractors still should be cognizant that the implied duty has its limits. In Metcalf Construction, the Federal Circuit recognized that the implied duty of good faith and fair dealing cannot be used to “trench on the authority of other government entities or on responsibilities imposed on the contracting agency independent of contracts.” Furthermore, and more importantly, an action “will not be found to violate the duty (which is implicit in the contract) if such a finding would be at odds with the terms of the original bargain, whether by altering the contract’s discernible allocation of risks and benefits or by conflicting with a contract provision.”