Metcalf Constr. Co. v. United States

• Decision Date: 11 February 2014
• Docket Number: No. 2013–5041.,2013–5041.
• Citation: 742 F.3d 984
• Parties: METCALF CONSTRUCTION COMPANY, INC., Plaintiff–Appellant, v. UNITED STATES, Defendant–Appellee.
• Court: U.S. Court of Appeals — Federal Circuit

742 F.3d 984

METCALF CONSTRUCTION COMPANY, INC., Plaintiff–Appellant,

v.UNITED STATES, Defendant–Appellee.

No. 2013–5041.

United States Court of Appeals,

Federal Circuit.

Feb. 11, 2014.

Robert J. Symon, Bradley Arant Boult Cummings LLP, of Washington, DC, argued for plaintiff-appellant. With him on the brief was Eric A. Frechtel.

Ellen M. Lynch, Trial Attorney, Commercial Litigation Branch, Civil Division, United States Department of Justice, of Washington, DC, argued for defendant-appellee. With her on the brief were Stuart F. Delery, Assistant Attorney General, Jeanne E. Davidson, Director, Reginald T. Blades, Jr., Assistant Director, and Russell J. Upton, Trial Attorney.

Jerrold J. Ganzfried, Holland & Knight LLP, of Washington, DC, for amicus curiae Associated General Contractors of America. With him on the brief was Stephen B. Shapiro. Of counsel on the brief was Ralph C. Nash, of Washington, DC.

Maurice Baskin, Venable LLP, of Washington, DC, for amicus curiae Associated Builders and Contractors, Inc. With him on the brief was Rebecca Pearson.

Robynne T. Parkinson, Thaxton Parkinson PLLC, of Mercer Island, Washington, for amici curiae The Design–Build Institute of America, et al. Of counsel on the brief was Michael Loulakis, Capital Project Law Group PLLC, of Reston, Virginia.

Before O'MALLEY, PLAGER, and TARANTO, Circuit Judges.

TARANTO, Circuit Judge.

We consider the scope of the duty of good faith and fair dealing under a contract between the federal government and a private company engaged to design and to build housing for the military. We hold that the Court of Federal Claims misread our precedent in articulating what the contractor, Metcalf Construction Company, needed to show in order to prove that the government breached that duty. We also hold that the trial court misinterpreted certain contractual provisions related to Metcalf's good-faith-and-fair-dealing claim. We therefore vacate the trial court's decision that Metcalf failed to establish liability, vacate the accompanying damages award, and remand for further proceedings using the correct standard.

Background

A

In 2002, the United States Navy awarded Metcalf a contract to design and to build housing units at Marine Corps Base Hawaii, which is located on Kaneohe Bay on the northeastern side of the island of Oahu. Under the original contract, Metcalf had to build 188 units by March 2005, and the government promised to pay Metcalf $42,971,000. The parties modified the contract numerous times. Eventually, the contract required Metcalf to build 212 units by October 17, 2006, for a price of just under $50 million.

On December 31, 2002, the Navy told Metcalf to proceed with performance, but problems arose almost immediately. One involved the soil at the site of construction. “Expansive soil” swells when wet, which can lead to cracks in concrete foundations and other damage. Because the character of the soil could significantly affect the cost of construction, it was a topic of attention in the process preceding the signing of the contract. Before the Navy issued its initial request for proposals—the request to which Metcalf responded, leading to the contract—a government-commissioned report found that the soil at the site had a “slight expansion potential.” In outlining construction requirements, the request for proposals cited that report as relevant to certain features of the project, such as concrete foundations.

The government made clear that its pre-request soil report was not to be the last word on soil conditions for purposes of the project. A revised request for proposals stated that the requirements in the “soil reconnaissance report” were “for preliminary information only.” The resulting contract required that the contractor conduct its own independent soil investigation, and it incorporated Federal Acquisition Regulation (FAR) 52.236–2, 48 C.F.R. § 52.236–2, which concerns site conditions that differ materially from those disclosed in the contract. Even before potential bidders had submitted proposals in response to the request, the government had clarified, in a publication written in question-and-answer form, that the contract would be amended if the contractor's post-award independent investigation turned up soil conditions significantly different from those described in the government's report:

Q15: ... This requires an independent investigation after award.... Should we infer from this that any unforeseen soil conditions or variances from the Government's soils report will be dealt with by change order?

Answer: Yes, if there's a major disparity from the Government's soil reconnaissance report.

At the end of January 2003, after the contract took effect, Metcalf hired Geolabs, Inc., to investigate the soil. Five months later, Geolabs reported that the soil's swelling potential was “moderate to high,” not “slight” (as the pre-bid government study had said), and recommended a course of action to account for the newly uncovered condition. Within days, Metcalf notified the Navy. Discussions ensued, delaying construction for roughly a year. In those discussions, Metcalf insisted on following Geolabs's recommendations, while the Navy generally insisted on following construction requirements set out in the original contract. By mid–2004, Metcalf decided that the cost of waiting for the Navy to approve the Geolabs-recommended design changes had become too high, and it began to implement those changes by over-excavating the soil and replacing it with non-expansive fill, despite awareness of the risk of proceeding without a contract modification.

In August 2004, the Navy came to rest on how it would treat Metcalf's claim regarding the soil's swelling potential. The Navy denied that there was any material difference between the pre-bid and post-award soil assessments and thus concluded that no additional compensation was warranted. But the Navy also approved contract modifications that (1) paid Metcalf about $14,000 for additional soil tests and (2) authorized Metcalf to build two prototype units in accordance with Geolabs's recommendations, at an increased cost of $56,640 over an additional five days.

By that time, Metcalf was about 200 days “behind schedule.” In an effort to get back on track, and in light of the Navy's decision, Metcalf decided to start addressing the expansive-soil issue through the use of “post-tension” concrete, which was more expensive than ordinary concrete but would avoid the additional time and cost of continuing to over-excavate the soil and import non-expansive fill. The trial court here noted that the Navy amended the contract to approve the use of post-tension concrete slabs (later concluding that Metcalf was not entitled to recover increased costs associated with that design change). All told, Metcalf claims that the expansive-soil problems cost more than $4.8 million, mostly for over-excavating the soil under certain units and using post-tension concrete slabs.

Delays in construction also resulted from the presence in the soil of more of a chemical contaminant—chlordane—than had been expected. In the request for proposals, the government had represented: “Chlordane is present in the soils around the building foundation. Remediation actions are not required since the levels are acceptable.” The government made the same representation in its pre-proposal question-and-answer clarification:

Q34: Does the Navy have any requirements for removal of the Chlordane contaminated soil, shown on the environmental survey? For example, if homes are built over the contaminated area or will the Navy require removal of the Chlordane?

Answer: No remediation action of the Chlordane contaminated soil is required ....

In August 2003, after the contract took effect, the Navy issued instructions to Metcalf about testing the soil for chlordane and disposing of any contaminated soil.

By 2005, excavated soil was accumulating on the site, and Metcalf needed a place to store it. (The request for proposals had said that the contractor would have access to a landfill, but the landfill had closed.) Before moving the soil, Metcalf had to test it for chlordane. Metcalf found higher levels than the pre-bid representation by the government, and it notified the Navy. The parties discussed the matter, with each other and with State authorities. The Navy ultimately decided that, although the amount of chlordane found was higher than detected before the contract, the level that was acceptable was also higher than previously stated. With the exception of one “hot spot,” the Navy deemed the site to be safe. The Navy afforded Metcalf a 286–day extension for completing the building project and reimbursed Metcalf $1,493,103 for costs associated with chlordane remediation, but Metcalf sought an additional $500,000.

There were other disputes and interruptions along the way to Metcalf's ultimate completion of the project. Metcalf alleges, for example, that the Navy imposed requirements not found in the written contract and that an uncooperative inspector hindered the project. The Navy accepted the last three buildings on March 2, 2007, a few months after the October 17, 2006 deadline (which was the result of certain extensions). Metcalf alleges that its final cost of construction was roughly $76 million. The government paid Metcalf less than $50 million.

B

On March 30, 2007, Metcalf filed a claim for damages with the Navy's contracting officer. What is relevant here is that Metcalf argued that the Navy had materially breached the contract and—what is before us—the implied duty of good faith and fair dealing under the contract. The contracting officer denied the claim.

Metcalf brought suit in the Court of Federal Claims under the Contract Disputes Act, 41 U.S.C. § 609 (2006) (later recodified at 41 U.S.C. § 7104, see Public Contracts Act of Jan. 4, 2011, Pub.L. No. 111–350, 124 Stat. 3677). The government counterclaimed under a...