pclj.orgpclj.org/wp-content/blogs.dir/2/files/2012/07/d32618ffbbc… · web viewdecisions that...
Post on 03-Apr-2020
0 Views
Preview:
TRANSCRIPT
LET THE GOVERNMENT CONTRACT:The Sovereign Has The Right, And Good Reason,To Shed Its Sovereignty When It Contracts
Stuart B. NibleyJade Totman
April 14, 2012
DSMDB-3050080v1
I. THE PROBLEM: THE UNDERSTANDABLE BUT MISGUIDED JUDICIAL INSTINCT TO OVER-PROTECT THE SOVEREIGN WHEN IT ACTS IN ITS CONTRACTING CAPACITY
Originally, we had planned to discuss in this article a was
intended to cover a number of topics and decisional patterns in
which some decisions issued by the United States Court of Appeals
for the Federal Circuit have had the effect of over-protecting
the federal Federal government Government in its contractual
relationships, to the detriment of all constituents to the
government contracting process. Decisions we that this article
might have discussed in this regard relate to application of
mutual obligations to file claims under the Contract Disputes
Act;1 the disproportionate application of massive forfeitures and
penalties to contractors in situations in which they, like the
governmentGovernment, were victims;2 and a series of decisions
from Am-Pro Protective Agency, Inc. v. United States3 through
Precision Pine & Timber, Inc. v. United States,4 that address the
government’s Government’s rights and responsibilities when it
acts in its contracting capacity rather than in its sovereign
1 41 U.S.C. §§ 7101-7109; see, e.g., M. Maropakis Carpentry, Inc. v. United States, 609 F.3d 1323 (Fed. Cir. 2010); Parsons Global Servs., Inc. v. Sec’y of the Army, CAFC No. 2011-1201 (Apr. 20, 2012).2 See, e.g., Long Island Sav. Bank, FSB v, United States, 503 F.3d 1234 (Fed. Cir. 2007).3 Am-Pro Protective Agency, Inc. v. United States, 281 F.3d 1234 (Fed. Cir. 2001).4 Precision Pine & Timber, Inc. v. United States, 596 F.3d 817 (Fed. Cir. 2010).
2DSMDB-3050080v1
capacity. These decisions appear to apply the law, and the
application of law to fact, incorrectly.5 They also appear to
promote bad policy.
This The aforementioned assertions are not intended is not
to ascribe bad improper motives to the judges who issued these
decisions such as Maropakis or Am-Pro;. Iin fact, the theme that
seems to underlie these decisions is a recognition that the
sovereign is, after all, the sovereign6 ; the sovereign must be
accorded sovereign rights7 ; and it is the judiciary’s charge to
protect these sovereign rights.8
We Ultimately, this article only discusses settled on one
topic, those decisions that address the Government’s rights and
responsibilities when it acts in its contracting capacity rather
than in its sovereign capacitythe last of the three we mention
above. This The difference between the Government acting in its
sovereign capactity and acting in its contracting capacitytopic
has importance and relevance not only in the judicial world but
also in the practical world of government contracting.9 The
topic is the continuing confusion expressed in decisions of the
federal judiciary regarding the right of the government, the
5 [Need Source – maybe Schooner’s new Maropakis article?]6 7 8 9
3DSMDB-3050080v1
sovereign, to contract. The path to this discussion is well-
worn;. Iit is not the path less taken.10 Tomes of expert
commentary, case law and academic work product lend considerable
guidance, and some misguidance, to this topic. 11 On the one
hand, it seems folly to tread where other experts have led the
discussion;. Oon the other hand, the topic is one that builds
upon prior analysis that, unfortunately, twists and turns upon
itself, raising spectors and mischiefs that were once thought put
to rest.12 And so, discussion of prior analysis is not only
warranted, but inevitable.13
Jurisprudence in recent decades on concerning this topicthe
the Government’s contracting power in comparison to its sovereign
10 Robert FrontFrost, “The Road Not Taken,” Mountain Interval (1920).11 See, e.g., Tecom, Inc. v. United States, 66 Fed. Cl. 736 (2005); W. Stainfield Johnson, “The Federal Circuit’s Great Dissenter and her ‘National Policy of Fairness to Contractors,’” 40 Pub. Cont. L.J. 275 (Winter 2011); Ralph C. Nash, “Postscript: Breach of the Duty of Good Faith and Fair Dealing,” 24 No. 5 Nash & Cibinic Rep. ¶ 22 (May 2010); W. Stanfield Johnson, “Mixed Nuts and Other Humdrum Disputes: Holding the Government Accountable Under the Law of Contracts Between Private Individuals,” 32 Pub. Cont. L.J. 677 (Summer 2003); Joshua I. Schwartz, “The Status of the Sovereign Acts and Unmistakability Doctrines in the Wake of Winstar: An Interim Report,” 51 Ala. L. Rev. 1177 (Spring 2000); Assembling Winstar: Triumph of the Ideal of Congruence in Government Contracts Law,” 26 Publ. Cont. L.J. 481 (Summer 1997).12 13 We invoke Mark Twain’s musing about the challenges of original thought and advancing upon the well-conceived thoughts of others is particularly salient here: “How lucky Adam was. He knew when he said a good thing, nobody had said it before.” Notebook, Mark Twain. [Totally insufficient, I know – we’ll have to trackdown a copy].
4DSMDB-3050080v1
power in recent decades has involved discussion discussedof a
Core Tenet, and three interwoven but distinct Principles which
flow from the Core Tenet.14 The Core Tenet has served as the
foundation for decisions of the United States Supreme Court,15
the Court of Appeals for the Federal Circuit,16 and tribunals
below17 when deciding disputes between the government Government
and its contractors, as well as the standards that govern such
disputes. The Core Tennet has been most succinctly defined, and
is most often presented,18 byIn recent years, it is the Supreme
Court’s plurality decision in United States v. Winstar Corp.,19
quoting Justice Brandeis,20 that is most frequently quoted when
invoking the Core Tenet:
“[w]When the United States enters into contract relations,
its rights and duties therein are governed generally by the law
applicable to contracts between private individuals.” 21 22
14 15 16 17 We refer to the United State Court of Federal Claims and its predecessor the United States Claims Court, as well as the Boards of Contract Appeals, as “the tribunals below.” 18 See, e.g., United States v. Winstar Corp., 518 U.S. 839 (1996).19S. 839 (1996).20 Lynch v. United States, 292 U.S. 571 (1934).21 Lynch v. United States, 292 U.S. 571 (1934).22 Id. 518 U.S. 839, 895 (1996).
5DSMDB-3050080v1
Judicial analysis of thise Core Tenet has discussed three
other, distinct but related Principles that are subsidiary to the
Core Tenet: Principle 1 — the presumption of good faith;23
Principle 2 — the duty of good faith and fair dealing (and its
corollaries, the duty to cooperate and not to hinder);24 and
Principle 3 — the sovereign acts doctrine.25 Each is a unique
Principle. It is important to keep that in mindWhen assessing
when assessing their the applicability to of each Principle to a
particular set of facts, it is important to remember that each is
a unique principle.26
Principle 1 (the presumption of good faith) is an
evidentiary standard that provides that a plaintiff alleging that
the government Government is liable for damages due to the acts
or omissions of government employees acting in their sovereign
23 24 25 Many decisions have addressed the separate but related doctrine, the unmistakability doctrine, in tandem with the sovereign acts doctrine. See, e.g., Winstar, 518 U.S. at __. Timber Prods. Co. v. United States, No. 01-627c, 2011 WL 6934815 (Fed. Cl. Dec. 29, 2011). Most recent decisions issued by the Federal Circuit and tribunals below forego discussion of the unmistakability doctrine and address its effects in the context of discussion of the applicability of the sovereign acts doctrine in a particular situation, and this article follows that trend. See, e.g, Precision Pine, 596 F.3d at ___; Firemen’s Fund Ins. Co. v. United States, 92 Fed. Cl. 598 (2010); Aecom Gov’t Servs., Inc., 10-2 BCA ¶ 34, 577 (A.S.B.C.A. Oct. 13, 2010); Am. Gen. Trading & Contracting, WLL, ASBCA No. 56758, 12-1 BCA ¶ 34,905 (A.S.B.C.A. Dec. 13, 2011) at _____. We have followed that practice here. 26
6DSMDB-3050080v1
capacity must prove by clear and convincing evidence that the
government employees acted with subjective bad intent, bad faith,
or animus towards the plaintiff.27 In other words, government
employees acting in their sovereign capacities — e.g, enacting
legislation, regulating, taxing — are presumed to act in good
faith.28 Principle 1 applies exclusively in the sovereign
arenato the Government’s exercise of its sovereign power;. I it
does not apply in the contractual arenao the Government’s
exercise of its contractual power, where the government acts in
its contracting capacity rather than in its sovereign capacity.29
Principle 2 (the duty of good faith and fair dealing) is a
principle of contract law that is implied into every contract,
including each government contract.30 It providesThe Principle
provides that each party to a contract owes the other the duty to
cooperate, and not to hinder the other party’s performance, and
to take all actions necessary to permit the other party to enjoy
the benefit of the bargain it anticipated when it contracted.31
Principle 2 applies only in the contractual arena, not in the
27 28 29 A limited exception to this rule applies when a contractor specifically alleges that government employees acting in their contractual capacity acted in bad faith, with intent to harm the contractor, with animus.30 31
7DSMDB-3050080v1
sovereign arena.32 It is a principle Principle 2 is one of
mutuality, fundamental to bilateral contracting33 ;. I it arises
in the context of a government contracts dispute when a
contractor alleges that the government Government has breached
the duty of good faith and fair dealing (failed to cooperate or
hindered the contractor’s performance).34 Breach of the duty
supplied by Principle 2 is proven by a preponderance of
evidence.35 Principle 1 (the presumption of good faith ─
sovereign arena) is irrelevant to the applicability of Principle
2.36 Application of Principle 2 (the duty of good faith and fair
dealing) does not involve assessment of subjective intent, bad
faith, or animus on the part of government employees.37 Rather,
application of Principle 2 is made determined by assessing
objective criteria — i.e.in other words, asking if the did the
government’s Government’s alleged acts and omissions deprive the
contractor of a benefit it reasonably anticipated it would
receive when it executed the contract.?38 In this regard,
32 33 34 35 36 37 As we noted, the exception is when a contractor specifically alleges that government employees acted with intent to harm the contractor, and that this bad faith itself breached the contractual duty of good faith and fair dealing. 38
8DSMDB-3050080v1
Principle 1 and its subjective intent (bad faith) analysis have
no relevance in the contracting arena.
Principle 3 (the sovereign acts doctrine) is imnplicated
when an action the government Government takes or fails to take
in its sovereign capacity — e.g., for example, when enacting
legislation — has the effect of depriving a government contractor
of a benefit the contractor reasonably expected when it
contracted with the governmentGovernment.39 Principle 3,
therefore, assesses sovereign acts that have effect in the
contractual arena.40 Stated very generally, case law has
provided that, when the government Government acts in its
sovereign capacity in a “public and general” manner, it is
shielded from liability for damages arising from contractor
allegations that the sovereign act breached the government’s its
alleged breach of its duty of good faith and fair dealing under a
government contract.41 Conversely, if the government Government
acts in its sovereign capacity with primary intent to erase
contract obligations already existing, the sovereign acts
doctrine will not relieve the government Government from
liability to a contractor who claims breach of the duty of good
faith and fair dealing by reason of the sovereign act.42
39 40 41 42
9DSMDB-3050080v1
Unfortunately, as recognized by Justice Souter, writing for the
Supreme Court in Winstar, recognized that a particular sovereign
act can have both “public and general” effects and intent as to
its insofar as prospective application, and adverse effects and
intent as to its retrospective application.43
The Principles described above were applied for many years
before and after Winstar with recognition of their distinct, but
related, characters.44 However, the Federal Circuit’s decisions
in Am-Pro Protective Agency, Inc. v. United States,45 and
Precision Pine & Timber, Inc. v. United States46 now have placed
the three Principles into a “judicial fondue pot” that melts the
concepts of each Principle and merges them into a single
standard.47 This The new, single standard created by recent
Federal Circuit decisions relies exclusively and erroneously on
analysis of subjective intent on the part of government
employees, on concepts of “specifically targeted” conduct, bad
faith,and animus on the part of government employeesanalysis,
even where the government Government acts under consideration are
taken solely in the contractual arena.48 It is far from clear
43 Winstar, 518 U.S. at 839.44 45 Am-Pro Protective Agency, Inc. v. United States, 281 F.3d 1234 (Fed. Cir. 2002).46 Precision Pine & Timber, Inc. v. United State, 596 F.3d 817 (Fed. Cir. 2010).47 48
10DSMDB-3050080v1
thatWhile the the drafters of theCourt in Precision Pine decision
may not have intended this to conflate the rules governing the
Government’s contractual acts with those governing its sovereign
actsresult.,49 However, the imprecise language and analysis in
that decision have led to this result.50 As a result of
decisions like Precision Pine, A a number of judges have imported
the subjective intent analysis applicable only under Principle 1
into their analysis of Principles 2 and 3.51
The effect is of conflating the rules governing the
Government’s contractual acts with those governing its sovereign
acts is not only to create law and guidance that is highly
confusing, but also to erode substantially the Core Tenet, both
as a legal principle and as a beacon to guide government
employees acting in the contractual arena as they administer
contracts and its impact on the actions of government
employees.52 By eroding the Core Tenet in the government
contracting arena, judicial decisions undermine the government’s
Government’s credibility at the bargaining table; an air of
distrust develops as contractors and government contract
49 See infra (discussing Timber Prods. Co. v. United States, No. 01-267C, 2011 WL 6934815 (Fed. Cl. Dec. 29, 2011); Fireman’s Fund Ins. Co. v. United States, 92 Fed. Cl. 598 (2010).50 See infra, White Buffalo Const., Inc. v. United States, 101 Fed. Cl. 1 (2011); Metcalf Const. Co. v. United States, No. 07-0777C, 2011 WL 6145128 (Fed. Cl. Dec. 9, 2011); D’Andrea Bros. LLC v. United States, 96 Fed. Cl. 205 (2010).51 52
11DSMDB-3050080v1
administrative personnel realize that the acts and omissions of
government personnel cannot subject the government Government to
liability under the bilateral obligations otherwise implied into
every contract — the government will not be held to the same
standards that apply to all other contracting parties.53
The Federal Circuit needs to issue a cleaner articulation of
how the three Principles work together and alone, where they
overlap, and where they do not, and how alone and together they
support the Core Tenet. The Federal Circuit is ultimately the
forum responsible for ensuring that fairness and neutrality guide
the government’s Government’s contracting activities, including
resolution of disputes.54 The government Government chartered
the United States Court of Claims — the Federal Circuit’s
predecessor — in 1855, as a forum to adjudicate claims brought
against the United States by Mexican-American War veterans.55
Six years later, for the sake of fairness, Abraham Lincoln
petitioned Congress to increase the Court of Claims’ jurisdiction
53 See discussion at III.B infra. As we state there, our analysis here does not involve consideration of ethics (although ethical considerations of course apply). Our analysis states a fundamental premise of business and contracts administration. Parties to a contract begin their analysis of what they must do under a contract with reference to what is required of them to enable them to enjoy the benefit of the contractual bargain and to avoid liability for failure to perform. 54 55 2 Wilson Cowen et al., The United States Court of Claims: A History (1978).
12DSMDB-3050080v1
and powers.56 And, concerned by the Court of Claims’ inability
to render final judgments against the government, President
Lincoln reminded Congress in 1861, as follows:
It is important that some more convenient means should be
provided, if possible, for the adjustment of claims against the
government, especially in view of their increased number by
reason of war. It “[i]t is as much the duty of the government to
render prompt justice against itself in favor of its citizens as
it is to administer the same between private individuals.” . . .
It was intended by the organization of the Court of Claims mainly
to remove [the investigation and adjudication of claims against
the government] from the halls of Congress; but while the court
has proved to be an effective and valuable means of
investigation, it in great degree fails to effect the object of
its creation for want of power to make its judgments final.
Fully aware of the delicacy, not to say the danger, of the
subject, I commend to your careful consideration whether this
power of making judgments final may not properly be given to the
court . . .57
56 See A. Lincoln, First Annual Message (Dec. 3, 1861).57 Id. (emphasis added).
13DSMDB-3050080v1
Since 1861, this President Lincoln’s clarion call for
fairness often has been revived and reiterated;.58 Iin fact, it
is chiseled into the entrance to the Federal Circuit’s
courthouse.59 Moreover, it Lincoln’s call for fairness now
underscores the Federal Acquisition Regulation (“FAR”), which was
“established for the codification and publication of uniform
policies and procedures for acquisition by all executive
agencies.”60 In its the FAR’s “Statement of [G]uiding
[P]rinciples,” the FARit advises that “[t]he vision for the
Federal Acquisition System is to deliver on a timely basis the
best value product or service to the customer [i.e., the
government], while maintaining the public’s trust and fulfilling
public policy objectives.”61 The FAR affirms that government
procurements must be done “with integrity, fairness, and
openness.”62
The practical effect ofIf the Federal Circuit provided
clarification regarding the Principles, the practical effect
would be to give the tribunals, regulators, federal employees
58 See, e.g., M. Maropakis Carpentry, Inc. v. United States, 609 F.3d 1323, 1335 n.3 (Fed. Cir. 2010) (Newman, J., dissenting).59 Id. (noting engraving reminding all entrants that “[i]t is as much the duty of the government to render prompt justice against itself in favor of its citizens as it is to administer the same between private individuals”).60 FAR 1.101.61 FAR 1.102(a) (emphasis added).62 FAR 1.102(b)(3) (emphasis added).
14DSMDB-3050080v1
involved with contracting, and contractors clear guidance about
the respective rights and responsibilities they possess under
government contracts.63 Such clarification would begin to remove
the ill effects of the judiciary’s well-meaning but misguided
decisions that over-protect the government Government in its
contracting capacity.64 By providing clear and well-articulated
clarification, the Federal Circuit would give meaning to the
Supreme Court’s imperative — Let the government contract.65
II. CONFLATION AND CONSIDERABLE CONFUSION IN THE APPLICATION OF THREE DISTINCT LEGAL PRINCIPLES IN THE CONTEXT OF DECIDING GOVERNMENT CONTRACTS DISPUTES: THE PRESUMPTION OF GOOD FAITH; THE DUTY OF GOOD FAITH AND FAIR DEALING; AND THE SOVEREIGN ACTS DOCTRINE
A. The Evolution Of The Core Tenet In The Decisions Of The Supreme Court: The Sovereign Has The Right To Contract, The Right To Shed Its Sovereignty To Pursue Commerce In The Marketplace
For nearly eighty years, Supreme Court decisions have
emphasized the importance of allowing the federal Federal
Ggovernment to enjoy the benefits of and to be held accountable
for the obligations it creates through bilateral contracting.66 ;
Tthese decisions flow from a civil war era decision issued by the
Court of Claims, a case colloquially known as Deming’s Case.67
In 1861 — coincidentally, just as President Lincoln invoked the
63 64 65 66 67 See Israel Deming v. United States, 1 Ct. Cl. 190 (1865).
15DSMDB-3050080v1
goal of fairness and exhorted Congress to strengthen the Court of
Claims’ remedial powers — Israel Deming contracted with the
government Government to provide daily rations to the U.S. Marine
Corps.68 However, later that year, and again in 1862,69 the
Congress imposed new, generally applicable duties that increased
Deming’s costs, leading him to perform his contract at a
financial loss.70 Deming sued. to recover his losses.71
In the Court of Claims, Deming argued that Congress had “in
effect imposed new conditions upon [his] contracts, and that
thereby he has suffered $3,558.48 [in] damages.”72 Unfortunately
for Deming, the Court of Claims dismissed his claims.73 The
Court of Claims, In in its “seminal”74 decision, the court held
that the government’s Government’s general actions as a sovereign
are immune from liability—or, as put by the court:
A contract between the government and a private party cannot
be specially affected by the enactment of a general law. . . . In
form, the claimant brings this action against the United States
68 Id.69 The U.S. government renewed its contract with Mr. Deming in 1862. See id.70 See id.71 72 Id.73 74 Joshua I. Schwartz, “Liability for Sovereign Acts: Congruence and Exceptionalism in Government Contracts Law,” 64 Geo. Wash. L. Rev. 633, 652 (April 1996).
16DSMDB-3050080v1
for imposing new conditions upon his contract; in fact he brings
it for exercising their sovereign right of enacting laws.”75
Importantly, however, the court distinguished the
government’s Government’s actions as a sovereign from the
government’s Government’s actions as a contractor.76 The court
advised:
But the government entering into a contract, stands not in the
attitude of the government exercising its sovereign power of
providing laws for the welfare of the State. The United States
as a contractor are not responsible for the United States as a
lawgiver. Were this action brought against a private citizen,
75 Deming’s Case, 1 Ct. Cl. at 190. In the words of the Court:A contract between the government and a private party cannot be specially affected by the enactment of a general law. . . . In form, the claimant brings this action against the United States for imposing new conditions upon his contract; in fact he brings it for exercising their sovereign right of enacting laws.” (emphasis in original).
76 Deming’s Case, 1 Ct. Cl. at 190. The Court specifically stated that:
[T]he government entering into a contract, stands not in the attitude of the government exercising its sovereign power of providing laws for the welfare of the State. The United States as a contractor are not responsible for the United States as a lawgiver. Were this action brought against a private citizen, against a body corporate, against a foreign government, it could not possibly be sustained. In this court the United States can be held to no greater liability than other contractors in other courts.
See also Joshua I. Schwartz, “Liability for Sovereign Acts: Congruence and Exceptionalism in government Contracts Law,” 64 Geo. Wash. L. Rev. 633, 652 (April 1996) (“According to Deming, then, the United States should be regarded as though it were two separate entities, the sovereign and the contractor-government.”).
17DSMDB-3050080v1
against a body corporate, against a foreign government, it could
not possibly be sustained. In this court the United States can
be held to no greater liability than other contractors in other
courts.77
Thus, the government Government should be held accountable
as any other private party would be when it acts in its
contracting capacity.78 Mr. Deming lost his case only because he
sought to hold the government to a standard of liability that was
greater than that which would apply to private parties. 79 An apt
summary of this holding comes from Joshua Schwartz:
The general lawmaking actions of the sovereign should not be
attributed to the government as contractor and are therefore not
to be regarded as breaching the contractor’s obligations under
the contract. This bifurcation allocates the risk of general
77 Deming’s Case, 1 Ct. Cl. at 190 (emphasis added).78 79 In other words, absent a risk allocating provision in his contract, Deming would not have been able to sue a private party for breach of contract on the basis that the U.S. Government had passed a law increasing duty fees. See Joshua I. Schwartz, “Liability for Sovereign Acts: Congruence and Exceptionalism in Government Contracts Law,” 64 Geo. Wash. L. Rev. 633, 652 (April 1996). Professor Schwartz noted that:
The general lawmaking actions of the sovereign should not be attributed to the government as contractor and are therefore not to be regarded as breaching the contractor’s obligations under the contract. This bifurcation allocates the risk of general government action that interferes with the performance of a government contract in the same manner that the risk is allocated in a similar nongovernment contract.
18DSMDB-3050080v1
government action that interferes with the performance of a
government contract in the same manner that the risk is allocated
in a similar nongovernment contract.80
Seventy years later, in Lynch v. United States, the Supreme
Court arrived at a similar conclusion.81 In Lynch, the
beneficiaries of government-issued, World War I-era, “War Risk”
insurance policies sued the gGovernment for payment on the
policies.82 In his majority opinion, Justice Brandeis left no
doubt that the insurance policies were binding contracts, and
that the “War Risk policies, being contracts, [were] property and
create[d] vested rights” for the beneficiaries.83 Further,
Justice Brandeis reaffirmed that — despite the government’s
Government’s general privilege of sovereign immunity — the
government’s Government’s contracts subjected the governmentit to
liability.84 Indeed, he Justice Brandeis noted that “Congress,
as if to emphasize the contractual obligation assumed by the
United States when issuing war risk policies, conferred upon
80 Joshua I. Schwartz, “Liability for Sovereign Acts: Congruence and Exceptionalism in Government Contracts Law,” 64 Geo. Wash. L. Rev. 633, 652 (April 1996) (emphasis added).81 Lynch v. United States, 292 U.S. 571 (1934).82 Id.83 Id. at ___; see also Joshua I. Schwartz, “Liability for Sovereign Acts: Congruence and Exceptionalism in Government Contracts Law,” 64 Geo. Wash. L. Rev. 633, 675 (April 1996).84 See id. at ___.
19DSMDB-3050080v1
beneficiaries the same legal remedy which beneficiaries enjoy
under policies issued by private contractors.”85
Although Lynch did not involve a procurement contract,86
courts routinely recall its language when articulating the
distinction between acts the Ggovernment takes in its sovereign
capacity and acts it takes in its contracting capacity.87
Justice Brandeis declared that “[v]alid contracts are property,
whether the obligor be a private individual, a municipality, a
State or the United States.”88 In language that affirms the
importance of judicial neutrality towards the gGovernment and
government contractors, he stated: “Punctilious fulfillment of
contractual obligations is essential to the maintenance of the
credit of public as well as private debtors.”89 Significantly,
Justice Brandeis stated the “Core Tenet” denoted in this article:
“[W]hen the United States enters into contract relations, its
rights and duties therein are governed generally by the law
applicable to contracts between private individuals.”90
85 Id.86 Writing for the majority, Justice Brandeis noted that “[t]hese contracts, unlike others, were not entered into by the United States for a business purpose.” Id. at ___.87 See, e.g., Cherokee Nation of Ok. v. Leavitt, 543 U.S. 631, 646 (2005); United States v. Winstar Corp., 518 U.S. 839, 884-85 (1996).88 Lynch, 292 U.S. at ___.89 Id. at ___.90 Id. (emphasis added); see also Joshua I. Schwartz, “Liability for Sovereign Acts: Congruence and Exceptionalism in Government Contracts Law,” 64 Geo. Wash. L. Rev. 633, 675 (April 1996) (discussing Lynch, and noting majority’s holding that
20DSMDB-3050080v1
Sixty years later, in United States v. Winstar Corp., the
Supreme Court again examined the rights and responsibilities the
government bears in its contracting capacity.91 The Court’s
plurality opinion articulated the same, fundamental conclusions,
often using the same language, that which Justice Brandeis had
articulated in issuing the majority opinion in Lynch.92
Winstar’s plurality opinion again stressed the significance of
the Core Tenet to the judiciary’s resolution of government
contracts disputes.93 It Winstar also considered the application
of Principle 3 (the sovereign acts doctrine) as a defense when a
contractor alleges that the government Government has breached a
contract.94 In so doingexamining the sovereign acts defense, it
Winstar set the stage for the judiciary’s subsequent assessment
of the application and interplay of the Core Tenet and the three
Principles.
Winstar is a product of the 1980s’ savings and loan, or
“thrift,” crisis.95 In the early 1980s, thrifts rapidly began to
“[t]he United States are as much bound by their contracts as are individuals”) (internal quotation marks and citation omitted).91 Winstar, 518 U.S. at 839.92 See United States v. Winstar Corp., 518 U.S. 839Id., 884-85 (1996) (“As Justice Brandeis recognized, ‘[p]unctilious fulfillment of contractual obligations is essential to the maintenance of the credit of the public as well as private debtors.’” (citation omitted)).93 94 95 Id. at 843-48 (recounting history of “[t]he modern savings and loan industry”); see also Joshua I. Schwartz, “Assembling
21DSMDB-3050080v1
fail.96 In response, the Ggovernment encouraged healthy thrifts
to acquire failing thrifts—also known as “supervisory mergers”—
and offered, as inducement, favorable accounting standards for
the healthy, acquiring thrifts.97 In 1989, however, Congress
enacted the Financial Institutions Reform, Recovery, and
Enforcement Act (“FIRREA”),98 which altered the thrifts’
accounting standards, eliminating the once-favorable treatment.99
Winstar: Triumph of the Ideal of Congruence in Ggovernment Contracts Law?,” 26 Pub. Cont. L.J. 481, 482 (Summer 1997).96 United States v. Winstar Corp., 518 U.S. 839,at 845 (1996). As recounted in Justice Souter’s plurality opinion, with “the combination of high interest rates and inflation in the late 1970’s and early 1980’s,” many thrifts suffered as “the costs of short-term deposits overtook the revenues from long-term mortgages[.]” Id. As a result, “435 thrifts failed between 1981 and 1983.” Id.97 Id. at 847-48 (“[T]he principal inducement for these supervisory mergers was an understanding that the acquisitions would be subject to a particular accounting treatment that would help the acquiring institutions meet their reserve capital requirements imposed by federal regulations.”). Among the accounting incentives: the recognition of supervisory goodwill, the ability to amortize goodwill assets, and the “double counting” of cash as a tangible and intangible asset to meet capital requirements. Id. at 849-53.; see See also Joshua I. Schwartz, “Assembling Winstar: Triumph of the Ideal of Congruence in Government Contracts Law?,” 26 Pub. Cont. L.J. 481, 484 (Summer 1997) (:
“To encourage and facilitate these supervisory mergers, the federal thrift agencies allegedly promised the acquiring entities that they would enjoy favorable regulatory accounting treatment that would permit them to treat the amount by which the purchase price paid exceeded the market value of the insolvent thrift institutions as goodwill that could be used to satisfy capital requirements imposed by regulators.”).
98 Pub. L. No. 101-73, 103 Stat. 183.99 United States v. Winstar Corp., 518 U.S. 839,at 856-57 (1996).
22DSMDB-3050080v1
FIRREA’s impact was “swift and severe,”100 and the revised
financial standards drove once-healthy thrifts to the brink of
insolvency.101
The three Winstar plaintiffs/respondents had acquired
failing thrifts through supervisory mergers.102 In FIRREA’s wake,
two of the plaintiffs/respondents were seized and liquidated,
while the third narrowly avoided the same fate.103 The three sued
and “claimed that the application of [the] new, statutorily
mandated standards constituted a breach of the agreements that
they had entered into with federal regulators in connection with
the supervisory mergers that they had undertaken.”104 The Court
of Federal Claims and, later, the en banc Federal Circuit,105
100 Id. at 857.101 Id. at 857-58.102 103 Id. at 858.104 Joshua I. Schwartz, “Assembling Winstar: Triumph of the Ideal of Congruence in Government Contracts Law?,” 26 Pub. Cont. L.J. 481, 485 (Summer 1997); see also Winstar, 518 U.S. at 858 (“Believing that [government agencies] had promised them that the supervisory goodwill created in their merger transactions could be counted toward regulatory capital requirements, respondents each filed suit against the United States . . . .”).105 Initially, on interlocutory appeal, a divided panel of the Federal Circuit reversed the Court of Federal Claims. See Winstar, 518 U.S. at 859. However, the Federal Circuit reheard the case en banc and reversed its first decision. Id.
Stanfield Johnson has illuminated Judge Newman’s critical role as the dissenting judge on the original Federal Circuit panel. See W. Stanfield Johnson, “The Federal Circuit’s Great Dissenter and Her ‘National Policy of Fairness to Contractors,’” 40 Pub. Cont. L.J. 275, 284-85 (Winter 2011). He Mr. Johnson describes her Judge Newman’s dissenting opinion as “rare because it ultimately prevailed—and can be said to have had a significant impact on the Federal Circuit’s contract jurisprudence.” Id.
23DSMDB-3050080v1
agreed with the plaintiffs/respondents.106 The Federal Circuit
concluded that the Ggovernment had formed express contracts with
the plaintiffs/respondents, and that these contracts were
predicated on the Ggovernment’s promise of favorable
accounting.107
The Supreme Court granted certiorari for the express purpose
of evaluating whether and to what extent government contracts are
governed by general contract law (the Core Tenet) — and, in
particular, to evaluate the viability of the Ggovernment’s unique
defenses of “unmistakability” and “sovereign acts”(Principle
3).108 Justice Souter—joined by Justices Stevens, Breyer, and (in
part) O’Connor—authored the Court’s plurality opinion.109 In
Further, his description of her dissenting opinion harkens to the normative goals of neutrality, as he describes her emphasis on “the bargaining of contracts, the essentiality of the government’s commitments, and the financial benefits to the government.” Id. at 286 (“She commented that ‘governmental responsibility is not a new idea in this nation’s law’ and sovereign acts are ‘not a boundless justification for government non-liability.’” (citations omitted)).
Judge Newman joined the en banc majority. Id. According to Mr. Johnson, Winstar is the “high-water mark” in Judge Newman’s “persistent—and largely lonely—advocacy of fairness in the adjudication of contractor disputes with the sovereign.” Id. at 333 (citation omitted).106 Winstar, 518 U.S. at 858-59.107 Id at 859.108 See id., 518 U.S. at 860 (“We took this case to consider the extent to which special rules, not generally applicable to private contracts, govern enforcement of the governmental contracts at issue here.”).109 See generally idId. Justice Breyer wrote a separate concurring opinion. Id. at 910. Justices Scalia, Kennedy, and Thomas concurred in the judgment, with Justice Scalia writing separately. Id. at 919. Chief Justice Rehnquist and Justice
24DSMDB-3050080v1
discussing the defense of unmistakability and the application of
the sovereign acts doctrine, tThe purality opinion examined when
it is appropriate to apply the sovereign acts doctrine to shield
the gGovernment from liability for breach damages for which the
governmentit would otherwise be liable.110 Under the facts of
Winstar, the Count found that the sovereign acts doctrine did not
shield the Ggovernment from liability.111
Many have attempted to find a consensus in the Court’s
plurality and separately written opinions.112 While it is not the
purpose of this article to cover this same groundissues already
discussed at length by other authors, it has been persuasively
argued that the Court’s majority affirmed the Court’s prior
application of the Core Tenet.113 Consequently, of critical
Ginsberg dissented. Id. at 924.110 111 See generally iId.112 See, e.g., Rodger D. Citron, “Lessons from the Damages Decisions Following United States v. Winstar Corp.,” 32 Pub. Cont. L.J. 1 (Fall 2002); Joshua I. Schwartz, “The Status of the Sovereign Acts and Unmistakability Doctrines in the Wake of Winstar: An Interim Report,” 51 Ala. L. Rev. 1177 (Spring 2000); Thomas R. Gilliam, Jr., Note, “Contracting with the United States in its Role as Regulator: Striking a Bargain with an Equitable Sovereign or a Capricious Siren?,” 18 Miss. C. L. Rev. 247 (Fall 1997); Joshua I. Schwartz, “Assembling Winstar: Triumph of the Ideal of Congruence in Government Contracts Law?,” 26 Pub. Cont. L.J. 481 (Summer 1997).113 See Joshua I. Schwartz, “Assembling Winstar: Triumph of the Ideal of Congruence in Government Contracts Law?,” 26 Pub. Cont. L.J. 481, 489-533 (Summer 1997) (describing Justice Souter’s plurality opinion, which supports applicability of general common law); id. at 533-34 (describing support for the same principle in Justice Breyer’s opinion); id. at 543 (describing Justice Scalia’s opinion, which appears to support this principle, as
25DSMDB-3050080v1
import for this article is the language used by Justice Souter’s
language is critically important for this article, as it arguably
reflects a consensus of the Court and indisputably reaffirms what
Justice Brandeis advised in Lynch: “[W]hen the United States
enters into contract relations, its rights and duties therein are
governed generally by the law applicable to contracts between
private individuals.”114 Justice Souter recognized that the
“practical capacity to make contracts” is, by itself, “the
essence of sovereignty.”115
The Winstar opinion plurality stressed that the judiciary
undermines the Ggovernment’s ability to contract —- in effect, it
well).114 Winstar, 518 U.S. at 895 (quoting Lynch, 292 U.S. 571,at 579 (1934)) (internal quotation marks omitted). In addition to Lynch, Justice Souter recited other caselaw supporting the application of general contract law to government contracts. See, e.g., id. at 884 n.28 (“[T]he Federal government, as sovereign, has the power to enter contracts that confer vested rights, and the concomitant duty to honor those rights . . . .”) (quoting Bowen v. Public Agencies Opposed to Social Sec. Entrapment, 477 U.S. 41, 52 (1986) (emphasis added))); id. at 886 n.31 (“It is no less good morals and good law that the government should turn square corners in dealing with the people than that the people should turn square corners in dealing with their government.” (quoting Heckler v. Comm. Health Servs. of Crawford Cty., Inc., 467 U.S. 51, 61 n.13 (1984) (emphasis added))); id. (“It is very well to say that those who deal with the government should turn square corners. But there is no reason why the square corners should constitute a one-way street.”) (quoting Fed. Crop Ins. Corp. v. Merrill, 332 U.S. 380, 387-88 (1947) (Jackson, J., dissenting))); id. at 895 n.39 (“The United States does business on business terms.” (quoting Clearfield Trust Co. v. United States, 318 U.S. 363, 369 (1943))); id. (“The United States, when they contract with their citizens, are controlled by the same laws that govern the citizen in that behalf.” (quoting United States v. Bostwick, 94 U.S. 53, 66 (1877) (emphasis added))).115 Winstar, 518 U.S. at 895.Id.
26DSMDB-3050080v1
interferes with the Ggovernment’s sovereign right to contract —
when it treats the Ggovernment differently than it would treat a
private party to a contract.116 Justice Souter notes, as an
“essential point” from precedent, that the Ggovernment, in its
contracting capacity, should be “put [] in the same position that
it would have enjoyed as a private contractor.”117 When the
judiciary over-protects the Ggovernment when resolving government
contract disputes, it inhibits the gGovernment’s freedom to
contract, with “the certain result of undermining the
government’s credibility at the bargaining table and increasing
the cost of its engagements.”118
In Winstar, the Court wrestled with the need to define and
reassess the circumstances under which it is appropriate to
relieve the gGovernment from liability for payment of damages for
breach of contract by reason of the exercise of a sovereign act
(Principle 3, the sovereign acts doctrine).119 The plurality
rejected the Ggovernment’s argument that all gGovernment actions
(in Winstar, enactment of legislation) that are designed to
advance the general welfare (i.e., that are “public and general”
in nature) automatically invoke the sovereign acts doctrine.120
116 117 Id. at 892 (discussing Horowitz v. United States, 267 U.S. 458, 461 (1925)) (emphasis added).118 Id. (emphasis added).119 120
27DSMDB-3050080v1
The plurality recognized that, sometimes, the gGovernment acts in
a way that blurs the divide between the gGovernment’s role as
sovereign and its role as contractor.121 :
The government argues that “[t]he relevant question [under these cases] is whether the impact [of governmental action] ... is caused by a law enacted to govern regulatory policy and to advance the general welfare.” Brief for United States 45. This understanding assumes that the dual characters of government as contractor and legislator are never “fused” (within the meaning of Horowitz) so long as the object of the statute is regulatory and meant to accomplish some public good. That is, on the government’s reading, a regulatory object is proof against treating the legislature as having acted to avoid the government’s contractual obligations, in which event the sovereign acts defense would not be applicable. But the government’s position is open to serious objection.
To address the phenomenon of the
121 Id. at 893. The plurality went on to note that:The government argues that “[t]he relevant question [under these cases] is whether the impact [of governmental action] ... is caused by a law enacted to govern regulatory policy and to advance the general welfare.” Brief for United States 45. This understanding assumes that the dual characters of government as contractor and legislator are never “fused” (within the meaning of Horowitz) so long as the object of the statute is regulatory and meant to accomplish some public good. That is, on the government’s reading, a regulatory object is proof against treating the legislature as having acted to avoid the government’s contractual obligations, in which event the sovereign acts defense would not be applicable. But the government’s position is open to serious objection.
Id. (emphasis added).
28DSMDB-3050080v1
gGovernment acting at once as sovereign and
contractor, the plurality recognized that it
is important to examine the multiple effects
that can follow from a Ggovernment action
rather than merely the motive that led to the
effects.122 The plurality recognized that, in
certain circumstances, finding the
Ggovernment liable for breach of contract
damages when it takes a sovereign act (e.g.,
enactment of legislation) should not be seen
as blocking the gGovernment’s ability to take
the sovereign act.123 As to the those without
existing contracts at the time theA sovereign
act is taken,will be considered the act is
“public and general”; ” for those who don’t
have extant contracts at the time of the act,
but, as to those with contracts that will be
adversely affected by the sovereign act, the
act subjects the gGovernment to breach
damages by those who have extant contracts
that will be adversely affected.124 This
distinction is not made to conflate or
122 123 124
29DSMDB-3050080v1
confuse the rights and obligations the
government Government has when it acts in its
sovereign capacity vis-à-vis those it has
when it acts in its contracting capacity. ;
Rrather, it is to say that a single
Ggovernment act may be sovereign in nature in
some respects, and therefore shield the
Ggovernment from exposure with regard to the
“public and general” effects of the act, and
at the same time contractual in nature in
other respects, and thus subject the
gGovernment to liability for breach damages
with regard to adverse effects on existing
government contracts.125
The Supreme Court’s decisionss in Winstar’s wake have
continued to affirm the Core Tenet — that, when contracting, the
Ggovernment is bound by general contract law.126 For example, in 125 Id. at 881. The plurality stated further:
The government’s position is mistaken, however, for the complementary reasons that the contracts have not been construed as binding the government’s exercise of authority to modify banking regulation or of any other sovereign power, and there has been no demonstration that awarding damages for breach would be tantamount to any such limitation.
Id.126 See, e.g., Cherokee Nation of Ok. v. Leavitt, 543 U.S. 631, 644, 646 (2005); Mobil Oil Exploration & Prod. Se., Inc. v. United States, 530 U.S. 604, 607-08 (2000).
30DSMDB-3050080v1
Mobil Oil Exploration & Producing Southeast, Inc. v. United
States, the Court analyzed whether legislation enacted subsequent
to the gGovernment’s execution of offshore drilling leases
granted to the plaintiffs/petitioners breached gGovernment
obligations under the leases.127 Even with the intricate
regulatory framework applicable to offshore energy exploration,128
the Court’s analysis began with the “basic contract law
principle[],” (the Core Tenet) announced in Lynch and reaffirmed
in Winstar.129 Then, in a decision “peppered with references to
the Restatement of Contracts, as well as citations to contract
law treatises by Professors Williston, Corbin, and Farnsworth,”
the Court rejected the “variety of statutes and regulations
which, the U.S. claimed, justified its actions.”130
B. An Overview of The Principles That Govern the Rights And Obligations The Government Enjoys In Its Sovereign Capacity Compared With Those It Enjoys In Its Contracting Capacity
127 See generally Mobil Oil, 530 U.S. 604 (Add Pincite).128 Thomas J. Madden and Andrew S. Gold, “Supreme Court Holds Government to Same Standards as Private Party in Breach Action; Future of ‘Sovereign Acts’ Defense in Doubt,” 42 No. 27 Gov. Con. ¶ 277 (July 19, 2000).129 Mobil Oil, 530 U.S. 604,at 607-08 (2000) (emphasis added).130 Thomas J. Madden and Andrew S. Gold, “Supreme Court Holds Government to Same Standards as Private Party in Breach Action; Future of ‘Sovereign Acts’ Defense in Doubt,” 42 No. 27 Gov. Con. ¶ 277 (July 19, 2000). Only pre-existing statutes and regulations would have allowed the government to skirt its obligations, and even pre-existing statutes and regulations incorporated into the leases “should not be read to include subsequent statutes.” Id.
31DSMDB-3050080v1
Nearly every decision that has dealt with these issues in
the federal judiciary has acknowledged the universal
applicability of the Core Tenet: “When the United States enters
into contract relations, its rights and duties therein are
governed generally by the law applicable to contracts between
private individuals.”131 However, a number of judges have
neglected the Core Tenet when evaluating the application of one
or more of the trio of Principles that underlie the Core Tenet.132
These judges have employed considerable conflation, melting,
borrowing, and ignoring of one or more of the Principles.133
The fundamental problem is the unwillingness of some judges
to employ rigorous analysis to ensure recognition that the rights
and effects that define and follow from sovereign acts are
distinct from the rights and effects that define and follow from
government contractual acts.134 The problem derives from certain
decisions issued by the Federal Circuit regarding the three
Principles, perpetuated recently in some decisions issued by the
tribunals below.135 Accordingly, let us first briefly examine the
fundamentals of each of the three Principles that are subordinate
to the Core Tenet, which together shape this area of law. We
131 132 133 134 135
32DSMDB-3050080v1
then analyze how some decisions issued by the Federal Circuit and
the tribunals below have merged the three distinct Principles
into tangled confusion.136
Each of the three Principles is properly understood by
examining whether or not the principle has applicability 1) in
the context of the Ggovernment acting in its sovereign capacity;
2) in the context of the gGovernment acting in its contracting
capacity, or 3) in situations relating solely to Principle 3,
where the gGovernment acts in a way that has sovereign effects as
to the general public, but contractual effects as to contractors
adversely affected by the sovereign act. Broadly stated, the
operative rule is that each of the three Principles operates only
in one of the two arenas (the sovereign arena or contractual
arena), not in both arenas — although, with this rule has some
important exceptions.137 But it is the rule, not the exceptions,
that matters. Yet;nonetheless, decisions of the Federal Circuit
and some decisions of tribunals below have melted the boundaries
and distinctions that separate the two arenas.138
Let us restate our understanding of the three legal
Principles and the law that governs them:139
136 137 138 139 The statement of the Principles here is the authors’ articulation based on their understanding of the applicable case law. We state the Principles first in our own words, then
33DSMDB-3050080v1
a) Principle 1: The Presumption Of Good Faith
The presumption of good faith presumes that gGovernment
employees act properly and in good faith when they perform their
professional duties. This Principle 1 applies in the sovereign
arena, not in the contractual arena, with limited exception. The
exception —is that the presumption can apply in a dispute in the
contractual arena, but only if (with very few exceptions), the
contractor to the dispute alleges bad faith on the part of one or
more government employees.140 Where a contractor in a contract
dispute alleges bad faith on the part of one or more government
employees, fora have imported the evidentiary rule that applies
in the sovereign arena — the requirement that the contractor
prove by clear and convincing evidence subjective bad faith or
animus on the part of the government employee(s).141
Absent invocation by the contractor in a dispute, the
presumption of good faith has no relevance in the contractual
arena (with the limited regulatory/contractual exception noted).
Principle 1 belongs in the sovereign arenarelates exclusively to
the Government’s sovereign powers.
follow with discussion of the case law that has led us to our understanding. 140 Regulatory bodies have created a small number of exceptions where regulations and/or contract clauses commit action or inaction to the discretion of applicable government employees, such as the Termination for Default clause; [other examples]. But these are very few in number; an increase would run afoul of the Core Tenet and the Supreme Court decisions discussed above.141
34DSMDB-3050080v1
b) Principle 2: The Duty of Good Faith and Fair Dealing, And Its Corollaries, The Duty To Cooperate and Not To Hinder
This Principle 2 applies in the contractual arena, not in
the sovereign arenato the Government’s contractual powers, rather
than to its sovereign powers. The Principle is a fundamental
precept of contract law,. It which posits that each party to a
contract owes a duty to the other to allow the other to enjoy the
fruits of its contractual bargain.142 The duty involves
affirmative obligations, such as the duty to perform actions that
are foreseeable at the time of contracting necessary to enable
the other party to enjoy the fruits of its bargain (the duty to
cooperate).143 It also involves obligations of restraint, such as
the duty not to take action that will frustrate the other party’s
ability to enjoy the fruits of its bargain (the duty not to
hinder).144 The duty applies with equal force to both parties to
a contract.145 Courts at every level have stated that the
Ggovernment and contractors alike are subject to the duty.146
Establishing a breach of the duty of good faith and fair
dealing involves assessment of objective evidence. It is not
necessary when assessing an alleged breach of the duty to examine
142 [Should be able to just go with a basic restatement of contracts provisions]143 144 145 146
35DSMDB-3050080v1
the intent of the allegedly breaching party. Again, the question
is: does a preponderance of evidence establish that one party
breached its duty to cooperate and not to hinder the other party
in the performance of the contract? Evidence of the subjective
bad intent of the allegedly breaching party (including the
gGovernment) can, but need not be, evidence that is assessed in
determining if a preponderance of evidence exists to establish a
breach of the duty.147
Principle 2 is inapplicable to the Government’s exercise of
its sovereign power, but it is of principal importance to the
Government’s exercise of its contractual powerhas no place in the
sovereign arena, but occupies a paramount perch in the
contractual arena.
c) Principle 3: The Sovereign Acts Doctrine
As the name implies, this Principle 3 springs from the
sovereign arenaapplies to the Government’s sovereign capacity.
However, unlike Principle 1 (the presumption of good faith), it
can become an important consideration in applying Principle 2
147 As we discuss in more detail below, it is remarkable to discover that the rules that fall from Principle 1 are often merged into those that govern Principle 2 for no other reason than that both Principles use the term “Good Faith.” With no more than this lily pad to stand on, a number of decisions have reasoned a breach of the duty of good faith and fair dealing requires a showing of bad faith, bad intent on the part of the government, which can only be overcome by rebutting the presumption of good faith, wrongly imported in these misguided decisions from the sovereign arena into the contractual arena. Discussed at Heading_____infra.
36DSMDB-3050080v1
(the duty of good faith and fair dealing), but only in certain
circumstances.
In simplistic terms, Principle 3 stands for the proposition
that the sovereign is the sovereign, and except in rare
instances, no entity can be seen to take action that would strip
the sovereign of its powers.148 The sovereign acts doctrine
enters the contractual arena when the government Government is
alleged to have breached a government contract through its
exercise of a sovereign power that deprives a contractor of all
or a portion of the benefit the contractor reasonably expected to
receive from a pre-existing contract with the gGovernment.149 In
such instances, the contractor alleges that the gGovernment’s
exercise of its sovereign power — for example, enactment of
legislation — has the effect of frustrating the contractor’s
ability to enjoy the fruits of the bargain that it anticipated
when it contracted with the gGovernment.150
As might be expected, and as we discussed above, this
Principle 3 is among those rare issues pertaining to government
contracts law that has found its way to the Supreme Court more
than once in the last two decades.151 In both Winstar and Mobil
Oil, the Court found it necessary to assess whether or not the 148 149 Discussed at Heading ____ infra.150 151 See discussion in Heading _____ supra of Winstar and Mobil Oil.
37DSMDB-3050080v1
sovereign acts doctrine should relieve the gGovernment of its
obligation to fulfill its duties under certain of its
contracts.152 The Court in these decisions relied, and arguably
expanded upon, precedent.153 The decisions have been interpreted
to articulate a rule that establishes that the gGovernment is
shielded from liability for breach of contract if the effects of
its sovereign act are “public and general” in nature.154
Conversely, if at least part of the motivation for and effect of
the gGovernment’s exercise of sovereignty is to deprive a
contractor of benefits it reasonably believed it would derive
from a contract with the gGovernment, the gGovernment cannot be
shielded from liability for breach damages.155 Thus, if the
“sovereign act” is the enactment of legislation and it is this
sovereign act that allegedly caused a breach of contract, the
question is whether the legislation has broad and general effect
and applies in a “public and general” manner, or conversely, has
effects that fall primarily upon a class of entities within which
the complaining contractor falls.156 As the plurality in Winstar
recognized, merely because it is proper to find that the
gGovernment owes one or more contractors damages due to the
152 153 154 155 156
38DSMDB-3050080v1
adverse effects that fall from a sovereign act does not mean that
the finding of liability blocks the gGovernment’s ability to
pursue the sovereign act.157
The underpinning of the sovereign acts doctrine is that,
except in limited circumstances that invoke the unmistakability
doctrine, the gGovernment cannot contract away its sovereign
powers.158 For example, the gGovernment cannot through contract
agree to refrain from enacting certain legislation or from
regulating in a certain way.159 The sovereign acts doctrine
prevents private parties, including contractors, from enjoining
the sovereign from exercising its powers.160 It exempts the
gGovernment from the fundamental rule of contract law that a
party to a contract cannot blame its own breach on the
impossibility of performance when its own acts or inactions
created the impossibility.161 And, it recognizes that this rule
should not be applied to gGovernment contract disputes in a way
that would have the effect of blocking the government from
exercising sovereign powers.162 In discussing the origins and
purposes behind the sovereign acts doctrine, Justice Souter
157 158 159 160 161 162
39DSMDB-3050080v1
stressed that the doctrine was conceived to work with the Core
Tenet, not against it:
An even more serious objection is that allowing the government to avoid contractual liability merely by passing any “regulatory statute” would flout the general principle that, “[w]hen the United States enters into contract relations, its rights and duties therein are governed generally by the law applicable to contracts between private individuals.” Lynch v. United States, 292 U.S., at 579, 54 S.Ct., at 843. Careful attention to the cases shows that the sovereign acts doctrine was meant to serve this principle, not undermine it.163
C. Some Decisions Of The Federal Circuit And Tribunals Below Have Created Confusion
Some Federal Circuit decisions and a number of decisions
issued by tribunals below have applied these Principles in loose
fashion, mixing and matching concepts, importing some aspects of
each in certain situations, and leaving other aspects behind.164
Precision Pine exacerbated the problem, and the judges of the
tribunals below have struggled to interpret the decision.165 Some
have merely thrown up their hands and relied upon the facts to
transport them out of the morass.166
For example, the presumption of good faith (Principle 1),
which is enjoyed by government employees when they act in their
the Government’s sovereign capacity, should not be applied when 163 Winstar, 539 U.S. at 839.164 165 166
40DSMDB-3050080v1
private contractors allege that the gGovernment has breached the
implied duty of good faith and fair dealing (Principle 2), which
the gGovernment accepts in its contracting capacity.
Nevertheless, some Federal Circuit judges appear to have confused
the two Principles, giving murky precedent to the tribunals
below.167 Here, we discuss: (1) the differences between these
Principles; and (2) the confusion following the Federal Circuit’s
decisions in Am-Pro Protective Agency, Inc. v. United States;
Centex Corp. v. United States, and Precision Pine & Timber, Inc.
v. United States.
1. Principle 1: (the presumption of good faith applicable in the sovereign arena) is separate and distinct from Principle 2 (the implied duty of good faith and fair dealing applicable in the contractual arena)
As we have discussed earlier, Principle 1 is unrelated to
Principle 2.168 And, as we stated above, the conflation of the
two Principles by some federal Federal judges has been the
subject of extensive analysis and commentary, and we do not wish
to retrace that analysis completely.169 However, this article’s
topic warrants articulation of some of that analysis as a
building block for the discussion that follows.170
167 168 169 170 See, e.g., Stuart B. Nibley, “Unraveling the Mixed Messages that government Procurement Personnel Receive: Message 1: Act Absolutely in the Government’s ‘Best Interests’: Message 2: Act
41DSMDB-3050080v1
On the one hand, Principle 2 (the implied duty of good faith
and fair dealing) is succinctly stated in the Restatement
(Second) of Contracts: “Every contract imposes upon each party a
duty of good faith and fair dealing in its performance and its
enforcement.”171 Here, “good faith” means “faithfulness to an
agreed common purpose and consistency with the justified
expectations of the other party[.]”172 Although a party acting in
subjective bad faith can breach this duty, a breach does not
require proof of subjective bad faith.173 Indeed, the
Restatement’s examples of breach demonstrate that proof of
subjective bad faith is not necessary to prove breach of the
contractual duty of good faith and fair dealing:
Subterfuges and evasions violate the obligation of good faith in performance even
‘Ethically,’” 36 Pub. Cont. L.J. 23, 25-26 (Fall 2006) (contrasting the implied duty of good faith and fair dealing with the presumption of good faith); see also Karen L. Manos, “Changes—Constructive changes—Breach of implied duty to cooperate and not hinder performance,” 2 Gov’t Con. Costs & Pricing § 87:6 (2d ed., March 2011) (“[T]he implied duty to cooperate . . . is an aspect of the implied obligation of good faith and fair dealing, [and] it should not be confused with the presumption of good faith.”); Ralph C. Nash, “Postscript: Breach of the Duty of Good Faith and Fair Dealing,” 24 No. 5 Nash & Cibinic Rep. ¶ 22 (May 2010) (contrasting these principles in light of Precision Pine & Timber, Inc. v. United States, 596 F.3d 817 (Fed. Cir. 2010)); Ralph C. Nash, “The government’s Duty of Good Faith and Fair Dealing: Proving a Breach,” 23 No. 12 Nash & Cibinic Rep. ¶ 66 (Dec. 2009) (contrasting these principles in light of U.S. Court of Federal Claims decisions).171 Restatement (Second) of Contracts § 205 (emphasis added).172 Id., Comment A (“Meanings of ‘good faith.’”) (emphasis added).173 See id., Comment D (“Good faith performance.”).
42DSMDB-3050080v1
though the actor believes his conduct to be justified. But the obligation goes further: bad faith may be overt or may consist of inaction, and fair dealing may require more than honesty. A complete catalogue of types of bad faith is impossible, but the following types are among those which have been recognized in judicial decisions: evasion of the spirit of the bargain, lack of diligence and slacking off, willful rendering of imperfect performance, abuse of power to specify terms, and interference with or failure to cooperate in the other party’s performance.174
Further, the Restatement extends the duty of good faith and fair
dealing to “the assertion, settlement and litigation of contract
claims and defenses,”175 and again, the Restatement does not limit
breach to proof of subjective bad faith:
The obligation is violated by dishonest conduct such as conjuring up a pretended dispute, asserting an interpretation contrary to one’s own understanding, or falsification of facts. It also extends to dealing which is candid but unfair, such as taking advantage of the necessitous circumstances of the other party to extort a modification of a contract . . . . Other types of violation[s] have been recognized in judicial decisions: harassing demands for assurances of performance, rejection of performance for unstated reasons, willful failure to mitigate damages, and abuse of power to determine compliance or to terminate the contract.176
These examples demonstrate that, in the context of the duty of
good faith and fair dealing, the term “bad faith” refers to the
174 Id., Comment D (emphasis added).175 Id., Comment E (“Good faith in enforcement.”).176 Id.
43DSMDB-3050080v1
absence of good faith, not to conduct taken with subjective bad
faith, intent to injure, or animus.177
On the other hand, we have Principle 1, provides that
gGovernment employees acting in their sovereign capacities, e.g.
legislating, regulating, and taxing, are presumed to act in good
faith.178 Here, subjective bad faith is the touchstone: this
presumption “can be overcome only by ‘clear and convincing’
evidence of subjective bad faith, which means personal animus.”179
The presumption that government employees act in good faith did
not spring from contract law.180 Rather, it “has its roots in
English law” as an evidentiary presumption created to shield the
gGovernment from liability otherwise caused by discretionary,
sovereign action.181 In the mid-twentieth century, it Principle I
177 See, e.g., W. Stanfield Johnson, “Mixed Nuts and Other Humdrum Disputes: Holding the Government Accountable Under the Law of Contracts Between Private Individuals,” 32 Pub. Cont. L.J. 677, 704 (Summer 2003) (“‘[B]ad faith’ is simply ‘the other side of the coin’ or a lack of good faith.”).178 179 W. Stanfield Johnson, “Needed: A Government Ethics Code and Culture Requiring its Officials To Turn ‘Square Corners’ when Dealing with Contractors,” 19 No. 10 Nash & Cibinic Rep. ¶ 47 (October 2005) (emphasis in original).180 See Tecom, Inc. v. United States, 66 Fed. Cl. 736, 757-69 (2005); see also W. Stanfield Johnson, “Mixed Nuts and Other Humdrum Disputes: Holding the Government Accountable Under the Law of Contracts Between Private Individuals,” 32 Pub. Cont. L.J. 677, 703-04 (Summer 2003) (“There is no such rule in the general law of contracts. . . . A very different concept of ‘good faith and fair dealing’ pervades contract law.”).181 See Tecom, Inc. v. United States, 66 Fed. Cl. 736,at 757-69 (2005). In modern jurisprudence, the good faith presumption appears to have emerged in personnel disputes. See W. Stanfield Johnson, “Mixed Nuts and Other Humdrum Disputes: Holding the
44DSMDB-3050080v1
appeared in American U.S. government-contracts settings, but was
“largely restricted” to the adjudication of claims arising out of
discretionary government actions such as contract terminations.182
Since then, courts have occasionally but sparingly applied this
presumption to other areas of government contracts law.183 With
few exceptions, the courts have not applied the presumption — and
Government Accountable Under the Law of Contracts Between Private Individuals,” 32 Pub. Cont. L.J. 677, 699 (Summer 2003) (“[T]he rule finds its genesis in personnel disputes[.]”); see, e.g., Gonzales v. West, 218 F.3d 1378, 1381 (Fed. Cir. 2000) (applying presumption when veteran challenged disability rating assigned by Department of Veterans Affairs); Robinson v. U.S. Postal Serv., No. 99-3460, 2000 WL 674674 at *2 (Fed. Cir. May 23, 2000) (“Penalty decisions are judgment calls best left to the discretion of the employing agency, and the presumption is that Government officials have acted in good faith.”). But see Major Bryan O. Ramos, “Never Say Die: The Continued Existence of the government Officials’ Good Faith Presumption in Federal Contracting Law and the Well-Nigh Irrefragable Proof Standard After Tecom,” 63 A.F. L. Rev. 163, 166-70 (2009) (insisting that the presumption of good faith is well-established as an historical principle in government contracts law); Linda P. Armstrong, Walter H. Pupko, and Donald M. Yenovkian II, “Federal Procurement Ethical Requirements and the Good Faith Presumption,” 20 No. 6 Nash & Cibinic Rep. ¶ 29 (June 2006) (same).182 See W. Stanfield Johnson, “Needed: A Government Ethics Code and Culture Requiring its Officials To Turn ‘Square Corners’ when Dealing with Contractors,” 19 No. 10 Nash & Cibinic Rep. ¶ 47 (October 2005); see also Ralph C. Nash, “The Government’s Duty of Good Faith and Fair Dealing: Proving a Breach,” 23 No. 12 Nash & Cibinic Rep. ¶ 66 (Dec. 2009); W. Stanfield Johnson, “Mixed Nuts and Other Humdrum Disputes: Holding the Government Accountable Under the Law of Contracts Between Private Individuals,” 32 Pub. Cont. L.J. 677, 700 (Summer 2003).183 See, e.g., Galen Med. Assocs., Inc. v. United States, 369 F.3d 1324, 1328-30 (Fed. Cir. 2004) (applying presumption when assessing agency action in bid protest challenge under Administrative Procedure Act, 5 U.S.C. § 702); Precision Standard, Inc. v. Widnall, No. 97-1096, 1997 WL 794107 at *3 (Fed. Cir. Dec. 30, 1997) (applying standard when private contractor appealed termination for default); Ralph C. Nash, “The Government’s Duty of Good Faith and Fair Dealing: Proving a
45DSMDB-3050080v1
its heavy evidentiary burden — to resolution of disputes between
the gGovernment and its contractors.184
2. The Federal Circuit’s Ddecisions in the pPast dDecade in tThis aArea of lLaw hHave bBeen iInconsistent and cConfusing, Effectively Importing the Concept of Subjective Bad Faith From Principle 1 (The Presumption of Good Faith) Into Application of Principles 2 (Duty of Good Faith and Fair Dealing) and 3 (Sovereign Acts Doctrine).
a. Am-Pro Protective Agency, Inc. v. United States
In 2002, the Federal Circuit decided Am-Pro Protective
Agency, Inc. v. United States.185 In Am-Pro, a private contractor
(“Am-Pro”) alleged that the Ggovernment was liable for additional
employee compensation costs Am-Pro incurred during contract
performance.186 The gGovernment argued that Am-Pro had already
released its claims; Am-Pro responded that its purported releases
were made under duress and thus were void.187 On a motion for
summary judgment, the Court of Federal Claims found for the
Breach,” 23 No. 12 Nash & Cibinic Rep. ¶ 66 (Dec. 2009) (discussing application of presumption to terminations for default).184 See, e.g., W. Stanfield Johnson, “Mixed Nuts and Other Humdrum Disputes: Holding the Government Accountable Under the Law of Contracts Between Private Individuals,” 32 Pub. Cont. L.J. 677, 701 (Summer 2003) (“Indeed, government contract tribunals have held government officers to standards of ‘good faith’ in other contractual dealings, applying tests more akin to the general law of contracts, and without presumption and without wresting through unnatural issues of malice, personal animus, or specific intent to injure.”).185 Am-Pro Protective Agency, Inc. v. United States, 281 F.3d 1234 (2002).186 Id. at 1236-38. 187 Id. at 1237-38.
46DSMDB-3050080v1
gGovernment, and on appeal, the Federal Circuit affirmed.188
Curiously, the Federal Circuit’s ruling ignored the relevant
standards for the implied duty of good faith and fair dealing
(Principle 2), which — given the facts alleged by Am-Pro — might
have been breached.189 For example, aside from the mere “absence
of good faith,” Am-Pro’s allegations suggested a genuine issue of
material fact regarding the contracting Contracting oOfficer’s
evasion of the spirit of the bargain, interfering with Am-Pro’s
performance, taking advantage of necessitous circumstances, and
abusing her authority.190
Instead, the Federal Circuit began and ended its analysis
with “[t]he presumption that government officials act in good
faith,” or Principle 1.191 The court emphasized the considerable
burden of proof that a plaintiff must meet to overcome the
188 189 Specifically, Am-Pro alleged that the contracting officer threatened to cancel Am-Pro’s contract and “adversely impact [its] ability to contract with other agencies” if Am-Pro maintained its original claims. Id. at 1237. Am-Pro withdrew its claims and “effectively releas[ed] the government from any future claims[.]” Id. at 1237-38.190 Id.; sSee also Restatement (Second) of Contracts § 205, Comments D & E. Stanfield Johnson has re-assessed Am-Pro under the Restatement’s standards for good faith and fair dealing, and he has argued that, “under the law of contracts between private individuals, Am-Pro could not have been decided as it was.” W. Stanfield Johnson, “Mixed Nuts and Other Humdrum Disputes: Holding the Government Accountable Under the Law of Contracts Between Private Individuals,” 32 Pub. Cont. L.J. 677, 705 (Summer 2003). Further, “Am-Pro [does not] appear to be consistent with prior government contract precedent dealing with duress and good faith in performance . . . .” Id.191 Am-Pro, 281 F.3d at 1239.
47DSMDB-3050080v1
presumption: “[W]e are ‘loath to find to the contrary of [good
faith], and it takes, and should take, well-nigh irrefragable
proof to induce us to do so.’”192 Then, before weighing Am-Pro’s
allegations under this burden, the court withdrew somewhat from
its application of a subjective intent standard, noting that “the
presumption of good faith, as used here, applies only in the
situation where a gGovernment official allegedly engaged in fraud
or in some other quasi-criminal wrongdoing.”193 Finally, the
court found no genuine issue of material fact with regard to the
contractor’s allegations that the gGovernment had acted with
subjective bad faith.194 According to the court, Am-Pro had not
shown that: (1) “the government ‘had a specific intent to injure’
Am-Pro”; (2) the contracting officer’s threats were “‘motivated
alone by malice’”; (3) there was “a proven ‘conspiracy . . . to
get rid of [Am-Pro]’”; (4) the “governmental conduct [] was
‘designedly oppressive’”; or (5) the contracting officer had
“animus toward’ Am-Pro.”195
Following Am-Pro, a number of decisions have merged the
presumption of good faith’s burden of proof — “well-nigh
irrefragable proof” of subjective bad faith, or personal animus
192 Id. (citations omitted) (emphasis added) (“[O]ur court and its predecessor have often used the ‘well-nigh irrefragable’ language to describe the quality of evidence to overcome the good faith presumption . . . .”).193 Id. (emphasis added). 194 See 281 F.3dId. at 1243.195 Id. at 1241 (citations omitted).
48DSMDB-3050080v1
(Principle 1) — into the standard private contractors must meet
to prove the Ggovernment’s breach of the duty of good faith and
fair dealing (Principle 2).196 The concept of subjective “bad
faith” is often discussed in connection with the duty of good
faith and fair dealing. Some judges now require proof by clear
and convincing evidence of “bad faith,” or personal animus, not
just the absence of good faith (such as slacking, lack of
diligence, failure to cooperate), to prove breach of the duty of
good faith and fair dealing.197 Notably, some decisions, such as
that of the Court of Federal Claims in Tecom, have expended
considerable effort to clarify the distinction between the
presumption of good faith (Principle 1) vis-à-vis the duty of
good faith and fair dealing (Principle 2).198 However, the
196 See, e.g., Ralph C. Nash, “The Government’s Duty of Good Faith and Fair Dealing: Proving a Breach,” 23 No. 12 Nash & Cibinic Rep. ¶ 66 (December 2009); see also W. Stanfield Johnson, “Mixed Nuts and Other Humdrum Disputes: Holding the Government Accountable Under the Law of Contracts Between Private Individuals,” 32 Pub. Cont. L.J. 677, 703 (Summer 2003) (predicting that, “[i]f Am-Pro is not seen as an aberration [] by a renewed application of general contract law, its precedential effect would be to grant government contracting officials a dangerous license to ignore those obligations of good faith and fair dealing in contractual actions that government contract law has already adopted from the law of contracts between private individuals”).197 See, e.g., Ca. Human Dev. Corp. v. United States, 87 Fed. Cl. 282 (2009); Keeter Trading Co. v. United States, 85 Fed. Cl. 613 (2009); N. Star Alaska Housing Corp. v. United States, 76 Fed. Cl. 158 (2007).198 See, e.g., Universal Shelters of Am., Inc. v. United States, 87 Fed. Cl. 127, 144-45 (2009) (Wolski, J.); Tecom, Inc. v. United States, 66 Fed. Cl. 736, 757-72 (2005) (Wolski, J.); see also Helix Elec., Inc. v. United States, 68 Fed. Cl. 571, 586-88
49DSMDB-3050080v1
confusion persists, and as it does, government contracts as
bilateral deals become further imbalanced, with private
contractors and the gGovernment assuming much different rights
and responsibilities.199
b. Centex Corp. v. United States
The Federal Circuit’s decision in Centex v. United States
addressed the same issue the courts had addressed in Winstar — a
suit for breach of contract damages filed by a trust company
(“the contractor”) that had acquired failed thrifts pursuant to
agreements with the Federal Savings and Loan Insurance
Corporation under which the contractor and gGovernment expected
that the contractor would enjoy certain tax benefits. 200 The
gGovernment’s subsequent enactment of the Guarini legislation
deprived the contractor of the tax benefits it had expected it
would enjoy through the execution and performance of the
(2005) (Williams, J.); cf. Jay Cashman, Inc. v. United States, 88 Fed. Cl. 297, 308 n.15 (2009) (Allegra, J.) (“While most cases seem to suggest that there can be no violation of the duty to cooperate without a showing of bad faith, that view is not universal.”).199 See, e.g., discussion at heading III.A.1; White Buffalo Const., Inc. v. United States, 101 Fed. Cl. (2011); Metcalf Const. Co. v. United States, No. 07-777C, 2011 WL 6145128 (Fed. Cl. Dec. 9, 2011); D’Andrea Bros. LLC v. United States, 96 Fed. Cl. 205 (2010).200 See Centex v. United States, 395 F.3d 1283 (Fed. Cir. 2005); see also Stuart B. Nibley, “Unraveling the Mixed Messages that Government Procurement Personnel Receive: Message 1: Act Absolutely in the gGovernment’s ‘Best Interests’: Message 2: Act ‘Ethically,’” 36 Pub. Cont. L.J. 23, 27-28 (Fall 2006) (discussing Centex). Soon after, the Federal Circuit decided First Nationwide Bank v. United States, 431 F.3d 1342, 1353 (Fed. Cir. 2005), a similar case with a similar outcome.
50DSMDB-3050080v1
contract.201 The Federal Circuit’s decision in Centex not only
hewed to the Winstar plurality’s reasoning, it also rounded it
out and introduced Principle 2 to the analysis.202
The Federal Circuit began with a straightforward recitation
of the duty of good faith and fair dealing (Principle 2).203
However, the court then confronted the question of when it should
consider legislation to be a sovereign act that shields the
gGovernment from liability for breach of contract damages
(Principle 3).204 The Ggovernment asserted that the Guarini
legislation was an insulating exercise of sovereign power.205 The
Federal Circuit concluded that it the Guarini legislation was did
not serve to insulate the Government from liability because it
was not because the legislation had been “specifically targeted”
at reappropriating contractual benefits and abrogating
contractual obligations.206 The Federal Circuit followed Winstar
in finding that the imposition of damages for the Ggovernment’s
breach of contract did not block the gGovernment’s right to
exercise its taxing authority in a public and general manner.:
The Federal Circuit noted that
201 202 Compare [Centex at x] with [Winstar at Y].203 Id.Centex, 395 F.3d at 1304 (affirming that it “imposes obligations on both contracting parties” and “applies to the government just as it does to private parties”).204 Id. at 1305-11.205 206 Id.
51DSMDB-3050080v1
As noted above, the government’s assertion that a contract
cannot preclude Congress from changing the tax laws does not
fairly characterize the issue we are called on to decide.
T”[t]he question raised by this case is whether the government is
liable in damages for breach of the contract when Congress enacts
specifically targeted legislation that appropriates for the
government a portion of the benefits previously available to the
contractor.” The Supreme Court’s decision in Winstar establishes
that while a contract may not interfere with Congress’s power to
enact tax legislation, the contract may nonetheless bind the
government to pay damages in the event such legislation is found
to breach the contract. As the plurality opinion in Winstar
noted,Applying the plurality decision from Winstar, the court
further held that while “[o]nce general jurisdiction to make an
award against the government is conceded, a requirement to pay
money supposes no surrender of sovereign power by a sovereign
with the power to contract.... The [t]he Government cannot make a
binding contract that it will not exercise a sovereign power,
but[] it can agree in a contract that if it does so, it will pay
the other contracting party the amount by which its costs are
increased by the Government’s sovereign act.”207 Winstar, 518 U.S.
at 881, 116 S.Ct. 2432, citing Amino Bros. Co. v. United States,
178 Ct.Cl. 515, 372 F.2d 485, 491 (1967). Finally, the court 207 Id. at ___ (citing Winstar v. United States, 518 U.S. at 881, 116 S.Ct. 2432).
52DSMDB-3050080v1
stated, “Thus, a claim for damages arising from the breach of a
contract by an act of Congress does not bar Congress from
exercising its taxing power; it merely ensures that if the
exercise of that power breaches a particular contractual
obligation, the injured party will have redress for the breach.
Based on that fundamental principle underlying Winstar, we reject
the government’s characterization of the claim for damages as a
request to enjoin the enactment of legislation.208
In Centex, Tthe court held that the gGovernment had breached
its duty of good faith and fair dealing.209 Unfortunately, a
number of decisions subsequent to Centex have primarily focused
on the that decisiondecision’s use of the term “specifically
targeted,” such that some judges have required contractors to
prove subjective bad faith or animus (associated with Principle
1) to prove that the gGovernment breached the contractual duty of
good faith and fair dealing (Principle 2).210
208 Id at ___ (emphasis added).209 Id. at 1311, 1314. 210 See, e.g., Precision Pine & Timber, Inc. v. United States, 596 F.3d 817, 829-30 (Fed. Cir. 2010); D’Andrea Bros. LLC v. United States, 96 Fed. Cl. 205, 221-22 (2010).
53DSMDB-3050080v1
c. Precision Pine & Timber Co. v. United States
The Federal Circuit’s treatment of these issues in a more
recent decision, Precision Pine & Timber Co. v. United States,211
is rooted in Centex’s language and analysis.212 However, the
Precision Pine decision discussed Principles 2 and 3 in a way
that not only appeared to invoke Principle 1, which had no
application to the matter, but which has also led to the merging
of all three Principles.213 Precision Pine has enabled judges who
are so inclined to melt the distinctions between the three
governing Principles even more, leading to more, not less,
confusion.214 So what is in the presumption of good faith/duty of
good faith and fair dealing/sovereign acts doctrine fondue pot
after Precision Pine?
In Precision Pine, the Federal Circuit reversed the Court of
Federal Claims, which had found that that gGovernment had
breached both an express warranty and the implied duty not to
hinder the contractor (Precision Pine) in its performance of
fourteen timber harvesting contracts.215 Although the Federal
Circuit reversed on both issues, we address the first issue, the
alleged breach of express warranty, only insofar as it pertains
211 Precision Pine, 596 F.3d at 817 (Fed. Cir. 2010).212 Precision Pine also relies on First Nationwide Bank, which immediately followed Centex. See supra note [ ].213 See, e.g., Precision Pine, 596 F.3d at ___.214 215 Id. at 820.
54DSMDB-3050080v1
to the second issue, which involves allegations of the
gGovernment’s breach of the duty not to hinder the contractor’s
performance.216
As to the second issue, the Federal Circuit found that the
lower court erred when it held that the gGovernment had breached
the duty of good faith and fair dealing (the duty not to hinder)
by consuming more time than the tribunal found appropriate to
allow removal of a court-ordered suspension of timber harvesting
contracts.217 A federal district court in Arizona had ordered
timber harvesting under the contracts in Arizona suspended until
the Forest Service
… “consulted with the U.S. Fish and Wildlife Service about the
pertinent land resource management plans.”218 See Silver v.
Babbitt, 924 F.Supp. 976, 989 (D.Ariz.1995). The order explained
that such consultation was required under § 7 of the Endangered
Species Act, 16 U.S.C. § 1536, due to the recent listing of the
Mexican spotted owl as an endangered species.219 The fourteen
contracts remained suspended until completion of the consultation
process in December 1996.220
216 217 218 See Silver v. Babbitt, 924 F.Supp. 976, 989 (D. Ariz. 1995).219 220 Id. at 819-820.
55DSMDB-3050080v1
The contractor alleged that its timber harvesting contracts
included an express warranties that the Forest Service had
complied with the requirements of the Endangered Species Act.221
The Federal Circuit rejected this argument, finding that the
contracts did not include express warranties.222
The Federal Circuit also reversed the tribunal below with
regard to the alleged breach of the implied contractual duty of
good faith and fair dealing (duty not to hinder — Principle
#2).223 As summarized by the Federal Circuit, tThe trial court
found that the Forest Service unreasonably delayed the resumption
of the timber harvesting contracts in several ways, as follows:
The trial court found that Forest Service’s actions during the
suspension resulted in the suspension being unreasonably long.
Precision Pine I, 50 Fed.Cl. at 70-71. Specifically, the trial
court concluded that the Forest Service hindered the contracts
because twelve days elapsed after the Arizona district court’s
order in Silver before the Forest Service requested formal
consultation. Id. at 70. The trial court also found the two-
month delay that preceded the actual start of formal
consultations unreasonable; the Forest Service spent this period
formulating and revising its Biological Assessment to include
requested information. Id. at 48. Finally, the trial court
221 222 Id. at 824-825. 223
56DSMDB-3050080v1
found the Forest Service unreasonably delayed the consultation
process by failing to provide a legally sufficient Biological
Opinion that conformed to a joint stipulation with the
environmental groups in Silver. Id. at 48-50, 71. ; Ithe trial
court supported its findings by citing to the Arizona district
court,n support of this finding, the trial court cited the
Arizona district court, “which had reprimanded the Forest Service
on several occasions for attempting to resume timber harvesting
while the injunction remained in effect.”224
It is important to study the Federal Circuit’s ruling on
this issue.225 The Federal Circuit, in reversing the findings of
the trial court, articulated two reasons why it found that the
contractor was not entitled to recover damages in relation to
alleged breaches of the gGovernment’s duty not to hinder
(Principle 2): “[t]he Forest Service’s actions during these
formal consultations were (1) not ‘specifically targeted’ [at the
contractor], and (2) did not reappropriate any ‘benefit’
guaranteed by the contracts, since the contracts contained no
guarantee that Precision Pine’s performance would proceed
uninterrupted.”226
224 Id. at 828-829 (emphasis added). 225 Id. at 828-831.226 Id. at 829.
57DSMDB-3050080v1
We believe tThe order in which the decision Precision Pine
decision addressed these two reasons has caused confusion in the
tribunals below, at least within the Court of Federal Claims.227
In some ways, the Federal Circuit creates a straw man issue with
regard to its consideration of the contractor’s allegations that
the gGovernment breached its duties of good faith and fair
dealing (the duty not to hinder).228 As we have stated, the court
first found that the timber harvesting contracts did not include
express warranties guaranteeing that performance would not be
suspended by reason of the Forest Service’s consultation with the
EPA under the Endangered Species Act.229 The court then stated
that, “[b]ecause the suspensions were authorized, the only
remaining question is [was] whether the Forest Service’s actions
during the suspensions violated the implied duty of good faith
and fair dealing.”230 Thus, the court waitsed until the second
reason (for finding no breach of the duty of good faith and fair
dealing) to announce that there can be no breach of the implied
duty of good faith and fair dealing under the circumstances
because there were no express warranties under the contract:;
importantly, the court stated that “[t]
227 228 229 Id.230 Id. at 828 (emphasis added).
58DSMDB-3050080v1
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.”231 Thus, the court found that because the parties
had not contemplated a guarantee of uninterrupted performance, it
found that Precision Pine had no expectation, and no express
warranty, that the Forest Service wouldn’t delay performance due
to its other statutory obligations. Id. at 1304-06; see also
Agredano, 595 F.3d at 1280-82, 2010 WL 537160, at *2-3. In these
contracts, CT 6.01 and CT 6.25 make clear that one “benefit” the
parties did not contemplate, and which Precision Pine is thus not
entitled to under the contracts, is the guarantee of
uninterrupted performance. Cf. id. (noting that the benefit
eliminated by subsequent government action was an “important part
of the contract consideration” and one “they reasonably expected
the government not to withhold”). Because Precision Pine had no
reasonable expectation that its contracts would be unaffected by
the listing of a new species like the Mexican spotted owl, the
Forest Service’s actions did not destroy Precision Pine’s
reasonable expectations under the contract. Id. at 1304; see
also Restatement (Second) of Contracts § 205.232
231 232 Id. at 831 (emphasis added).
59DSMDB-3050080v1
Having found that the contracts did not include express
warranties, the court could have disposed of the allegation of
the breach of the duty of good faith and fair dealing without
further discussion.; Iin other words, the court could have
articulated its second reason first (that no “benefit” or
reasonable expectation for the contractor existed that could be
frustrated by any type of government action or inaction,
sovereign or otherwise); the Federal Circuit, and it could have
thereby avoided the confusion it created by stating its first
reason first.233
However, the court did not do this. Rather, the court began its
discussion of its ruling with regard to consideration of
Principle 2 (the duty of good faith and fair dealing, including
the duty not to hinder) with language charged with tones of
subjective bad intent.234 It did so byThe court began by
discussing the legal standard that should be applied to assess
the gGovernment conduct in question before it discussed the
nature of the gGovernment conduct in question — i.e., whether or
not the government Government conduct under review involved the
government acting in its sovereign capacity, or in its
233 234 The court didbegan its discussion, as virtually all fora within the federal judiciary do in dealing with this issue, begin its discussion with the standard invocation of the Core Tenet. Id. at 828. It promptly abandoned the Core Tenet in its analysis.
60DSMDB-3050080v1
contracting capacity, or both.235 As we have discussed, the
relevant legal standard to be applied depends upon the nature of
the gGovernment conduct that is being reviewed.236 In Precision
Pine, however, the court first articulated the legal standard
that is to be applied before it explained whether or not the
gGovernment conduct under review was sovereign, or contractual,
in nature.237 The court addressed the sovereign acts doctrine
(Principle 3) in its opinion.238 However, Precision Pine never
mentions the sovereign acts doctrine by name, nor does it mention
the first aspect of consideration under the sovereign acts
doctrine (Principle 3) — whether or not the gGovernment’s
sovereign act was “public and general” in nature.
This The Precision Pine analysis has led to considerable
confusion.239 Precision Pine failed to articulate crisply the
individual Principles and sub-considerations at work.240 As an
initial problem, the court’s articulation of a portion — but only
a portion — of the sovereign acts doctrine (“specifically
targeted” v. “public and general”) allows, if not encourages,
judges to apply Precision Pine in all instances in which a
235 236 237 238 239 240
61DSMDB-3050080v1
contractor has alleged that the gGovernment has breached its duty
of good faith and fair dealing, not merely instances involving
sovereign acts.241 This Precision Pine’s imprecise articulation
of the sovereign acts doctrine enables judges who are so inclined
to merge the three Principles into a single, incorrect,
articulation of law.242 Only after it articulated the legal
standard to be applied did the Federal Circuit explain that its
legal standard applies to the government’s actions only in its
sovereign capacity, not its contractual capacity.243
So, the first significant problem with Precision Pine is
that its imprecise analysis and explanation of the applicable
Principles fuel the confusion that already existed in the case
law. The decision invites, and indeed has resulted in, judicial
inattention to the crucial distinction between the gGovernment
acting in its sovereign capacity and the gGovernment acting in
its contractual capacity, leading some judges to apply the
241 242 243 Eventually, after articulating the legal standard to be applied, the court explains that the Government conduct in question is sovereign in nature. Id. 830. Even then, the court does not articulate this clearly — it never mentions the term “sovereign acts”; it never begins its analysis with the “public and general” in nature consideration of the application of the sovereign acts doctrine that leads to its articulation of the “specifically targeted” consideration. Iit simply announces the “specifically targeted” standard, and subsequently points out that it finds that the conduct in question is sovereign in nature.nature.
62DSMDB-3050080v1
Precision Pine “specifically targeted” standard to actions the
gGovernment takes strictly in its contracting capacity.244
Second, the same imprecision in the decision invites the
tribunals below to impute the concepts of subjective bad faith
from Principle 1 (the presumption of good faith) into
applications of Principles 2 (the duty of good faith and fair
dealing) and 3 (the sovereign acts doctrine).245 Precision Pine
dealt with Principles 2 (the duty of good faith and fair dealing)
and 3 (the sovereign acts doctrine).; Iit did not deal with
Principle 1 (the presumption of good faith).246 The court cited
Principle 2 and its basic premises, as well as the Core Tenet,
but quickly moved on.247
In addressing Principle 3, the court never mentioned
“sovereign acts” or addressed the legal underpinning (“public and
general”) supporting Principle 3.248 Instead, it used language
applicable to Principle 1: “misbehavior”, “the old bait and
switch”, “a governmental bait and switch or double-crossing.”249
These are words of bad intent, not applicable to Principle 2 (the
duty of good faith and fair dealing) and only marginally
244 245 246 247 Id. at 828.248 249
63DSMDB-3050080v1
connected with Principle 3 (sovereign acts doctrine).250 It also
merged Principle 2 (the duty of good faith and fair dealing) with
concepts that belong exclusively with Principle 1 (the
presumption of good faith). The court avoided language on the
one side of the Principle 3 coin — i.e., whether or not the
sovereign act that allegedly led to the deprivation of the
contractor’s benefit of the bargain was “public and general” in
nature. Instead, the court focused on the other, negative, side
of Principle 3 — i.e., “specifically targeted,” “bait and
switch,” “double-crossing,” and “misbehavior,” terms imported
from Principle 1.251 :
Not all misbehavior, however, breaches the implied duty of good faith and fair dealing owed to other parties to a contract. See First Nationwide, 431 F.3d at 1350 (noting that not all governmental action that affects existing government contracts violates the implied duty of good faith and fair dealing).
Cases in which the government has been found to violate the implied duty of good faith and fair dealing typically involve some variation on the old bait-and-switch. First, the government enters into a contract that awards a significant benefit in exchange for consideration. Then, the government eliminates or rescinds that contractual provision or benefit through a subsequent
250 See, supra, discussion under Heading II.B.251 Id.at 829. For example, the Court said, “Not all misbehavior, however, breaches the implied duty of good faith and fair dealing owed to other parties to a contract. Cases in which the government has been found to violate the implied duty of good faith and fair dealing typically involve some variation on the old bait-and-switch.” Id.
64DSMDB-3050080v1
action directed at the existing contract. See, e.g., id. at 1350-51; Centex Corp. v. United States, 395 F.3d 1283, 1304-07 (Fed.Cir.2005); see also Hercules, 516 U.S. 417, 116 S.Ct. 981, 134 L.Ed.2d 47. The government may be liable for damages when the subsequent government action is specifically designed to reappropriate the benefits the other party expected to obtain from the transaction, thereby abrogating the government’s obligations under the contract. Centex, 395 F.3d at 1311.
* * *
There are no similar indicia of a governmental bait-and-switch or double crossing at work here. We conclude that there was no breach of the government’s implied duty of good faith and fair dealing because the Forest Service’s actions during these formal consultations were (1) not “specifically targeted,” and (2) did not reappropriate any “benefit” guaranteed by the contracts, since the contracts contained no guarantee that the Precision Pine’s performance would proceed uninterrupted. Cf. id. at 1306.
The Federal Circuit’s migration from Centex to Precision
Pine has had the effect of importing the subjective intent
standard into analysis of the applicability of the sovereign acts
doctrine (Principle 3) and the duty of good faith and fair
dealing (Principle 2) in a number of instances,s. Thiswhich has
further merged the three Principles into a single Principle
dependent upon a subjective intent analysis.252
252
65DSMDB-3050080v1
A third problem with Precision Pine emerges from its less-
than-crisp analysis and application of the three Principles and
their sub-considerations.253 The decision and its predecessors
show no evidence that the Federal Circuit considered the
possibility that a sovereign act can be both “public and general”
and “specifically targeted” in nature.254 The Federal Circuit’s
focus solely on bad motive (“specifically targeted” language)
sullies the analysis.255 With regard to the application of
Principle 3, courts do better to turnshould first first to
Justice Souter’s articulation of the “public and general”
consideration of a gGovernment sovereign act.; Aas Justice
Souter noted, and Professor Schwartz has analyzed so
thoroughly,256 it is possible that the gGovernment can pursue a
sovereign act that has “public and general” effect prospectively,
going forward, but has the effect of depriving one or more
contractors of the benefit of their contractual bargains with
regard to its retrospective application.257 Finding that the
253 254 255 256o. Wash. L. Rev. 633 (Apr. 1, 1996).257 See Winstar Corp. v. United States, 518 U.S 839 (1996); Joshua I. Schwartz, “The Status of the Sovereign Acts and Unmistakability Doctrines in the Wake of Winstar: Au luterim Report,” 51 Ala. L. Rev. 1177 (Spring 2000); Joshua I. Schwartz, “Assembling Winstar: Triumph of the Ideal of Congruence in Government Contracts Law?,” 26 Pub. Cont. L.J. 481 (Summer 19979); Joshua I. Schwartz, “Liability for Sovereign Acts: Congruence and Exceptionalism in Government Contracts Law,” 64
66DSMDB-3050080v1
gGovernment has breached its duty of good faith and fair dealing
by frustrating contractor rights does not necessarily mean that
the sovereign act under review must be viewed solely in a binary
manner — i.e., either as a prospective sovereign act, or as a
retrospective act specifically targeted at existing contracts.258
The sovereign act, such as legislation, may be properly motivated
as to its prospective application — i.e., a proper exercise of
the gGovernment’s “public and general” right to legislate — but
at the same time, it may subject the gGovernment to liability
with regard to existing contracts retrospectively affected by the
legislation.259 In such instances, motive becomes less relevant.
In his plurality decision in Winstar, Justice Souter
examined the conundrum presented by attempting to protect both
the gGovernment’s right to be unfettered in its exercise of its
sovereign powers and the gGovernment’s need to create enforceable
contracts with benefits and obligations.260 The Precision Pine
decision lost sight of Justice Souter’s assessment of the
sovereign acts doctrine: “The application of the doctrine thus
turns on whether enforcement of the contractual obligation
alleged would block the exercise of a sovereign power of the
Geo. Wash. L. Rev. 633 (Apr. 1, 1996).258 259 260
67DSMDB-3050080v1
government.”261 The gGovernment argued in each case that any
exercise of sovereign authority that was designed to accomplish
some public good warranted application of the sovereign acts
doctrine.262 Justice Souter recognized that the analysis is not
so simple, and that the gGovernment may at times act in its
contractual capacity when it exercises a sovereign power.263
Referring to the gGovernment’s “dual characters as contractor and
legislator,” he recognized that a specific sovereign act may be
undertaken to effect affect “some public good,” but at the same
time may be designed to relieve the government of obligations it
has accepted through contracts.264 :
The government argues that “[t]he relevant question [under
these cases] is whether the impact [of governmental action] ...
is caused by a law enacted to govern regulatory policy and to
advance the general welfare.” Brief for United States 45. This
understanding assumes that the dual characters of government as
contractor and legislator are never “fused” (within the meaning
of Horowitz ) so long as the object of the statute is regulatory
and meant to accomplish some public good. That is, on the
government’s reading, a regulatory object is proof against
treating the legislature as having acted to avoid the
261 Winstar, 518 U.S. at 879 (emphasis added). 262 263 264 Id. at 893.
68DSMDB-3050080v1
government’s contractual obligations, in which event the
sovereign acts defense would not be applicable. But the
government’s position is open to serious objection.265
Justice Souter found that the concept of finding the
gGovernment liable for damages for the retrospective application
of a sovereign power is not incompatible in all instances with
recognizing the gGovernment’s right to exercise sovereign power
prospectively.266 : Justice Souter reasoned that the neither the
contracts themselves, nor the award of damages, has the affect of
limiting the Government’s ability to “exercise authority to
modify banking regulations.”
The government’s position is mistaken, however, for the
complementary reasons that the contracts have not been construed
as binding the government’s exercise of authority to modify
banking regulation or of any other sovereign power, and there has
been no demonstration that awarding damages for breach would be
tantamount to any such limitation.267
265 Id. at 893 (emphasis added). 266 267 Id. at 881. See also the Court’s reference to this concept in Footnote 35 of the Opinion:
“See Speidel, Implied Duties of Cooperation and the Defense of Sovereign Acts in Ggovernment Contracts, 51 Geo. L.J. 516, 542 (1963) (“[W]hile the contracting officers of Agency X cannot guarantee that the United States will not perform future acts of effective government, they can agree to compensate the contractor for damages resulting from justifiable acts of the United
69DSMDB-3050080v1
Precision Pine states the rule too narrowly, with language
that leads to imprecision.268 Courts should be careful to limit
their focus on evidence of sovereign subjective intent when they
assess the applicability of the sovereign acts doctrine
(Principle 3), (just as they should avoid introducing
considerations of subjective intent when considering the
application of Principle 2 — the duty of good faith and fair
dealing).269 The sovereign’s motive behind its exercise of a
sovereign act (e.g., enactment of legislation) may be pure, and
therefore appropriate as to its prospective effect, but less
pure, and therefore inappropriate as to its retroactive effect270 .
In other words, the sovereign’s desire to see the prospective
application of legislation may not involve “misbehavior,” “bait
and switch,”or “double crossing” (negative aspects of subjective
intent), and yet that same legislation may have the effect of
negating contractor rights under existing contracts (which may or
may not be motivated by bad intent).271 Thus, application of a
standard that examines a sovereign act solely on the basis of
States in its ‘sovereign capacity’ “ (footnotes omitted)).”
Id. at 890, n.35 (emphasis added).268 269 270 [I think we should just cite Precision Pine for a lot of this – let me know what you think]271
70DSMDB-3050080v1
single motive — particularly a negative motive (“specifically
targeted” action) — is too limited.
In sum, courts should assess the effect/effects of a
sovereign act to at least the same degree that they assess the
sovereign’s motive.272 Examination by motive alone leads to the
binary analysis that hampers the Federal Circuit’s analysis in
Precision Pine, and now some decisions in the tribunals below.273
Examination by effect recognizes that, as to some effects, a
sovereign act may create liability on the part of the
gGovernment, but as to other effects, it may not.274 Injection of
the concepts that reside with Principle 1 (Presumption of Good
Faith) — such as subjective intent, and particularly, bad intent
(“misbehavior” and “bait and switch or double crossing”) — into
analysis of the applicability of Principles 2 and 3 is a recipe
for melted Principles.
III. THE ILL EFFECTS THAT FOLLOW THE OVER-PROTECTION OF THE GOVERNMENT AND CONFLATION OF THE THREE LEGAL PRINCIPLES
A. In the Wake Of The Federal Circuit’s Decision In Precision Pine: The Federal Circuit’s Imprecise Language And Analysis Have Led To Messy Results As Tribunals Below Try To Determine What Is Left Of The Three Principles.
1. Some Decisions Issued After The Federal Circuit’s Decision In Precision Pine Have Conflated And Confused The Three Principles, Applying Precision Pine’s Legal Analysis To Situations Where Only
272 273 274
71DSMDB-3050080v1
Government Contractual Acts, Not Sovereign Acts, Were Involved
Some judges have concluded from Precision Pine that the
Federal Circuit intended that they apply the decision’s language
and analysis not only to situations in which the government acts
in its sovereign capacity, but also to situations in which the
government acts solely in its contractual capacity.to both the
Government’s sovereign acts and its contractual acts.275 These
cases have not involved sovereign acts. Indeed these cases have
not involvedNone of these cases involved sovereign acts to which
to apply the sovereign acts doctrine (Principle 3) — no
legislation, no environmental permitting, no regulatory action —
merely allegations that the government breached its contractual
duty of good faith and fair dealing (Principle 2) through action
or inaction entirely associated with the contracts at issue.; In
in these cases, the contractor has merely complained that the
gGovernment breached the duty of good faith and fair dealing in
administering the contracts at issue.276 And yet, the judges in
these cases applied the legal standard that the Federal Circuit
articulated in Precision Pine, which dealt solely with sovereign
acts, not government contractual acts.277
275 276 277
72DSMDB-3050080v1
In White Buffalo Construction, Inc. v. United States,278 a
contractor asserted both that the gGovernment had breached its
duty of good faith and fair dealing in administering its
construction contract and that the government Government had
acted in bad faith by converting a termination for default into a
termination for convenience to avoid breach damages (liability
for lost profits).279 Our discussion concerns the first
allegation.280 The contractor alleged that the Ggovernment
breached its contractual duty of good faith and fair dealing by
concealing a differing site condition on the construction site,
by failing to pursue certain permits required to enable
performance and, by misrepresenting that the gGovernment had
pursued the permits, and by other acts that had the effect of
hindering the contractor’s performance.281
In assessing these allegations, the court imported the bad
intent (“bad faith”) standard applicable under Principle 1 (the
presumption of good faith) to its consideration of the
applicability of Principle 2 (the duty of good faith and fair
dealing) by citing to the standard articulated in Precision Pine,
278 , 101 Fed. Cl. 1 (2011).279 White Buffalo Construction, Inc. v. United States, 101 Fed. Cl. 1 (2011).280 It appears that the contractor alleged both breach of the duty of good faith and fair dealing (Principle 2) and bad faith (Principle 3) in contract administration, which may have contributed to the court’s conflation of the Principles. 281
73DSMDB-3050080v1
which dealt with Principle 3 (the sovereign acts defense).282 The
court paid the standard homage to the Core Tenet and noted that
the duty of good faith and fair dealing is implied into every
contract:283
Generally, every contract includes an implied duty of good
faith and fair dealing. Precision Pine & Timber, Inc. v. United
States, 596 F.3d 817, 828 (Fed.Cir.2010) (quoting Restatement
(Second) of Contracts § 205); Bannum, Inc. v. United States, 80
Fed.Cl. 239, 246 (Fed.Cl.2008). The covenant of good faith and
fair dealing is an implied duty that 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. See Centex Corp. v. United States, 395 F.3d
1283, 1304 (Fed.Cir.2005).284
The court then conflated Principles 1 and 2, stating that a
contractor can only prove breach of the duty of good faith and
fair dealing (Principle 2) by overcoming the presumption of good
faith — i.e., by proving bad faith, government “specific intent
282 Id. The court citing to the standard articulated in Precision Pine, which dealt with Principle 3 (the sovereign acts defense).283 Id. at 13. 284 Id. at 13.
74DSMDB-3050080v1
to injure” the contractor — by clear and convincing evidence
(Principle 1):.
When the government’s conduct is called into question,
“government officials are presumed to act conscientiously and in
good faith in the discharge of their duties.” Bannum, 80 Fed.Cl.
at 249 (citing Spezzaferro v. Fed. Aviation Admin., 807 F.2d 169,
173 (Fed.Cir.1986)); Kalvar Corp. v. United States, 543 F.2d
1298, 1301 (Ct.Cl.1976). Thus, in order to overcome the
presumption of good faith, “a plaintiff must present clear and
convincing evidence of bad faith.” Bannum, 80 Fed.Cl. at 249
(citing Am—Pro Protective Agency v. United States, 281 F.3d 1234,
1238—39 (Fed.Cir.2002)) (internal quotation omitted). Further,
to demonstrate that the government has acted in bad faith, “a
plaintiff must allege and prove facts constituting a specific
intent to injure [the] plaintiff on the part of a government
official.” Pratt v. United States, 50 Fed.Cl. 469, 479
(Fed.Cl.2001) (citing Texas Instruments, Inc. v. United States,
991 F.2d 760, 768 (Fed.Cir.1993)).285
The court brushed aside the contractor’s argument that the
court had wrongly conflated Principles 1 and 2 and expressly
285 Id. (emphasis added). The court noted that “government officials are presumed to act conscientiously and in good faith in the discharge of their duties” and therefore, “a plaintiff must present clear and convincing evidence of bad faith” in order to overcome that presumption.
75DSMDB-3050080v1
stated that both Principles involve proof of bad faith on the
part of gGovernment:
White Buffalo claims that “ ‘[t]he presumption of good faith
conduct of government officials has no relevance’ “with respect
to “ ‘claims that the duties to cooperate and not hinder
performance of a contract have been breached,’ “ and in such
cases, proof of a violation need not be by clear and convincing
evidence. Moreland Corp. v. United States, 76 Fed.Cl. 268, 291
(2007) (brackets in original) ( quoting Tecom, Inc. v. United
States, 66 Fed.Cl. 736, 771 (2005)). Pl.’s Post Trial Rep. Br.
at 9. The Court finds it unnecessary to address this question as
under either the heightened presumption standard or under a
lesser standard, White Buffalo has failed to establish that the
government intended to harm White Buffalo, and, thus, acted in
bad faith. 286
In so ruling, the court used the standard Precision Pine so
articulated for the sovereign acts doctrine (Principle 3) in a
case that did not involve any sovereign acts, but only
contractual acts.287 The court imported the subjective intent and
bad faith (“specific intent to injure”) concept from the
presumption of good faith (Principle 1), to assess whether or not
286 Id. 287
76DSMDB-3050080v1
the gGovernment had breached its contractual duty of good faith
and fair dealing (Principle 2).288
The same outcome befell the contractor in Metcalf
Construction Co. v. United States.289. In Metcalf, Tthe court
completely merged the three distinct Principles into one.290 The
court stated its understanding that Precision Pine requires that,
in order to prove that the government breached its contractual
duty of good faith and fair dealing, a contractor must to prove
subjective bad intent on the part of government personnel - bad
faith, intent to specifically injure the contractor — in all
situations, not merely situations that involve sovereign acts or
where the contractor specifically alleges bad faith.291 Like
those in White Buffalo, the facts in Metcalf involved government
acts that were taken solely in the contractual arena, not in the
sovereign arena: “Therein, Metcalf claimed that the Navy
breached the Contract by failing to administer it in good
faith.”292 No sovereign acts were at issue in the case, only acts
of contract administration.293
288 289 Metcalf Construction Co. v. United States, No. 07-777C, 2011 WL 6145128 (Fed. Cl. Dec. 9, 2011).290 291 292 Id. at 6 (emphasis added). 293 It is possible that the contractor contributed to some of the confusion because, according to the court’s decision, the contractor claimed that the government subjected it “to numerous instances of bad faith conduct,” and that the government had
77DSMDB-3050080v1
The court in Metcalf found that the gGovernment engaged in
the same type of conduct referenced in the Restatement (Second)
of Contracts and in many judicial decisions as the archetypical
conduct that establishes breach of the duty of good faith and
fair dealing — failure to promptly take action necessary to allow
the contractor to perform, poor communication and acts of
retaliation. The Court noted:
The record establishes that there was a retaliatory aspect
to some of the noncompliance notices that the Navy issued…
* * *
Having made this determination, the court would be remiss if
it did not state that the court was singularly unimpressed with
the bona fides of CO Matsuura. TR 117—219 (court examining Ms.
Matsuura). It is clear to the court that Ms. Matsuura’s lack of
knowledge and experience significantly contributed to the lack of
trust and poor communication that plagued the 212 Project at the
beginning. It also appeared that other members of the Navy team
actually were making the decisions, as best evidenced by the
“breached its duty of good faith and fair dealing.” Thus, the contractor might have specifically alleged bad faith as well as breach of the duty of good faith and fair dealing. This does not, however, explain the court’s conflation and melting of the legal standards.
78DSMDB-3050080v1
significant delay in promptly investigating the soil expansion
issue.294
Under Winstar, Malone, and other precedent, the type of
failure to cooperate and the hindrances evidenced by the
gGovernment in Metcalf would be more than enough to establish
that, as an objective matter, the gGovernment had breached the
duty of good faith and fair dealing it owed to the contractor.295
In Malone, the Federal Circuit found that a cContracting oOfficer
engaged in the same type of non-cooperative behavior that marked
the Ccontracting Oofficer’s behavior in Metcalf — the Contracting
Officer had been “evasive” in refusing to answer questions that
would direct the contractor’s continued performance; he refused
to answer the contractor’s “explicit question concerning whether
the standard of workmanship had changed”; and he failed to allow
the contractor to know the true performance requirements yet
continued to make progress payments to the contractor.296
294 Id. at 27-30 (emphasis added). Indeed, the court there noted that “the record establishes that there was a retaliatory aspect to some of the noncompliance notices that the Navy issued.” Id. 295 296 Malone v. United States, 849 F.2d 1441, 1445 (Fed. Cir. 1988). The court in Malone found that the Contracting Officer had been “evasive” in refusing to answer questions that would direct the contractor’s continued performance; he refused to answer the contractor’s “explicit question concerning whether the standard of workmanship had changed”; and he failed to allow the contractor to know the true performance requirements yet continued to make progress payments to the contractor. Id.
79DSMDB-3050080v1
The Federal Circuit in Malone assessed the Contracting
Officer’s actions under a reasonableness standard and the
criteria discussed in the Restatement (Second) of Contracts:
According to Restatement (Second) of Contracts § 241(e) (1981),
“the extent to which the behavior of [a] party failing to perform
. . . comports with standards of good faith and fair dealing” is
a significant factor in determining whether that party’s breach
is material. The Restatement also states that “subterfuges and
evasions violate the obligation of good faith,” as does lack of
diligence and interference with or failure to cooperate in the
other party’s performance.297
The Federal Circuit in Malone did not inject elements of
subjective intent, bad faith, or animus into its assessment of
whether the government Government had breached its duty of good
faith and fair dealing.298 Rather, it interpreted this the
Government’s duty of good faith in a way that makes it consistent
with the Core Tenet — that the gGovernment and its contractors
owe certain reciprocal duties to one another.299
297 Id. (internal citations omitted). The court specifically stated that: “According to Restatement (Second) of Contracts § 241(e) (1981) . . . ‘subterfuges and evasions violate the obligation of good faith,’ as does lack of diligence and interference with or failure to cooperate in the other party’s performance.”298 299
80DSMDB-3050080v1
The court in Metcalf cited Malone, but nonetheless read
Malone in a way that effectively requires contractors to
demonstrate the kind of subjective bad faith that the Restatement
(Second) and Malone do not require.300 The Metcalf court added
the word “only” to its paraphrase of the Malone ruling, which
makes it appear as if Malone is in line with Precision Pine’s
“specifically targeted” standard, which it is not.:
Precision Pine, 596 F.3d at 829; see also Malone v. United States, 849 F.2d 1441, 1445—46 (Fed.Cir.1988) (holding that only where the CO’s “evasive conduct misled [plaintiff] to perform roughly 70% of its contractual obligation in reliance on a workmanship standard” was the issue of breach of good faith and fair dealing invoked).301
Malone did not state that only the facts before it would suffice to prove a breach of the government’s Government’s duty of good faith and fair dealing, as Metcalf suggests.302
Thus, turning away from the Malone reasonableness and
Restatement (Second) standard, the Metcalf court determined that
the sufficiency of the gGovernment’s contract administration acts
should be assessed under the Precision Pine standard.303 By so
doing, the court injected the subjective intent, bad faith, 300 301 Metcalf, 2011 WL 6145128 at *11. The Metcalf court summarized Malone as “holding that only where the CO’s ‘evasive conduct misled [plaintiff] to perform roughly 70% of its contractual obligation in reliance on a workmanship standard’ was the issue of breach of good faith and fair dealing invoked.” Id. (emphasis added). 302 303
81DSMDB-3050080v1
specifically – targeted concept into the assessment of not only
gGovernment sovereign acts, but also gGovernment acts taken
solely in the realm of contract administration:
In addition, our appellate court requires 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.” Precision Pine,
596 F.3d at 829; see also Centex Corp. v. United States, 395 F.3d
1283, 1304—07 (Fed.Cir.2005) (affirming trial court’s judgment
that government breached the implied covenant of good faith and
fair dealing when Congress enacted targeted tax legislation
depriving Plaintiffs of “a substantial part of the benefit of
their contract with [the government]”). Short of such
interference, it is well established that federal officials are
presumed to act in good faith, so that “[a]ny analysis of a
question of governmental bad faith must begin with the
presumption that public officials act conscientiously in the
discharge of their duties.” See Kalvar Corp. v. United States,
543 F.2d 1298, 1301 (Ct.Cl.1976) (internal quotation marks and
citation omitted); see also Spezzaferro v. Fed. Aviation Admin.,
82DSMDB-3050080v1
807 F.2d 169, 173 (Fed.Cir.1986) (“government officials are
presumed to carry out their duties in good faith.”).304
The court in Metcalf simply followed the lead of the Federal
Circuit in Precision Pine by injecting language tinged with
subjective bad intent — “misbehavior” — in assessing whether the
government’s Government’s conduct breached its duty of good faith
and fair dealing:
See Precision Pine, 596 F.3d at 829 (observing that “[n]ot all
misbehavior ... breaches the implied duty of good faith and fair
dealing”).305
Relying upon the imprecise language and analysis in
Precision Pine, the Metcalf court merged all three Principles
into one, all swirling around the concept of subjective intent,
bad faith, specifically – and targeted animus.306
304 Id. (emphasis added). The Metcalf court thereby conflated the bad faith analysis to be performed when evaluating the Government’s sovereign actions with the analysis to be performed when evaluating the Government’s contractual actions. 305 Id. at 27 (emphasis added) (citing Precision Pine as “observing that “[n]ot all misbehavior ... breaches the implied duty of good faith and fair dealing”).306 Id. Elsewhere, in D’Andrea Brothers LLC v. United States, 96 Fed. Cl. 205 (2010), the Ccourt applied the court also applied the subject bad faith standard to another also to a situation in which there were no sovereign acts involved, only government acts taken in the contractual arena.
83DSMDB-3050080v1
Other decisions issued subsequent to Precision Pine have
avoided interpreting the confusing legal standard the Federal
Circuit set out in Precision Pine by reversing the order in which
the decisions discuss issues.307 We stated in our discussion of
Precision Pine thatAs noted earlier, one of the factors that
contributescontributing to the confusion surrounding Precision
Pine is the order in which the Federal Circuit addressed its
reasons for finding that the contractor should not prevail with
regard to its allegation that the government had breached its
duty of good faith and fair dealingthe issues it was confronted
with.308 Specifically, in Precision Pine, the court waited until
after it articulated the “specifically targeted” legal standard
to rule that the contractor could not pursue its allegation of
breach of the duty of good faith and fair dealing, as the
contractor had no right to expect the benefit under the contract
that it alleged the gGovernment’s sovereign act negated.309 The
court found that the contractor had no right to assume that the
gGovernment (the Forest Service in that case) had taken all
necessary actions to warrant that the contractor’s performance
would remain uninterrupted — i.e., there was no reasonable
expectation of benefit.310
307 308 309 310
84DSMDB-3050080v1
A number of judges have found it unnecessary to interpret
the precise meaning and applicability of Precision Pine’s
“specifically targeted” standard because they have addressed the
benefit issue first.311 In AECOM Government Services, Inc.,312 the
contractor alleged that the gGovernment breached its duty of good
faith and fair dealing when Congress enacted legislation that had
the effect of subjectinged the contractor to F.I.C.A. (Federal
Insurance Contributions Act)certain taxes that its offshore
subsidiaries were not required to pay at the time the contractor
executed its pertinent government contract had not been liable
for at the time the contract was formed. 313 Thus, AECOM involved
a sovereign act, not a government Government contractual act, and
the Government thus. The government asserted the sovereign acts
doctrine as a defense to the contractor’s claim.314 e in defense.
The court board cited to the Restatement (Second) of Contracts,
but then quoted Precision Pine’s “old bait and switch” and
“specifically targeted” language.315 The court board rejected the
contractor’s reliance upon Centex. The court, and stated that,
unlike the government Government contract in Centex, AECOM’s
311 312 GovenA No. 56861, 10-2 BCA ¶ 34,577at (A.S.B.C.A, Oct. 13, 2010).313 AECOM Government Services, Inc., ASBCA No. 56861, 10-2 BCA ¶ 34,577, at (pincite).314 315
85DSMDB-3050080v1
contract did not contain a “bargained-for-benefit.”316 . Rather,
AECOM’s contract was silent as to the contractor’s responsibility
to pay F.I.C.A. taxes, and therefore, the board held that the
Government “did not breach its implied duty of good faith and
fair dealing:
Unlike the contracts in Centex, AECOM’s contract did not
contain a bargained-for benefit. AECOM’s contract was silent
with respect to the tax status of offshore subsidiaries. As a
result, we conclude that the government did not breach its
implied duty of good faith and fair dealing. Precision Pine, 596
F.3d at 829.
It is undisputed that the FAR does not provide a basis for
relief from after-imposed F.I.C.A. taxes. Accordingly, the
government’s motion for summary judgment is granted only as to
the implied duty of good faith and fair dealing. AECOM’s motion
for partial summary judgment is denied for the reasons stated
above..317
Thus, while the Board carefully quoted the legal standard for
Principle 3 (the sovereign acts doctrine) from Precision Pine,
its decision rested not on that standard, but rather on its
determination that there was no bargained-forno contractual
316 317 Id.
86DSMDB-3050080v1
benefit that could be targeted by the gnew
legislation.overnment’s legislation that created an after-imposed
F.I.C.A. obligation for the contractor.318
318 Id. The decision might be questioned in this regard. The decision discusses the purposes behind Congress’s decision to enact the HEART Act, which imposed the F.I.C.A. obligations on offshore subsidiaries of U.S. companies. , because Tthe decision quotes from the Congressional Record. The quote contains language, suggesting that Congress’s intent for the HEART Act was not only “public and general” in nature, but also “specifically targeted” at existing government contracts:The Congressional Record for 20 and 22 May 2008 contain the following comments regarding the HEART Act:
[Sen. Baucus (D-MT)]: This bill is paid for by requiring that companies that do business with the Federal government pay their employment taxes. The bill makes sure that foreign subsidiaries of U.S. parent companies that have contracts with the Federal government pay employment taxes for their employees. 154 CONG. REC. S4773 (daily ed. May 22, 2008).
[Sen. Grassley (R-IA)]: The bill also ensures that U.S. employers of Americans working abroad pursuant to a government contract pay Social Security and Medicare taxes, regardless of whether they operate through a foreign subsidiary. Id.
AECOM Gov’t Servs., Inc., 10-2 BCA ¶ 34,577 (A.S.B.C.A. Oct. 13 2010) (emphasis added.) Congress recognized that certain government contractors were deriving tax advantages by using offshore subsidiaries and wished to extinguish that benefit. Despite the inapposite legislative history, Tthe AECOM decision ruled was forced to conclude that while the that the contractors were enjoying that the benefit of tax-exempt holdingsbenefit, they had no right to assume at the time they contracted that the benefit flowed from the contract, or that Congress could not take that benefit away.
87DSMDB-3050080v1
2. Other Decisions Have Employed Careful Analysis In Attempts To Partially Undo Some Of The Melting Of The Three Principles That Has Followed The Federal Circuit’s Decisions In Am-Pro And Precision Pine
88DSMDB-3050080v1
Virtually all tribunals that have considered contractor
allegations that the gGovernment has breached contractual duties
of good faith and fair dealing (Principle 2) since the Federal
Circuit issued its February 2010 decision in Precision Pine have
addressed Precision Pine’s language and analysis.319 Two
decisions issued by the Court of Federal Claims, Firemen’s Fund
Insurance Co. v. United States,320 and Timber Products Co. v.
United States,321 dealt with factual situations similar to those
presented in White Buffalo and Metcalf. All four cases dealt
with contractor allegations that the gGovernment breached its
contractual duty of good faith and fair dealing (Principle 1)
through actions taken solely in the contractual arena, and none
of the cases involved sovereign acts.322 No sovereign acts were
involved. The White Buffalo and Metcalf decisions ignored this
the fact that those cases involved no sovereign acts;323 fact,
while however, the Firemen’s Fund and Timber Product decisions
recognized the importance of this fact, and used it to help
explain some of the Precision Pine’s confusing language and
319 320 Firemen’s Fund Insurance Co. v. United States, 92 Fed. Cl. 598 (2010)..321 Timber Products Co. v. United States, No. 01-627C. 2011 WL 6934815 (Fed. Cl. 2011) No. 01-627C. 2011 WL 6934815 (Fed. Cl. Dec. 29, 2011).322 323
89DSMDB-3050080v1
analysis that has fostered confusion.324
One of the contractor’s allegations in Firemen’s Fund was
that the gGovernment breached the duty of good faith and fair
dealing (Principle 2) it owed a construction contractor’s
surety325 when the gGovernment waited many months before informing
the contractor’s surety of its disapproval of a site rewatering
plan.326 The gGovernment cited the language and analysis in
Precision Pine as a defense to the contractor’s claim.327 The
court, as others have consistently done (whether they have
followed the Principles or not), began its discussion with a
recitation of the Core Tenet and Principle 2:
“The United States, no less than any other party, is subject
to this covenant.” Precision Pine, 596 F.3d at 828 ( citing
First Nationwide Bank, 431 F.3d at 1349).
“Both the duty not to hinder and the duty to cooperate are
aspects of the implied duty of good faith and fair dealing.” Id.
at 820 n. 1 ( citing Essex Electro Eng’rs, 224 F.3d at 1291).
The specifics of the parties’ duties under this covenant are
dependent on the particular circumstances of the case. See
324 325 Firemen’s Fund completed the construction project as surety following the contractor’s bankruptcy. 326 327
90DSMDB-3050080v1
Milmark Servs., Inc. v. United States, 731 F.2d 855, 859
(Fed.Cir.1984).
The government breaches these duties when it acts
unreasonably under the circumstances, viz., if it unreasonably
delays the contractor or unreasonably fails to cooperate. See C.
Sanchez & Son, 6 F.3d at 1542 (“The government must avoid actions
that unreasonably cause delay or hindrance to contract
performance.”); Commerce Int’l Co. v. United States, 167 Ct.Cl.
529, 338 F.2d 81, 86 (1964) (determining that “breach of [the]
obligation of reasonable cooperation” depends upon “particular
contract, its context, and its surrounding circumstances”).328
After the court paid homage to the Core Tenet and Principle
2, The courtit then stated that it was appropriate to comment
further on the Federal Circuit’s ruling in Precision Pine on the
issue of breach of the duty of good faith and fair dealing
(Principle 2) because the government had insisted in Firemen’s
Fund that the Precision Pine ruling applied to “all of
plaintiffs’ claims involving government-caused delay,” not merely
those that could be considered sovereign actsinsisted that
Precision Pine applied to all of the contractor’s claims:.
Because defendant trumpets the decision as a deus ex machina for
all of plaintiffs’ claims involving government-caused delay, and 328 Id. at 675 (emphasis added).
91DSMDB-3050080v1
because Precision Pine’s holding as to the implied duty of good
faith and fair dealing impacts the allegations of government-
caused delay in the Board claims differently from those
implicated by plaintiffs’ labor claim, a further analysis of
Precision Pine and its holding is warranted.329
The court then explained that the Federal Circuit’s ruling
in Precision Pine applied only to situations that involve
sovereign acts and government conduct that arises outside the
context of contract administration (Principle 3):
Precision Pine’s two-part test for whether the government
breaches the implied duty of good faith and fair dealing must be
read in this particular context, a situation where the
government’s alleged wrongful conduct does not arise directly out
of the contract, i.e., key to the alleged breach are actions
involving another government actor or a third party. (emphasis
added) See, e.g., Bateson-Stolte, 305 F.2d at 388-89 (finding no
breach of Corps’s duty of good faith and fair dealing because
Corps-as a separate government agency-could not be charged with
knowledge of location and wage-rate impact of unrelated project).
In Precision Pine the alleged breach occurred during a period of
suspended contract performance, during which the Forest Service
breached its statutory duty arising under the ESA, a duty owed
not to the plaintiff, but to the Fish and Wildlife Service. 329 Id. at 676.
92DSMDB-3050080v1
Similarly, in the two cases primarily relied on by the Federal
Circuit, First Nationwide and Centex, Congress was alleged to
breach the implied duties in contracts between the plaintiffs and
the Federal Savings and Loan Insurance Corporation. See First
Nationwide, 431 F.3d at 1344-45; Centex, 395 F.3d at 1304-06. It
is in this context, where the government conduct giving rise to
the allegation of breach does not arise directly out of the
contract, that the Federal Circuit clarified the rule that the
government’s liability attaches when the “subsequent government
action is specifically designed to reappropriate the benefits the
other party expected to obtain from the transaction.” Precision
Pine, 596 F.3d at 829. Here, by contrast, the Corps’s obligations
arise out of its Contract with the Joint Venture, and the alleged
breach involves the Corps’s performance under the Contract..330
Finding that Precision Pine did not apply to the facts
presented, the court in Firemen’s Fund stated that the standard
set out in Malone and its progeny (Principle 2) continued to
govern situations in which an alleged government Government
failure to cooperate or hinder performance arises from acts the
gGovernment has taken in its contractual capacity, not in its
sovereign capacity:
330 Id. at 677 (emphasis added).
93DSMDB-3050080v1
The court concludes that Precision Pine does not foreclose
consideration of whether the Corps breached its contractual duty
of good faith and fair dealing based on the standards set forth
in Malone and its progeny. As explained in detail above, the
facts giving rise to Precision Pine’s holding are sufficiently
distinguishable from this case. Moreover, nothing in Precision
Pine overrules the prior cases cited. Cf. Precision Pine, 596
F.3d at 830 ( citing Malone, 849 F.2d at 1445-46).331
The facts in Timber Products presented a somewhat more
complicated situation than those in Fireman’s Fund.332 However,
the court carefully analyzed the nature of the gGovernment acts
and omissions at issue.333 In Timber Products, tThe contractor
alleged that the gGovernment had breached the contractual duty of
good faith and fair dealing (Principle 2) by awarding timber sale
contracts prior to performing required environmental surveys.334
The contractor alleged that the gGovernment awarded the contracts
relying upon an interpretation of applicable environmental law
that it knew would be unlikely to prevail in a pending federal
district court action.335 The gGovernment asserted the sovereign
acts doctrine in defense, claiming that the gGovernment’s
331 Id. at 678.332 333 334 335
94DSMDB-3050080v1
obligation to observe and execute environmental laws was a
sovereign act.336
The court disagreed with the Government, finding that the
contractor’s allegation was aimed at the gGovernment’s decision
to award the contracts prior to performing the required surveys,
not rather than the Ggovernment’s failure to perform the
necessary environmental surveys.337 The court stated that the
duty breached ran specifically to the contractor, not to third
parties or the public in general, as did the duty in Precision
Pine.338
The court followed Firemen’s Fund in tracing outlining when
Precision Pine does and does not applies,y and when it does not
apply, and in affirming that the “reasonableness” standard
articulated in Malone and similarly reasoned decisions applies
when the government acts under review arose solely in the
contractual arena, rather than in the sovereign arena:.339
Defendant, relying on Precision Pine, submits that the legal
standard for assessing whether the government breached the
implied duties to cooperate and not hinder performance is whether
the government: (1) took an action “specifically targeted” at
Plaintiff, and (2) “reappropriate[d] the benefits [Plaintiff]
336 337 338 339
95DSMDB-3050080v1
expected to obtain from the transaction, thereby abrogating the
government’s obligations under the contract.” 596 F.3d at 829—30.
The “specifically targeted” standard in the cases relied
upon by the Precision Pine court— First Nationwide and Centex—was
articulated in the context of analyzing whether the government
action, there the Guarini legislation, was a sovereign act—a
general and public act of broad application taken by the
sovereign in its sovereign, governmental capacity—the type of act
which would have defeated government’s liability. See First
Nationwide Bank v. United States, 431 F.3d 1342 (Fed.Cir.2005);
Centex, 395 F.3d at 1307. Under the sovereign acts doctrine, the
government cannot be held liable for an obstruction to the
performance of a particular contract resulting from the
government’s public and general acts as a sovereign. Horowitz v.
United States, 267 U.S. 458, 461, 45 S.Ct. 344, 69 L.Ed. 736
(1925); Yankee Atomic Elec. Co. v. United States, 112 F.3d 1569,
1574 (Fed.Cir.1997).FN13
The sovereign acts doctrine attempts to “balance[ ] the
government’s need for freedom to legislate with its obligation to
honor its contracts by asking whether the sovereign act is
properly attributable to the government as contractor.” United
States v. Winstar Corp., 518 U.S. 839, 896, 116 S.Ct. 2432, 135
96DSMDB-3050080v1
L.Ed.2d 964 (1996). This balancing “is not a hard and fast rule,
but rather a case-specific inquiry that focuses on the scope of
the [governmental act] in an effort to determine whether, on
balance, that [act] was designed to target prior governmental
contracts.” Yankee Atomic Elec., 112 F.3d at 1575 (emphasis
added). Thus, the “specifically targeted” language in First
Nationwide and Centex was articulated in the context of resolving
the government’s sovereign acts defenses, and was not broadly
asserted as replacing the reasonableness standard for determining
whether there was a breach of the implied duty of good faith and
fair dealing. See Centex, 395 F.3d at 1307 (noting that the
sovereign acts doctrine does not apply to “legislation targeting
a class of contracts to which the government is a party”). Given
its reliance on Nationwide and Centex, Precision Pine should not
be interpreted as creating a wholly new standard, and displacing
the well entrenched reasonableness standard for determining
whether there was a breach of the implied duties.
Precision Pine did not purport to overrule or depart from
Scott Timber, American Export, Sanchez, Fuller or Malone v.
United States, 849 F.2d 1441 (Fed.Cir.1988). As the Court of
Federal Claims recognized in Fireman’s Fund Insurance Company v.
United States, 92 Fed.Cl. 598 (2010), “Precision Pine does not
foreclose consideration of whether [the government] breached its
97DSMDB-3050080v1
contractual duty of good faith and fair dealing based on the
standards set forth in Malone and its progeny.” 92 Fed.Cl. at 677
—78 (citing Malone v. United States, 849 F.2d 1441
(Fed.Cir.1988)). In short, the Fireman’s Fund court found the
reasonableness standard was not changed by Precision Pine,
stating:
The government breaches [the covenant of good faith and fair
dealing] when it acts unreasonably under the circumstances, viz.,
if it unreasonably delays the contractor or unreasonably fails to
cooperate. See C. Sanchez & Son, 6 F.3d at 1542 (“The government
must avoid actions that unreasonably cause delay or hindrance to
contract performance.”); Commerce Int’l Co. v. United States, 167
Ct.Cl. 529, 338 F.2d 81, 86 (1964) (determining that “breach of
[the] obligation of reasonable cooperation” depends upon [the]
“particular contract, its context, and its surrounding
circumstances”).
Precision Pine, the Federal Circuit’s most recent
explication of the implied duty of good faith and fair dealing,
does not change the standards cited above.
92 Fed.Cl. at 675—76.
In addition to holding that Precision Pine does not
foreclose the use of the reasonableness standard for determining
98DSMDB-3050080v1
breaches of the implied duty of good faith and fair dealing, the
Fireman’s Fund court limited the “specifically-targeted” test
articulated in Precision Pine to its context: “a situation where
the government’s alleged wrongful conduct does not arise directly
out of the contract, i.e., key to the alleged breach are actions
involving another government actor or a third party.” 92 Fed.Cl.
at 677.340
Applying the law to the facts, the court found that:
1) the gGovernment’s conduct arose from a duty owed to the
contractor, not to third parties; 2) accordingly,therefore, the
gGovernment’s conduct should be assessed under a reasonableness
standard (Principle 2), not a “specifically targeted” or other
subjective intent standard (Principle 1) or Precision Pine’s
articulation of Principle 3 (the sovereign acts doctrine); and 3)
the gGovernment conduct (award of contracts knowing that a court
was likely to enjoin performance) violated the duty of good faith
and fair dealing (Principle 2) it owed the contractor.. The
court stated:
Unlike Precision Pine, the Forest Service’s obligations here
ran directly to Timber Products under the Jack Heli contract, not
to a third party under a statute or a different contract, and the
alleged breach directly impacted Timber Products’ ability to
340 Timber Prods., 2011 WL 6934815 at *22-23. (emphasis added).
99DSMDB-3050080v1
perform under this contract. As such, the Scott Timber
reasonableness standard, not Precision Pine’s specifically-
targeted standard, applies.341
As the court in Scott Timber recognized, a breach of the
implied duty of good faith and fair dealing may occur “as” a
contract is awarded. 86 Fed.Cl. at 117.342
The Court finds that the government acted unreasonably and
breached its duties to cooperate and not hinder performance by
awarding the timber sale knowing of the risk of an injunction and
suspension, but never telling Timber Products. Because of these
breaches, the government’s liability is not limited to out-of-
pocket expenses.343
341 Id. at 24.342 Id. at 25343 Id.at *1; Am. Gen. Trading & Contracting, WLL, 12-1 BCA ¶ 34,905 (A.S.B.C.A. Dec. 13, 2011).
100DSMDB-3050080v1
B. The Practical Effects Of The Conflation Of The Three Principles
It would be easy to dismiss the melting of the Core Tenet
and the three Principles by the Federal Circuit and some judges
of tribunals below as merely an unfortunate legal detour. What
more is it than case law gone awry? That would not be the first
time this has happened, nor will it be the last, some might
argue. Like the environment, case law tends to heal itself if
left alone. Isn’t this somewhat of an overblown academic
exercise?
No, we think not. Justices Souter344 and Breyer,345 the panel
that decided Malone and panels that decided several decisions
similarly reasoned, Judge Newman346 and several other judges, and
many commentators and scholars from Stanfield Johnson347 to
Professors Nash348 and Scwhartz,349 think notunderstand the pivotal
importance of this question. We have already examined to some
extent how As demonstrated previously, the Federal Circuit’s use
344 United States v. Winstar Corp., 518 U.S. 839 (1996)345 Mobil Oil Expl. & Prod. Se., Inc. v. United States, 530 U.S. 604 (2000).346 W. Stanfield Johnson, “The Federal Circuit’s Great Dissenter and the ‘National Policy of Fairness to Contractors,’” 40 Pub. Cont. L.J. 275 (Winter 2011)347 Id.348 Ralph C. Nash, “Postscript: Breach of the Duty of Good Faith and Fair Dealing,” 24 No. 5 Nash & Cibinic Rep. ¶ 22 (May 2010).349 Joshua I. Schwartz, “The Status of the Sovereign Acts and Unmistakability Doctrines in the wake of Winstar: An Interim Report,” 51 Ala. L. Rev. 1177 (Spring 2000); Joshua I.Schwartz, “Assembling Winstar: Triumph of the Ideal of Congruence in Government Contracts Law,” 26 Pub. Cont. L.J. 481 (Summer 1997).
101DSMDB-3050080v1
of imprecise language and analysis regarding this important area
of government contracts law has caused considerable confusion
within the federal judiciary.350 Over time, the practical effects
could be even more corrosive to the relationship between the
gGovernment and its contractors.351
At the heart of the Core Tenet is the concept that it is not
only good and fair to contractors to place them on an equal
footing with the gGovernment when they enter and perform
government contracts, but it is good and fair to the government
Government as well.352 If the Ggovernment cannot be trusted as a
reliable partner in contracting, the pool of entities willing to
contract with the Ggovernment will shrink, and those that remain
willing to contract will inject risk factors into their pricing.
In the end, the gGovernment will pay more, and therefore, — the
taxpayer will pay more.. As the Supreme Court has stated:
Injecting the opportunity for unmistakability litigation
into every common contract action would, however, produce the
untoward result of compromising the government’s practical
capacity to make contracts, which we have held to be “of the
essence of sovereignty” itself. United States v. Bekins, 304
U.S. 27, 51—52, 58 S.Ct. 811, 815, 82 L.Ed. 1137 (1938).FN28 From
a practical standpoint, it would make an inroad on this power, by
350 351 352
102DSMDB-3050080v1
expanding the government’s opportunities for contractual
abrogation, with the certain result of undermining the
government’s credibility at the bargaining table and increasing
the cost of its engagements. As Justice Brandeis recognized,
“[p]unctilious fulfillment of contractual obligations is
essential to the maintenance of the credit of public as well as
private debtors.” Lynch v. United States, 292 U.S., at 580, 54
S.Ct., at 844.353
Standards, including legal principles, drive conduct. This
is not a matter of ethics; it is a matter of human nature, and
business. How many businesses, or individuals, pay more taxes
than they are required to pay? They may contribute generously to
charities, but few if any pay more taxes than they are required
to pay.354 Government procurement and contract administration
employees are obligated to obtain the best value for the taxpayer
money they are charged with spending.355 They are obligated to
pursue the most favorable conditions and outcomes they can
obtain.356 If they know that they cannot subject the Ggovernment
to liability by squeezing contractors until the contractors give
extra-contractual concessions during contract performance, they
353 See Winstar, 518 U.S. at 839 (emphasis added).354 355 356
103DSMDB-3050080v1
will, and arguably are obligated to, squeeze the contractors.357
Squeezing would include delay, threats of termination or negative
past performance reports, evasion of responses, and any other
acts and omissions that fall well short of specific intent to
injure a contractor, but have the practical effect of preventing
the contractor from realizing the benefits it reasonably
anticipated when it entered its government contract.
The same would be true if the balance were tipped in favor
of the contractor side. Government contracts clients ask, “What
are we required to do?” when seeking advice about compliance with
a regulation or contract provision. They may decide that it is
prudent as a business matter to foster their long term
relationship with a government customer — i.e., to do more than
that which is required of them by contract or regulation in a
particular circumstance. However, a determination of what is
required is almost always a starting point. If a lower level of
performance is required, decision-making starts at that point; if
a higher level of performance is required, decision-making starts
at the point.
Again, although consideration of ethics may be relevant to
this analysis, the analysis does not rest on considerations of
ethics. People in business are busy; they do not get to some
tasks; they mean no harm to their contracting partners when they
357
104DSMDB-3050080v1
miss response deadlines. Absent use of risk-shifting provisions,
universal rules of contracting make a party who contracts with
another liable to the other for delays in performing tasks that
would allow the other to enjoy the benefits of the contract the
two have executed. The Precision Pine language and analysis, and
the manner in which some tribunals have interpreted the language
and analysis, negate these universal rules of contracting, and
substantially erode the Core Tenet.358
Left as is, application of the conflated Principles
articulated in Precision Pine and some of its progeny will likely
lead to deterioration of government-contractor relations,
undermine the government’s credibility at the bargaining table,
and lead to higher procurement costs. The Federal Circuit should
find occasion to revisit its articulation and analysis of the
Principles that govern this area of the law to give clear
guidance to the tribunals below, regulators, government contract
administration personnel, and contractor personnel. Such
analysis would do well to avoid over-protection of the government
as contractor, and, to pay heed to the Supreme Court’s advice —
Let the government contract.
358
105DSMDB-3050080v1
top related