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Remarks of John S. Pachter at the Federal Circuit Bar Association Government Contracting Summit; Panel Topic: Implied Duty of Good Faith and Fair Dealing

Remarks of John S. Pachter at the Federal Circuit Bar Association Government Contracting Summit 

Panel Topic: Implied Duty of Good Faith and Fair Dealing

April 28, 2015

Good morning. Our panel will discuss the implied duty to cooperate and the implied duty not to hinder performance of contracts, both of which are subspecies of the  implied duty of good faith and fair dealing.

Let’s start with basics. The Tucker Act waives sovereign immunity for express or implied contracts, restricted to contracts implied in fact.1 The court lacks jurisdiction based solely on a contract implied in law, or quasi-contract. Why? Quasi contracts are not contracts at all. They are not consensual, but involve claims for restitution based on unjust enrichment.

Nevertheless, concepts of fairness and equity are pervasive in the law of express and implied in fact contracts. In Winstar the Supreme Court reaffirmed that contracts of the United States are “governed generally by the law applicable to contracts between private individuals.”2 This includes implied obligations, not expressly written into the contract, but imposed as a matter of law. Classic example: the 1918 Spearin case, where the Supreme Court imposed an implied warranty of adequacy of government-issued specifications.3

From its earliest days, the Court of Claims recognized implied-in-law duties of good faith and cooperation and the duty not to interfere with the other party’s performance. The Restatement contains a number of examples of implied-in-law terms, including, in Section 205, the “Duty of Good Faith and Fair Dealing” which is part of every contract and is imposed on each party. It includes “consistency with the justified expectations of the other party.” The Restatement says these terms “often rest … on considerations of public policy rather than on manifestation of the intention of the parties.” Section 5, cmt. b (“contract terms supplied by law.”) (emphasis added.)

Now we come to the first fly in the ointment. (Hint: there will be two.) The Supreme Court’s 1996 decision in Hercules, opinion by Chief Justice Rehnquist, denied claims of implied warranty and indemnification arising from an express contract, stating “[e]ach material term or contractual obligation, as well as the contract as a whole,” is subject to the jurisdictional limitation of the Tucker Act.In his dissent in Winstar, Justice Rehnquist said the majority’s “reading of additional terms into the contract” to insert “an unstated, additional promise … seems the very essence of a promise implied in law, which is not even actionable under the Tucker Act, rather than a promise implied in fact, which is.”5 Notice he was speaking in dissent in Winstar, during the same term that Hercules was decided.

Justice Rehnquist’s views went against the grain of years of decisional law. Nevertheless, Hercules has remained, shall we say, a burr in the saddle.

To illustrate a dramatically unjust outcome, consider the Federal Circuit’s 2010 decision in Agredano.6 Mr. Agredano purchased a 1987 Nissan from the U.S. Customs Service at an auction of forfeited vehicles. The Customs Service had seized the vehicle at the Mexican border after finding forty sealed bags of marijuana in it. Although the Customs Service was required to remove all contraband before the auction, it failed to do so. The auction catalog and brochure stated all vehicles would be sold “AS IS, WHERE IS,” with a disclaimer of all warranties, express or implied. Mr. Agredano could only conduct a limited inspection of the locked vehicle. He and an associate passed through a checkpoint in Mexico where soldiers found narcotics in the upholstery, the doors and sides of the vehicle. The soldiers destroyed the vehicle. Agredano spent a year in Mexican prison in nightmarish conditions.

The Federal Circuit relied on Hercules for the jurisdictional restriction on implied in law warranties. The decision allowed the government to exculpate itself from the harmful consequences of its own negligence even though the government had an obligation to search vehicles and remove contraband and Mr. Agredano had no opportunity to find hidden narcotics.

Even worse for Mr. Agredano, the Federal Circuit had previously held that exculpatory provisions are construed “narrowly and strictly” and the Court had refrained from enforcing a limitation of liability clause when the circumstances surrounding the breach were within the Government’s control.7

Agredano poses the question how far can the government go in avoiding implied in law obligations through exculpatory provisions. Consider what would happen if the government issued a solicitation that stated, as a condition of contract award, the implied duty of good faith and fair dealing and the implied duty not to hinder or interfere would be waived and inapplicable to that contract. Would that be enforceable? Would it be in the government’s interest since it would presumably need to be mutual and reciprocal?

Logically, the Hercules opinion would seem to have eviscerated, on jurisdictional grounds, the implied in law duty of good faith and fair dealing and its corollaries. Yet the implied duty survives, although Hercules stands in the corner, like the unwanted guest at the wedding. In his article in the Winter 2015 issue of the Public Contract Law Journal, which I especially commend to your reading, Stan Johnson helpfully suggested that Hercules could be limited to its unusual circumstances; namely, that Agent Orange contractor claims posed extraordinary undefined risks to the public fisc and raised Anti-Deficiency Act issues. Viewed in this light, Hercules stands alone as an outlier.

And so we come to Precision Pine.8 There the Forest Service was under order of the Arizona district court to suspend timber harvesting because it had failed to timely submit its Land and Resource Management Plans under the Endangered Species Act for consultation with the Fish and Wildlife Service for protection of the Mexican Spotted Owl. Judge Damich wrote a thorough and convincing opinion for the COFC, which answers many of the questions we are now facing. He acknowledged that suspensions to comply with a statutory duty and a court order were sovereign and general acts. But, he said, the Government will not have the benefit of the sovereign act defense if it cannot satisfy the common-law doctrine of impossibility. That is, quoting the Supreme Court’s opinion in Winstar, “the Government ... must show that the [act] rendering its performance impossible was an event contrary to the basic assumptions on which the parties agreed, and must ultimately show that the language or circumstances do not indicate that the Government should be liable in any case.”9 So we know from Winstar that the presence of a sovereign act does not crowd out other considerations for government liability.

To the government’s arguments designed to foreclose judicial inquiry, Judge Damich responded in language of marvelous simplicity: “there is no reason why this Court is not capable of using standard norms of contract interpretation and classic implied-contract theories to determine whether a claim for delay caused by an agency’s course of action, contrary to law, is meritorious.”10 That seems to me a useful formulation, one that clears away the debris.

But the Federal Circuit reversed, relying in part on Hercules, holding that the contract did not guarantee the contractor a right to uninterrupted contract performance.11 But saying the contract imposed no time limitation on compliance with a court order is equivalent to saying the government need not act reasonably. It throws the reasonableness standard out the window. The Court also suggested that violations of the implied duty of good faith and fair dealing typically involve “some variation on the old bait-and-switch.”12 If true, however, this means the contractor in essence must prove bad faith to demonstrate the absence of good faith.

Here we come to the second fly in the ointment. Citing Centex13 and First Nationwide,14 the Federal Circuit in Precision Pine held the government could only be liable when its action “is specifically designed to re-appropriate the benefits the other party expected to obtain from the transaction, thereby abrogating the government’s obligations under the contract.”15 Centex and First Nationwide, however, are Winstar cases involving the Guarini “specifically targeted” legislation, which retroactively deprived the companies of a significant, central benefit of their contracts, thereby breaching the implied covenant of good faith and fair dealing.

Despite Judge Damich’s careful sorting of the facts, the Federal Circuit said the Forest Service violated only its statutory obligation to the Fish and Wildlife Service, an unrelated third party, and to the court that issued the injunction.

The Federal Circuit’s Precision Pine opinion created an uproar, and in Metcalf the court went part of the way to clear up the confusion.16 The court limited Precision Pine by saying it did not impose a specific-targeting requirement across the board. The court in Metcalf also rejected the “re-appropriation” standard. Responding to government arguments, the court held that “a breach of the implied duty of good faith and fair dealing does not require a violation of an express provision of the contract.”17

The same Winstar opinion that reaffirmed the application of the general law of contracts to contracts of the United States gave us the “specifically targeted” and “reappropriation” language. It is hard to imagine anything but an Act of Congress such as the Guarini legislation that would “specifically target” and “reappropriate” rights of a government contractor. Metcalf involved a “differing site conditions” claim relating to soil conditions on a military housing contract. There was no sovereign act issue. Why would “specifically targeted” and “reappropriation” come into the conversation at all? I submit they have no role to play outside the Guarini-type legislation in the sovereign act context.

Moreover, as Judge Damich demonstrated, even a sovereign act should not bring an end to analysis. So let me go back to his formulation in Precision Pine. “Standard norms of contract interpretation and classic implied-contract theories” work just fine. Why make it more complicated than necessary?

In conclusion, I have two recommendations: (1) put the Winstar genie back in the bottle, as I suggested in the title of my article, and (2) follow Stan Johnson’s suggestion for recognizing the limited reach of Hercules. The good old implied-in-law obligations have served a useful purpose for generations. I submit the court should, in appropriate cases, open that tool kit to ensure fairness and fulfilment of reasonable expectations. 

FOOTNOTES: 

1. 28 U.S.C. § 1491.

2. United States v. Winstar Corp., 518 U.S. 839, 895 (1996).

3. United States v. Spearin, 248 U.S. 132, 137 (1918).

4. Hercules Inc. v. United States, 516 U.S. 417, 423 (1996).

5. United States v. Winstar Corp., 518 U.S. 839, 930 (1996)(emphasis added).

6. Agredano v. United States, 595 F.3d 1278 (Fed. Cir. 2010).

7. New Valley Corp. v. United States, 119 F.3d 1576, 1584 (Fed. Cir.1997).

8. Precision Pine & Timber, Inc. v. United States, 50 Fed. Cl. 35 (2001); 596 F.3d 817 (Fed. Cir. 2010).

9. United States v. Winstar Corp., 518 U.S. at 904 (emphasis added).

10. Precision Pine & Timber, Inc. v. United States, 50 Fed. Cl. 35, 55 (2001).

11. Precision Pine & Timber, Inc. v. United States, 596 F.3d 817, 829 (Fed. Cir. 2010).

12. Id.

13. Centex Corp. v. United States, 395 F.3d 1283 (Fed. Cir. 2005).

14. First Nationwide Bank v. United States, 431 F.3d 1342 (Fed. Cir. 2005).

15. Precision Pine & Timber, Inc. v. United States, 596 F.3d at 829.

16. Metcalf Const. Co. v. United States, 742 F.3d 984 (Fed. Cir. 2014).

17. Id. at 994.