That Dog Can’t Hunt: Government Breaches Contract Duty of Good Faith and Fair Dealing
There’s a well-worn maxim that Government officials are presumed to exercise their duties in good faith in the absence of “well-nigh irrefragable proof” that they acted in bad faith (i.e., with malice). Sometimes, however, I’ve asserted claims that Government actions violate the contractual duty of good faith and fair dealing. And, as one might expect, some agency counsel have taken offense.
However, this isn’t actually an accusation of bad faith. As one case put it, “a claim that the government breached the covenant of good faith and fair dealing is not the same as a claim that the government acted in bad faith [rather it’s] an allegation that the party's contracting partner deprived it of the fruits of the contract.” Rivera Agredano v. United States, 70 Fed. Cl. 564, 574 n.8 (2006) (citations omitted). Another case explained that the covenant of good faith and fair dealing “imposes obligations on both contracting parties 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. Centex Corp. v. United States, 395 F.3d 1283, 1304 (Fed. Cir. 2005)(citations omitted).
This brings us to a decision issued by the Court of Federal Claims earlier this month in the case of State of Ohio v. United States, Case No. 20-288C (Fed. Cl. Oct. 7, 2022). This dispute arose out of a decades-old contract between the State of Ohio (“Ohio” or “State”) and the Army Corps of Engineers (“Corps”) for the construction of a dam and the supply and storage of water in what would become the Caesar Creek Reservoir upon completion of the dam. Part of the contract called for Ohio to contribute a percentage of the project’s “joint-use operation and maintenance costs.” See generally Opinion at 1-4.
And, of course, “joint use operation and maintenance” wasn’t defined, and, of course, that’s exactly what was at the center of the dispute between Ohio and the Corps. Earlier in the case, the parties filed motions to get the Court to define this phrase, which it did. Opinion at 7. Relying on the Court-clarified definition, the State asserted that the Corps breached its contract to charge it a “whole swath” of costs outside the scope of the definition. Among these were costs related to the operation of the reservoir’s visitor center, recreational activities, and for boating education and water safety. My personal favorite was the cost for “the purchase and cleaning of a costume for ‘Bobber the Water Safety Dog’” (yes that’s why I put dog in the title of this blog). Opinion at 8. While passing on whether a number of the “hundreds” of specific costs were or were not properly chargeable, the Court held that the costs of the visitor center, recreation and water safety programming were not proper. See Opinion at 12, 14-15. Sorry Bobber.
In addition to claiming the breach of contract, Ohio also claimed that the Corps breached its duty of good faith and fair dealing by failing to fulfill its inherent duty to maintain good records and “provide sufficient information and explanation of charges.” Opinion at 15-16. It also asserted that the Corps’ billing practices were “arbitrary” and did not “ensure compliance with the Contract.” Opinion at 16. The Court agreed. For example, it found that the Government’s records weren’t clear meaning that the State’s “right to review the records [was] meaningless” and noted that “the park manager, who is responsible for approving purchase requests, testified that the records are ‘[c]lear as mud.’” In holding that the Corps’ billing practices were arbitrary, it characterized the process as “labyrinthine” and that personnel could “only ‘guess’ or ‘speculate’ about” the classification of particular costs. Indeed, the hapless park manager “explained how birdseed exists in a ‘gray area’ because it can serve a recreational or natural resource purpose” and recognized that it could be characterized in both ways. Opinion at 16-17.
At the outset, I pointed out that a breach of the duty of good faith and fair dealing is different from bad faith, malicious conduct. The Court’s conclusion that the Corps breached the duty of good faith and fair dealing recognized that the officials did their best, but wrongfully engaged in guesswork and stated:
The Court does not doubt that these employees earnestly apply their best judgment when faced with “gray area” expenses, but where there is no clear guidance informing that judgment, the process is arbitrary. It should not require discussion among several employees or “guessing” to know whether an expense is appropriate. The opacity of the Corps’ records and reasoning does not allow Ohio to exercise its contractual right to meaningfully inspect them. And the Corps’ billing process is arbitrary. Accordingly, the United States has violated the implied covenant of good faith and fair dealing, and Plaintiff is entitled to summary judgment on this claim.
Opinion at 18.
While I get that government contractors aren’t perfect, it is my experience that the presumption that agency officials act in good faith often excuses lackluster contract administration to the detriment of otherwise capable, dedicated contractors. Many times, these officials do their level best but simply are grossly overburdened and lack the bandwidth necessary for effective management. Agencies should be on notice that they have to do better than the hot mess described in this case. That can only come from adequate staffing, support and training of their contracting teams.