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Federal Circuit Provides Guidance on Differing Site Conditions Claims and Broadens the Scope of the Implied Covenant of Good Faith and Fair Dealing




by:
Kirk J. McCormick
Hinckley, Allen & Snyder LLP - Boston Office

 
June 20, 2014

Previously published on June 18, 2014

A recent decision by the Federal Circuit Court of Appeals represents a major triumph for contractors pursuing certain types of claims against the Federal Government. In Metcalf Construction Co. v. United States, 742 F.3d 984 (Fed. Cir. 2014), the Federal Circuit reinforced the principles underlying the Government’s implied duty of good faith and fair dealing, reversing a trial court decision that would have made it exceedingly difficult for contractors to show that the Government had breached that duty. The Federal Circuit in Metcalf also clarified that a contractor’s duty to investigate site conditions after contract award will not prevent a successful differing site conditions claim that arises from the Government’s pre-award representations.

Background

The project in Metcalf required the prime contractor to design and build 212 military housing units at the Marine Corps base in Oahu, Hawaii. The Request for Proposal ("RFP") included a geotechnical report that indicated that the soil at the site had “slight expansion potential.” The RFP indicated that the information in the soils report was “for preliminary information only,” and it required the successful bidder to conduct its own post-award site investigation. The Government stated during pre-bid questions and answers that the contract would be modified if unforeseen soil conditions were encountered.

After Metcalf Construction Company (“Metcalf”) was awarded the contract, it hired a soil consultant to investigate the site. The consultant concluded that, contrary to the RFP, the soils exhibited “moderate to high” - as opposed to merely “slight” - expansion potential. Because this heightened expansion potential could adversely affect the stability of the constructed units, the consultant made several recommendations for mitigating the soil conditions.

Metcalf immediately notified the Government of the differing condition and requested permission to follow its consultant’s recommendations. However, the Government insisted that Metcalf follow the contract’s original construction requirements. Discussions continued for over a year. Although still without an approved contract modification, Metcalf pursued its consultant’s recommendations by over-excavating and replacing the soil with imported fill. Subsequently, the Government determined there was no differing site condition and refused to pay Metcalf for the majority of the added costs associated with the issue.

Besides mitigating unanticipated expansive soils, Metcalf had to remediate certain contaminated soils at the Project site, despite the Government’s pre-award assurances that no such remediation would be necessary. Although the Government ultimately issued a change order concerning the contaminated soils, Metcalf claimed the compensation was inadequate and failed to address the costs it incurred. Metcalf also faced other disruptions and hindrances before completing the Project several months past the contract completion date.

Metcalf subsequently submitted to the Contracting Officer a claim seeking its costs associated with the expansive soils and the other issues it encountered during performance. In its claim, Metcalf argued that the Government had materially breached the contract and the implied duty of good faith and fair dealing by failing to timely investigate the findings of Metcalf’s soils consultant and interfering with Metcalf’s work. After receiving the Contracting Officer’s Final Decision denying its claim, Metcalf sued in the United States Court of Federal Claims. The Government asserted a counterclaim for liquidated damages due to Metcalf’s failure to meet the contract completion date.

Although the trial court ruled in Metcalf’s favor on certain claims, it awarded the Government more than $2.4 million in liquidated damages due to late completion of the Project. The court also ruled that the Government had not violated the implied duty of good faith and fair dealing, because the Government had not undertaken “specifically targeted action” to gain the benefit of the contract or intended to delay or hamper performance of the contract. The trial court also stated that unless at least one factor is present, “incompetence and/or the failure to cooperate or accommodate a contractor’s request do not trigger the duty of good faith and fair dealing.”

Regarding Metcalf’s differing site condition claim, the trial court ruled that the RFP’s representations regarding swell potential and contaminated soils were excused by Metcalf’s obligations to conduct a post-award site investigation. According to the court, Metcalf was entitled to rely on the Government’s representations only “for bidding purposes” and not “in performing the...project.” Metcalf therefore assumed the financial responsibility for any differing conditions encountered at the site.

The Federal Circuit Reverses

Implied Duty of Good Faith and Fair Dealing

The Federal Circuit reversed, holding that the trial court applied the wrong standard in analyzing Metcalf’s good faith and fair dealing claim. The Court held that to prevail on this claim, a contractor need not show that the Government “specifically targeted” the contractor. Rather, the contractor need show only that the Government “interfere[d] with the [contractor’s] performance” and “destroy[ed] the [contractor’s] reasonable expectations...regarding the fruits of the contract.” The Federal Circuit emphasized that “a breach of the implied duty of good faith and fair dealing does not require a violation of an express provision in the contract,” and the Court sent the case back to the trial court to determine whether these standards had been met.

Differing Site Conditions

The Federal Circuit also rejected the trial court’s conclusion that Metcalf’s post-award duty to investigate site conditions shifted the risk of any differing site conditions to Metcalf, finding that this rationale misinterpreted the contract:

Nothing in the contract's general requirements that Metcalf check the site as part of designing and building the housing units, after the contract was entered into, expressly or implicitly warned Metcalf that it could not rely on, and that instead it bore the risk of error in, the government's affirmative representations about the soil conditions. To the contrary, the government made those representations in the RFP and in pre-bid questions-and-answers for bidders' use in estimating costs and therefore in submitting bids that, if accepted, would create a binding contract. The natural meaning of the representations was that, while Metcalf would investigate conditions once the work began, it did not bear the risk of significant errors in the pre-contract assertions by the government about the subsurface site conditions.

The court examined the purpose of the standard differing site condition clause, Federal Acquisition Regulation (FAR) 52.236-2, which the court noted was intended to “take at least some of the gamble on subsurface conditions out of bidding” by enabling contractors to obtain contract modifications if they encounter differing subsurface conditions. In that regard, the Federal Circuit confirmed that provisions requiring a pre-bid site investigation (such as FAR 52.236-3(a)) have been interpreted “cautiously,” and that even those provisions do not preclude a successful differing site condition claim, as long as a reasonable pre-bid site investigation was actually performed. Similarly, the Court held that the Government could not avoid liability simply because its RFP indicated that the information was “preliminary.” The RFP and other pre-bid information had advised bidders that they would be entitled to a change order if they encountered differing conditions, and the fact that Government-provided information was “preliminary” did not shift the risk of differing conditions to Metcalf.

Metcalf’s Impact for Federal Contractors

The Metcalf case represents an important victory for federal contractors for at least two reasons. First, it reversed the Court of Federal Claims’ narrow reading of the Government’s duty of good faith and fair dealing. As a result, Metcalf opens the door for potentially viable claims based on the Government’s failure to cooperate or failure to properly administer the contract, even where the Government has not breached an express provision of the contract or “specifically targeted” the contractor.

Second, Metcalf reaffirms previous case law regarding the federal differing site conditions clause and the contractor’s duty to investigate. After Metcalf, contractors may pursue successful differing site conditions claims even when their contract contains provisions that seem to bar recovery. For example, contracting officers will often use FAR 52.236-3, which generally requires contractors to investigate the site pre-bid, to shield the Government from liability. As Metcalf and its cited cases clarify, however, those clauses do not create a duty by the contractor to investigate conditions beyond a reasonable degree, nor do they completely shift the risks associated with differing conditions to the contractor.



 

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
 

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