Metcalf Construction Company v. United States , 742 F.3d 984 ( 2014 )

United States Court of Appeals
for the Federal Circuit
______________________
METCALF CONSTRUCTION COMPANY, INC.,
Plaintiff-Appellant,
v.
UNITED STATES,
Defendant-Appellee.
______________________
2013-5041
______________________
Appeal from the United States Court of Federal
Claims in No. 07-CV-0777, Judge Susan G. Braden.
______________________
Decided: February 11, 2014
______________________
ROBERT J. SYMON, Bradley Arant Boult Cummings
LLP, of Washington, DC, argued for plaintiff-appellant.
With him on the brief was ERIC A. FRECHTEL.
ELLEN M. LYNCH, Trial Attorney, Commercial Litiga-
tion Branch, Civil Division, United States Department of
Justice, of Washington, DC, argued for defendant-
appellee. With her on the brief were STUART F. DELERY,
Assistant Attorney General, JEANNE E. DAVIDSON, Direc-
tor, REGINALD T. BLADES, JR., Assistant Director, and
RUSSELL J. UPTON, Trial Attorney.
2 METCALF CONSTRUCTION COMPANY v. US
JERROLD J. GANZFRIED, Holland & Knight LLP, of
Washington, DC, for amicus curiae Associated General
Contractors of America. With him on the brief was
STEPHEN B. SHAPIRO. Of counsel on the brief was RALPH
C. NASH, of Washington, DC.
MAURICE BASKIN, Venable LLP, of Washington, DC,
for amicus curiae Associated Builders and Contractors,
Inc. With him on the brief was REBECCA PEARSON.
ROBYNNE T. PARKINSON, Thaxton Parkinson PLLC, of
Mercer Island, Washington, for amici curiae The Design-
Build Institute of America, et al. Of counsel on the brief
was MICHAEL LOULAKIS, Capital Project Law Group
PLLC, of Reston, Virginia.
______________________
Before O’MALLEY, PLAGER, and TARANTO, Circuit
Judges.
TARANTO, Circuit Judge.
We consider the scope of the duty of good faith and
fair dealing under a contract between the federal govern-
ment and a private company engaged to design and to
build housing for the military. We hold that the Court of
Federal Claims misread our precedent in articulating
what the contractor, Metcalf Construction Company,
needed to show in order to prove that the government
breached that duty. We also hold that the trial court
misinterpreted certain contractual provisions related to
Metcalf’s good-faith-and-fair-dealing claim. We therefore
vacate the trial court’s decision that Metcalf failed to
establish liability, vacate the accompanying damages
award, and remand for further proceedings using the
correct standard.
METCALF CONSTRUCTION COMPANY v. US 3
BACKGROUND
A
In 2002, the United States Navy awarded Metcalf a
contract to design and to build housing units at Marine
Corps Base Hawaii, which is located on Kaneohe Bay on
the northeastern side of the island of Oahu. Under the
original contract, Metcalf had to build 188 units by March
2005, and the government promised to pay Metcalf
$42,971,000. The parties modified the contract numerous
times. Eventually, the contract required Metcalf to build
212 units by October 17, 2006, for a price of just under
$50 million.
On December 31, 2002, the Navy told Metcalf to pro-
ceed with performance, but problems arose almost imme-
diately. One involved the soil at the site of construction.
“Expansive soil” swells when wet, which can lead to
cracks in concrete foundations and other damage. Be-
cause the character of the soil could significantly affect
the cost of construction, it was a topic of attention in the
process preceding the signing of the contract. Before the
Navy issued its initial request for proposals—the request
to which Metcalf responded, leading to the contract—a
government-commissioned report found that the soil at
the site had a “slight expansion potential.” In outlining
construction requirements, the request for proposals cited
that report as relevant to certain features of the project,
such as concrete foundations.
The government made clear that its pre-request soil
report was not to be the last word on soil conditions for
purposes of the project. A revised request for proposals
stated that the requirements in the “soil reconnaissance
report” were “for preliminary information only.” The
resulting contract required that the contractor conduct its
own independent soil investigation, and it incorporated
Federal Acquisition Regulation (FAR) 52.236-2, 48 C.F.R.
§ 52.236-2, which concerns site conditions that differ
4 METCALF CONSTRUCTION COMPANY v. US
materially from those disclosed in the contract. Even
before potential bidders had submitted proposals in
response to the request, the government had clarified, in a
publication written in question-and-answer form, that the
contract would be amended if the contractor’s post-award
independent investigation turned up soil conditions
significantly different from those described in the gov-
ernment’s report:
Q15: . . . This requires an independent investiga-
tion after award. . . . Should we infer from this
that any unforeseen soil conditions or variances
from the Government’s soils report will be dealt
with by change order?
Answer: Yes, if there’s a major disparity from the
Government’s soil reconnaissance report.
At the end of January 2003, after the contract took ef-
fect, Metcalf hired Geolabs, Inc., to investigate the soil.
Five months later, Geolabs reported that the soil’s swell-
ing potential was “moderate to high,” not “slight” (as the
pre-bid government study had said), and recommended a
course of action to account for the newly uncovered condi-
tion. Within days, Metcalf notified the Navy. Discussions
ensued, delaying construction for roughly a year. In those
discussions, Metcalf insisted on following Geolabs’s rec-
ommendations, while the Navy generally insisted on
following construction requirements set out in the original
contract. By mid-2004, Metcalf decided that the cost of
waiting for the Navy to approve the Geolabs-
recommended design changes had become too high, and it
began to implement those changes by over-excavating the
soil and replacing it with non-expansive fill, despite
awareness of the risk of proceeding without a contract
modification.
In August 2004, the Navy came to rest on how it
would treat Metcalf’s claim regarding the soil’s swelling
potential. The Navy denied that there was any material
METCALF CONSTRUCTION COMPANY v. US 5
difference between the pre-bid and post-award soil as-
sessments and thus concluded that no additional compen-
sation was warranted. But the Navy also approved
contract modifications that (1) paid Metcalf about $14,000
for additional soil tests and (2) authorized Metcalf to build
two prototype units in accordance with Geolabs’s recom-
mendations, at an increased cost of $56,640 over an
additional five days.
By that time, Metcalf was about 200 days “behind
schedule.” In an effort to get back on track, and in light of
the Navy’s decision, Metcalf decided to start addressing
the expansive-soil issue through the use of “post-tension”
concrete, which was more expensive than ordinary con-
crete but would avoid the additional time and cost of
continuing to over-excavate the soil and import non-
expansive fill. The trial court here noted that the Navy
amended the contract to approve the use of post-tension
concrete slabs (later concluding that Metcalf was not
entitled to recover increased costs associated with that
design change). All told, Metcalf claims that the expan-
sive-soil problems cost more than $4.8 million, mostly for
over-excavating the soil under certain units and using
post-tension concrete slabs.
Delays in construction also resulted from the presence
in the soil of more of a chemical contaminant—
chlordane—than had been expected. In the request for
proposals, the government had represented: “Chlordane is
present in the soils around the building foundation.
Remediation actions are not required since the levels are
acceptable.” The government made the same representa-
tion in its pre-proposal question-and-answer clarification:
Q34: Does the Navy have any requirements for
removal of the Chlordane contaminated soil,
shown on the environmental survey? For exam-
ple, if homes are built over the contaminated area
6 METCALF CONSTRUCTION COMPANY v. US
or will the Navy require removal of the Chlor-
dane?
Answer: No remediation action of the Chlordane
contaminated soil is required . . . .
In August 2003, after the contract took effect, the Navy
issued instructions to Metcalf about testing the soil for
chlordane and disposing of any contaminated soil.
By 2005, excavated soil was accumulating on the site,
and Metcalf needed a place to store it. (The request for
proposals had said that the contractor would have access
to a landfill, but the landfill had closed.) Before moving
the soil, Metcalf had to test it for chlordane. Metcalf
found higher levels than the pre-bid representation by the
government, and it notified the Navy. The parties dis-
cussed the matter, with each other and with State author-
ities. The Navy ultimately decided that, although the
amount of chlordane found was higher than detected
before the contract, the level that was acceptable was also
higher than previously stated. With the exception of one
“hot spot,” the Navy deemed the site to be safe. The Navy
afforded Metcalf a 286-day extension for completing the
building project and reimbursed Metcalf $1,493,103 for
costs associated with chlordane remediation, but Metcalf
sought an additional $500,000.
There were other disputes and interruptions along the
way to Metcalf’s ultimate completion of the project.
Metcalf alleges, for example, that the Navy imposed
requirements not found in the written contract and that
an uncooperative inspector hindered the project. The
Navy accepted the last three buildings on March 2, 2007,
a few months after the October 17, 2006 deadline (which
was the result of certain extensions). Metcalf alleges that
its final cost of construction was roughly $76 million. The
government paid Metcalf less than $50 million.
METCALF CONSTRUCTION COMPANY v. US 7
B
On March 30, 2007, Metcalf filed a claim for damages
with the Navy’s contracting officer. What is relevant here
is that Metcalf argued that the Navy had materially
breached the contract and—what is before us—the im-
plied duty of good faith and fair dealing under the con-
tract. The contracting officer denied the claim.
Metcalf brought suit in the Court of Federal Claims
under the Contract Disputes Act, 41 U.S.C. § 609 (2006)
(later recodified at 41 U.S.C. § 7104, see Public Contracts
Act of Jan. 4, 2011, Pub. L. No. 111-350, 124 Stat. 3677).
The government counterclaimed under a liquidated-
damages provision of the contract, seeking a specified
amount for each day past October 17, 2006, that Metcalf
had not completed the job. In early 2010, the case went to
trial in two phases.
The court issued a decision on liability in December
2011. Metcalf Const. Co. v. United States, 102 Fed. Cl.
334 (2011). After analyzing each of Metcalf’s particular
complaints, the court concluded that Metcalf had “failed
to establish liability under all claims alleged,” id. at 370,
with two exceptions. First, the court held that the Navy
had violated FAR 52.236-2(b) by failing to investigate the
expansiveness of the soil in a timely manner. Id. at 354,
370-71. Second, the court held that the Navy had not
issued a proper notice to proceed at the beginning of the
project until months later than contractually required.
Id. at 369-70. The court ultimately determined that this
delay was a breach that rendered Metcalf unable to work
for that period, to its detriment. Id.; Metcalf Constr. Co.
v. United States, 107 Fed. Cl. 786, 788 & n.2 (2012).
In its 2012 opinion on damages and the government’s
liquidated-damages counterclaim, the court decided that
liquidated damages against Metcalf were proper because
the parties had agreed to a completion date (October 17,
2006) and Metcalf missed it. The court rejected Metcalf’s
8 METCALF CONSTRUCTION COMPANY v. US
argument that the two delay-causing breaches by the
government nullified any liquidated damages based on
late delivery. Id. at 789. As for the two government
breaches, the court held first that Metcalf was not entitled
to damages for the expansive-soil-related breach because
only “post-January 2006 delays, primarily occasioned by
the chlordane remediation, were responsible for Metcalf
not completing the project on time”; the court had rejected
liability for chlordane problems; and (an apparent implicit
premise) the only damages sought were tied to delay of
completion past the due date. Id. at 794-95. The court
found, however, that Metcalf was entitled to $272,191.59
in damages on the notice-to-proceed breach ($2,700 per
day in “general condition costs” for 99 days, plus a “1.83%
general overhead rate”). Id. at 795 & n.15. On December
28, 2012, the court entered final judgment for the gov-
ernment in the amount of $2,401,315.41 ($2,637,507 in
liquidated damages minus $272,191.59), plus interest.
Metcalf appeals. We have jurisdiction under 28
U.S.C. § 1295(a)(3).
DISCUSSION
Two claims are at issue: Metcalf’s claim for breach of
the implied duty of good faith and fair dealing, and the
government’s counterclaim for liquidated damages. See
Oral Arg. at 15:20-20:45 (“Q [to Metcalf’s counsel]: You
have only one count of the complaint surviving, and that’s
based on the duty of good faith and fair dealing? A:
That’s correct.”). Metcalf takes issue with the trial court’s
decisions on both. With respect to its own claim, Metcalf
contends that the court (A) applied the wrong legal stand-
ard and (B) misinterpreted certain contract provisions
underlying the claim. We agree, and we therefore vacate
the judgment on Metcalf’s claim and remand. Because
the reconsideration of liability for government breach may
affect any entitlement the government has to liquidated
METCALF CONSTRUCTION COMPANY v. US 9
damages, we vacate the judgment on the government’s
counterclaim and remand on that matter as well.
A
1
“Every contract imposes upon each party a duty of
good faith and fair dealing in its performance and en-
forcement.” Restatement (Second) of Contracts § 205
(1981) (“Restatement”), quoted in Alabama v. North
Carolina, 120 S. Ct. 2295, 2312 (2010). Failure to fulfill
that duty constitutes a breach of contract, as does failure
to fulfill a duty “imposed by a promise stated in the
agreement.” Restatement § 235. We have long applied
those principles to contracts with the federal government.
E.g., Precision Pine & Timber, Inc. v. United States, 596
F.3d 817, 828 (Fed. Cir. 2010); Malone v. United States,
849 F.2d 1441, 1445-46 (Fed. Cir. 1988).
Identifying some acts as breaches of the duty, like
“[s]ubterfuges and evasions,” id. at 1445, may require
little reference to the particular contract. In general,
though, “what that duty entails depends in part on what
that contract promises (or disclaims).” Precision Pine, 596
F.3d at 830. That is evident from repeated formulations
that capture the duty’s focus on “faithfulness to an agreed
common purpose and consistency with the justified expec-
tations of the other party” (Restatement § 205 cmt. a),
which obviously depend on the contract’s allocation of
benefits and risks. “The covenant of good faith and fair
dealing . . . imposes obligations on both contracting par-
ties that include the duty not to interfere with the other
party’s performance and not to act so as to destroy the
reasonable expectations of the other party regarding the
fruits of the contract.” Centex Corp. v. United States, 395
F.3d 1283, 1304 (Fed. Cir. 2005) (emphases added). “Both
the duty not to hinder and the duty to cooperate are
aspects of the implied duty of good faith and fair dealing.”
Precision Pine, 596 F.3d at 820 n.1. What is promised or
10 METCALF CONSTRUCTION COMPANY v. US
disclaimed in a contract helps define what constitutes
“lack of diligence and interference with or failure to
cooperate in the other party’s performance.” Malone, 849
F.2d at 1445. In short, while the implied duty exists
because it is rarely possible to anticipate in contract
language every possible action or omission by a party that
undermines the bargain, the nature of that bargain is
central to keeping the duty focused on “honoring the
reasonable expectations created by the autonomous
expressions of the contracting parties.” Tymshare, Inc. v.
Covell, 727 F.2d 1145, 1152 (D.C. Cir. 1984) (per Scalia,
J.).
We have expressed this principle when we have said
that the “implied duty of good faith and fair dealing
cannot expand a party’s contractual duties beyond those
in the express contract or create duties inconsistent with
the contract’s provisions.” E.g., Precision Pine, 596 F.3d
at 831. Although in one sense any “implied” duty “ex-
pands” the “express” duties, our formulation means
simply that an act 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.
The implied duty of good faith and fair dealing is limited
by the original bargain: it 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 the contemplated value.
See First Nationwide Bank v. United States, 431 F.3d
1342, 1350 (Fed. Cir. 2005) (duty was breached by legisla-
tion that “changed the balance of contract consideration”).
We applied these principles in Precision Pine, which
involved logging contracts that expressly allowed the
government to suspend the private contractor’s timber-
harvesting operations in order to “‘comply with a court
order.’” 596 F.3d at 828. Faced with an injunction pro-
METCALF CONSTRUCTION COMPANY v. US 11
hibiting logging, the government suspended the contracts,
as the contracts allowed, and we declined to find a breach
of the duty of good faith and fair dealing in alleged unrea-
sonable delay in the government’s carrying out of actions
ordered by the court before harvesting might resume. Id.
at 828-31. We held that there was no breach because of
two grounds combined: the challenged delays “were
(1) not ‘specifically targeted[’ at the contracts,] and (2) did
not reappropriate any ‘benefit’ guaranteed by the con-
tracts, since the contracts contained no guarantee that . . .
performance would proceed uninterrupted.” Id. at 829.
On the central point about the underlying contract
bargain, Precision Pine emphasized that “the contracts
expressly qualified” the benefit of timber harvesting that
Precision Pines alleged the government’s actions had
impaired. Id. More specifically, as we later explained,
the particular “court order” clause of the contract at issue
in Precision Pine, in expressly authorizing suspension of
harvesting to comply with a court order, made clear that
the contract bargain did not include limits on the timing
of the government’s compliance with an obligation im-
posed by the court. Scott Timber Co. v. United States, 692
F.3d 1365, 1375 (Fed. Cir. 2012) (“Significantly, here, as
in Precision Pine, the obligation to comply with the in-
junction is not owed to the timber company but to the
court that issued the injunction and the party that sought
the injunction. There is no basis for redefining the con-
cept of good faith and fair dealing to include a require-
ment of diligence in complying with obligations imposed
by another tribunal in a separate case.”). As a result, an
essential basis of Precision Pine was that the challenged
conduct was not contrary to the contract bargain. Preci-
sion Pine, 596 F.3d at 830 (stressing that the challenged
12 METCALF CONSTRUCTION COMPANY v. US
delay involved obligations under the injunction, not under
the contract). 1
Our recent decision in Bell/Heery v. United States,
No. 2013-5002, –F.3d–, 2014 WL 43892 (Fed. Cir. Jan. 7,
2014), likewise reflects the need to take account of the
particular contract at issue in considering a claim of
breach of the good-faith-and-fair-dealing duty implicit in
that contract. Bell/Heery’s complaint “focuse[d] on the
frustrating conduct of . . . an independent state agency,”
alleging in particular that the state agency had unrea-
sonably administered state permits after Bell/Heery had
based its bid for a federal-government project on a belief
that the agency would act more favorably. Id. at *10. We
concluded that the contract itself allocated to Bell/Heery
the risks attending the securing of the required state
permits, and we saw no basis for finding that the federal
government had affirmatively interfered with Bell/Heery’s
dealings with the state agency or “reappropriated benefits
promised to [Bell/Heery] under the contract.” Id. at *9-10.
On those bases, we rejected a good-faith-and-fair-dealing
claim that sought to shift the responsibility for a state
agency’s alleged unreasonableness onto the federal gov-
ernment.
1 In Scott Timber, the court underscored the cen-
trality of understanding the allocation of benefits and
risks by the specific contract provisions at issue when it
contrasted the specific “court order” contract provision at
issue there and in Precision Pine with the distinct con-
tract provision under which the government had acted in
an earlier case involving the Scott Timber Company. See
Scott Timber, 692 F.3d at 1375 & n.4, describing Scott
Timber Co. v. United States, 333 F.3d 1358 (Fed. Cir.
2003).
METCALF CONSTRUCTION COMPANY v. US 13
2
The trial court’s decision in this case rests on an un-
duly narrow view of the duty of good faith and fair deal-
ing. Relying almost entirely on Precision Pine, it held
that “a breach of the duty of good faith and fair dealing
claim against the Government can only be established by
a showing that it ‘specifically designed to reappropriate
the benefits [that] the other party expected to obtain from
the transaction, thereby abrogating the government’s
obligations under the contract.’” Metcalf, 102 Fed. Cl. at
346 (emphasis added; bracketed word added by trial
court). Underscoring its narrow view, the court added
that “incompetence and/or the failure to cooperate or
accommodate a contractor’s request do not trigger the
duty of good faith and fair dealing, unless the Govern-
ment ‘specifically targeted’ action to obtain the ‘benefit of
the contract’ or where Government actions were ‘under-
taken for the purpose of delaying or hampering perfor-
mance of the contract.’” Id. (alterations omitted). The
court invoked those principles when deciding Metcalf’s
specific claims for breach. E.g., id. at 363-64.
The trial court misread Precision Pine, which does not
impose a specific-targeting requirement applicable across
the board or in this case. The cited portion of Precision
Pine does not purport to define the scope of good-faith-
and-fair-dealing claims for all cases, let alone alter earlier
standards. The passage cited by the trial court, after
saying as a descriptive matter that cases of breach “typi-
cally involve some variation on the old bait-and-switch,”
Precision Pine, 596 F.3d at 829, says that the government
“may be liable”—not that it is liable only—when a subse-
quent government action is “specifically designed to
reappropriate the benefits the other party expected to
obtain from the transaction.” Id. (emphasis added).
Precision Pine then states its holding as rejecting breach
for two reasons combined: the challenged government
actions “were (1) not ‘specifically targeted[’ at the con-
14 METCALF CONSTRUCTION COMPANY v. US
tracts,] and (2) did not reappropriate any ‘benefit’ guaran-
teed by the contracts.” Id.
As that statement indicates, the court in Precision
Pine did not hold that the absence of specific targeting, by
itself, would defeat a claim of breach of the implied duty—
i.e., that proof of specific targeting was a requirement for
a showing of breach. When the court said that specific
targeting would have been required for breach of the duty
in that case, id. at 830, it did so in a context in which the
more general bargain-impairment grounds for breach of
the duty were unavailable, because the suspension-by-
court-order provision expressly authorized the suspen-
sion, without limitation on the time of compliance with
the order. That is enough to make clear that specific
targeting is not a general requirement. In addition, the
challenged government conduct in Precision Pine occurred
in implementing a separate government authority and
duty independent of the contract, namely, enforcement of
and compliance with the injunction. In that context—as
in the legislative context from which Precision Pine bor-
rowed its reference to specific targeting, 596 F.3d at 830
(citing Centex and First Nationwide Bank)—the “specifi-
cally targeted” language protects against use of the im-
plied contract duty to trench on the authority of other
government entities or on responsibilities imposed on the
contracting agency independent of contracts. The present
case involves no such concern.
The government attempts to defend the trial court’s
standard by arguing that Precision Pine did not change
the good-faith-and-fair-dealing standard. But that asser-
tion sidesteps the question of what standards Precision
Pine and other precedents establish. The answer to that
question is that, as already explained, neither Precision
Pine nor other authority supports the trial court’s holding
that specific targeting is required generally or in the
present context, which does not involve the kind of dual-
authority circumstances that gave rise to the “specifically
METCALF CONSTRUCTION COMPANY v. US 15
targeted” formulation as part of the inquiry in Precision
Pine. The general standards for the duty apply here. The
trial court erred in relying on Precision Pine for a differ-
ent, narrow standard.
In seeking nevertheless to defend the trial court’s
judgment, the government relies on a legal standard it
draws from another statement in Precision Pine—that the
duty “cannot expand a party’s contractual duties beyond
those in the express contract or create duties inconsistent
with the contract’s provisions.” Id. at 831. That state-
ment does not even on its face support the specific-
targeting standard applied by the trial court. It is also
not a statement the trial court recited and relied on.
Critically, moreover, as a substantive matter, the quoted
language does not mean what the government seems to
urge.
As we have already explained, all that the quoted lan-
guage means is that the implied duty of good faith and
fair dealing depends on the parties’ bargain in the partic-
ular contract at issue. See section A.1, supra. The gov-
ernment suggests a much more constraining view when it
argues, for example, that there was no breach of the
implied duty because “Metcalf cannot identify a contract
provision that the Navy’s inspection process violated.”
Gov’t Br. 16. 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.
The government cites a few decisions to bolster its ap-
parent position, but none of them holds that the implied
duty requires a breach of an express contractual duty.
For example, Bradley v. Chiron Corp., 136 F.3d 1317
(Fed. Cir. 1998), in addressing a claim of constructive
fraud under California law, mentions the duty of good
faith and fair dealing only in a parenthetical explaining
an intermediate appellate court decision from California,
id. at 1326, and the cited decision itself makes clear that
16 METCALF CONSTRUCTION COMPANY v. US
“the covenant is implied as a supplement to the express
contractual covenants, to prevent a contracting party from
engaging in conduct which (while not technically trans-
gressing the express covenants) frustrates the other
party’s rights to the benefits of the contract.” Racine &
Laramie, Ltd. v. California Dep’t of Parks and Recreation,
11 Cal. App. 4th 1026, 1031-32, 14 Cal. Rptr. 2d 335, 339
(1992) (internal quotation marks omitted). In Centex,
moreover, we declined to read Bradley’s parenthetical
expansively, concluding that “it would be inconsistent
with the recognition of an implied covenant if we were to
hold that the implied covenant of good faith and fair
dealing could not be enforced in the absence of an express
promise to pay damages in the event of conduct that
would be contrary to the duty of good faith and fair deal-
ing.” 395 F.3d at 1306. And the government’s other
featured case, United States v. Basin Elec. Power Co-op.,
248 F.3d 781 (8th Cir. 2001), similarly recognizes that the
implied duty in fact is not limited to “the enforcement of
terms actually negotiated.” Id. at 796 (internal quotation
marks omitted).
For these reasons, the trial court’s standard for judg-
ing the claim of breach of the implied duty of good faith
and fair dealing was improperly narrow. So too is the
standard the government now seems to advance as its
principal defense of the trial court’s decision. Whether
the government breached the duty of good faith and fair
dealing—as to the expanded-soil problem, the chlordane
problem, or any other properly preserved matter—
requires reconsideration under the familiar broader
standards reflected in the passages from Centex and
Malone quoted above. Accordingly, we must vacate the
judgment on Metcalf’s claim and remand.
B
Two matters warrant further elaboration. Under the
correct standard, although Metcalf is pursuing only a
METCALF CONSTRUCTION COMPANY v. US 17
good-faith-and-fair-dealing claim, any breach of that duty
has to be connected, though it is not limited, to the bar-
gain struck in the contract. See section A.1, supra.
Proper application of the implied-duty standard thus
depends on a correct understanding of the contract.
Metcalf contends that the trial court misinterpreted
several contract provisions related to its claim. We agree.
The first set of provisions pertains to site conditions—
in particular, expansive soils and chlordane. The contract
incorporates FAR 52.236-2, which is entitled “Differing
Site Conditions” and provides:
(a) The Contractor shall promptly, and before the
conditions are disturbed, give a written notice to
the Contracting Officer of (1) subsurface or latent
physical conditions at the site which differ mate-
rially from those indicated in this contract, or (2)
unknown physical conditions at the site, of an un-
usual nature, which differ materially from those
ordinarily encountered and generally recognized
as inhering in work of the character provided for
in the contract.
(b) The Contracting Officer shall investigate the
site conditions promptly after receiving the notice.
If the conditions do materially so differ and cause
an increase or decrease in the Contractor’s cost of,
or the time required for, performing any part of
the work under this contract, whether or not
changed as a result of the conditions, an equitable
adjustment shall be made under this clause and
the contract modified in writing accordingly.
48 C.F.R. § 52.236-2. The RFP and pre-bid documents set
out an understanding of how that provision would be
applied to soil conditions. For both swelling potential and
chlordane, the RFP incorporated representations about
the site: it invoked a report on expansive soils for “site
preparation, foundation support, footing, slab and rein-
18 METCALF CONSTRUCTION COMPANY v. US
forcement requirements,” and it said that “[r]emediation
actions are not required since [chlordane] levels are
acceptable.” On both issues, the contract also anticipated
that Metcalf would test and investigate the soil in the
process of performance. But a pre-bid question-and-
answer stated in plain terms that material deviations
from the government’s report on swelling potential would
be “dealt with by change order” and that “[n]o remedia-
tion action of the Chlordane contaminated soil is re-
quired.”
The trial court interpreted the pre-bid site represen-
tations and related RFP provisions to be nullified by
Metcalf’s investigative responsibilities during perfor-
mance. With respect to expansive soils, the court held
that a reasonable contractor reading the contract docu-
ments as a whole would not interpret them as making a
representation as to the site conditions because “the
Contract required Metcalf to conduct an independent soil
analysis [and so] Metcalf was on notice that it could not
rely on the ‘information only’ report.” Metcalf, 102 Fed.
Cl. at 354. Metcalf was entitled to rely on the report “for
bidding purposes,” the court said, but not “in performing
the . . . project.” Id. Analogously, with respect to chlor-
dane, the court held that the fact that Metcalf would itself
need to assess the soil meant that Metcalf could not rely
on the representations that remediation was not required;
the company “was on notice to seek more information.”
Id. at 358-59. The court thus treated the contract as
placing on Metcalf the risk and costs of dealing with
newly discovered conditions different from those stated by
the government before the contract became binding.
These rulings about an important allocation of risk
were based on a misinterpretation of the contract. Noth-
ing in the contract’s general requirements that Metcalf
check the site as part of designing and building the hous-
ing units, after the contract was entered into, expressly or
implicitly warned Metcalf that it could not rely on, and
METCALF CONSTRUCTION COMPANY v. US 19
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 submit-
ting bids that, if accepted, would create a binding con-
tract. 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.
FAR 52.236-2, incorporated into the contract, rein-
forces that meaning. It exists precisely in order to “take
at least some of the gamble on subsurface conditions out
of bidding”: instead of requiring high prices that must
insure against the risks inherent in unavoidably limited
pre-bid knowledge, the provision allows the parties to deal
with actual subsurface conditions once, when work be-
gins, “more accurate” information about them can reason-
ably be uncovered. Foster Const. C. A. & Williams Bros.
Co. v. United States, 435 F.2d 873, 887 (Ct. Cl. 1970); see
also H.B. Mac, Inc. v. United States, 153 F.3d 1338, 1343
(Fed. Cir. 1998). For that reason, even requirements for
pre-bid inspection by the contractor have been interpreted
cautiously regarding conditions that are hard to identify
accurately before work begins, so that “the duty to make
an inspection of the site does not negate the changed
conditions clause by putting the contractor at peril to
discover hidden subsurface conditions or those beyond the
limits of an inspection appropriate to the time available.”
Foster, 435 F.2d at 888; see also, e.g., Hollerbach v. United
States, 233 U.S. 165, 170-71 (1914).
The conclusion is not changed by the statement in a
revised RFP that the expansive-soil report was “for pre-
liminary information only.” J.A. 20141. That statement
merely signals that the information might change (it is
“preliminary”). It does not say that Metcalf bears the risk
20 METCALF CONSTRUCTION COMPANY v. US
if the “preliminary” information turns out to be inaccu-
rate. We do not think that the language can fairly be
taken to shift that risk to Metcalf, especially when read
together with the other government pronouncements,
much less when read against the longstanding back-
ground presumption against finding broad disclaimers “of
liability for changed conditions.” United Contractors v.
United States, 368 F.2d 585, 598 (Ct. Cl. 1966).
Apart from the soil-condition issues, Metcalf also chal-
lenges the trial court’s holding that the contract required
written approval for all design changes, including those
changes that would leave the resulting design still within
the performance requirements of the RFP. Metcalf, 102
Fed. Cl. at 359-60. We see no basis for such an interpre-
tation in the two provisions cited by the trial court and
the government. The first states:
1D.6 PRECEDENCE: In the event of conflict or
inconsistency between any of the provisions of the
various portions of this contract, for which the
reconciliation of which is not otherwise provided
in the RFP, precedence shall be given in the fol-
lowing order with the provisions of any particular
portion prevailing over those of a subsequently
listed portion:
(a) Typewritten portions of the contract.
(b) The provisions of the “Request of Proposals” is-
sued in connection with this contract (includ-
ing all addenda, amendments, or other
modifications issued thereunder).
(c) Printed provisions of the contract form includ-
ing printed provisions of added slip sheets.
(d) The contents of the contractor’s proposal, in-
cluding but not limited to his forwarding letter,
drawings, outline specifications, accepted al-
ternates or additives, and materials, tests or
METCALF CONSTRUCTION COMPANY v. US 21
other data (including all supplements,
amendments and modifications thereto).
(e) The Government reviewed contractor prepared
final plans and specifications, except to the ex-
tent that any variation therein has been specif-
ically approved in writing by the Government.
J.A. 20039. That provision simply defines a hierarchy for
determining what terms prevail over other terms when
there is an inconsistency, placing certain government-
reviewed specifications lowest in the hierarchy, with an
exception for approved variations. Whatever the provi-
sion precisely means, it does not say that Metcalf needed
written approval for all design changes.
The second provision relied on by the government
states:
4. VARIATIONS: Variations from contract re-
quirements require Government approval pursu-
ant to Contract Clause entitled “Specifications
and Drawings for Construction” and will be con-
sidered where advantageous to the Government.
J.A. 20231. That provision requires government approval
only for variations from “contract requirements.” As to
what “contract requirements” means, Metcalf points to
early communications between the parties suggesting
that the phrase did not sweep in all elements of a design,
and specifically did not include elements not required by
the government-provided specification in the RFP that
became part of the contract. See Metcalf Br. 45-47; Dy-
namics Corp. of Am. v. United States, 389 F.2d 424, 430
(Ct. Cl. 1968) (“[T]he action of the parties ‘before a contro-
versy arises is highly relevant in determining what the
parties intended.’”). This issue warrants further explora-
tion on remand. At present, we decline to interpret the
reference to “contract requirements” to necessitate writ-
ten approval for all design changes, regardless of their
22 METCALF CONSTRUCTION COMPANY v. US
size or whether the resulting design remains within the
scope of the RFP.
C
Having decided to vacate the trial court’s judgment on
liability and remand for further proceedings, we do the
same for the damages award. The amount of damages
could change after reevaluation of Metcalf’s claim, both
for the good-faith-and-fair-dealing claim and for the
government’s liquidated-damages counterclaim. The
affirmative claim and the counterclaim, both involving
the effect of government-caused delays on the completion
date, appear to be intertwined. Accordingly, damages
should be revisited alongside liability on remand.
CONCLUSION
We vacate the claim court’s decision and remand for
further proceedings.
Costs to Metcalf.
VACATED AND REMANDED