Good Faith, Bad Faith in Government Contracts

Richard Rector

By Richard RectorOne of the core principles of contracting is that, in the performance of every contract, the parties are obliged to treat each other fairly and in good faith. Importantly, the duty does not have to be expressly stated. It is an implicit part of every contract, arising from fundamental notions of what it means to "contract" with another party.Good faith means different things in different contexts, but it has been described in the Restatement of Contracts as "faithfulness to an agreed common purpose and consistency with the justified expectations of the other party." In the Uniform Commercial Code, good faith is broadly defined as "honesty in fact" in the matter at issue.In both the commercial world and in public procurement, a party's breach of good faith and fair dealing can be the basis for legal action. In government contracts, for instance, courts and boards of contract appeals have held that a party violates the duty if it interferes with or fails to cooperate in the other party's performance.For example, let us say a contracting officer acted evasively regarding acceptable workmanship standards and misled the contractor to perform 70 percent of the contract before rejecting the work. The Court of Appeals for the Federal Circuit found a material breach of the duty of good faith and fair dealing on the part of the government.Similarly, boards of appeals have found that the government breached duty both in the administration of contracts and in negotiating modifications. For example, a breach is found when a contracting officer has made unreasonable demands on a contractor as a condition for approving the contractor's requested deviation from requirements.Notably in these cases, courts and boards have found violations of the duty of good faith and fair dealing without concluding that government officials acted in bad faith. This distinction is noteworthy, if slightly metaphysical, because there is a parallel line of cases regarding bad faith in which the government's interests are protected more substantially.In those cases, courts and boards routinely hold that government officials are presumed to act conscientiously and in good faith in the discharge of their duties. To overcome this presumption, a contractor must provide clear and strong evidence ? often described as "well-nigh irrefragable proof" ? of a specific intent to harm the contractor.Tension arises between good faith and bad faith cases, because they suggest that, at least in the government contract arena, good and bad faith are not mirror images of one another. In other words, the government can fail to act in good faith without necessarily acting in bad faith.This tension surfaced recently in Systems Management American Corp., a case decided by the Armed Services Board of Contract Appeals in September 2000 by a 3-2 split decision. In that case, the contractor alleged that the government had breached a written agreement to negotiate and incorporate option prices into a contract by a certain date.The majority rejected the contractor's claim that the government official had acted in bad faith. Nevertheless, the board ruled in favor of the contractor, holding that the official acted arbitrarily and unreasonably, and therefore breached the parties' agreement by refusing to approve the negotiated option prices. Notably, in reaching this conclusion, the majority stated, "The mere absence of bad faith ... does not mean the government met its obligation ... to negotiate in good faith." The dissent challenged the notion that the Navy did not negotiate in bad faith, but did not negotiate in good faith, either. The dissent suggested that, in order to overcome the presumption that the government official acted in good faith, the majority should have required clear and strong evidence of intent to injure the contractor.Despite this dissent, strong legal and policy grounds support the majority's decision. Thus, contractors should continue to act in good faith in their contracts with the government, and they should expect the government to do the same.Richard Rector is a partner in the government contracts group of Piper Marbury Rudnick & Wolfe LLP in Washington.

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