The Federal Circuit recently reversed a decision from the Court of Claims that has received much scrutiny in the government contracts and design-build legal communities. In Metcalf Construction Co. v. United States, Case No. 2013-5041 (Fed. Cir. Feb. 11, 2014), a federal design-build contractor appealed the Government’s rejection of its claim for extra compensation on account of what it alleged were differing site conditions. Because of its implications for design-build construction and long-standing government contracts precedent related to the Government’s duty of good faith and fair dealing, several commentators are already calling Metcalf the most important federal construction opinion of the last decade. A copy of the Federal Circuit’s decision is available for download here.
The project at issue in Metcalf required the design and construction of 212 duplex housing units at a Marine facility in Hawaii. In its bid package, the Government had furnished a soil report with a disclaimer that it was “for preliminary information only” and the design-build contract required the contractor to perform its own independent investigation of the soil conditions at the site. The contractor did as required, and determined that those conditions were materially different from the conclusions in the Government’s soil report. For this reason, the contractor timely recommended to the Government that the project foundations required a completely different design and construction approach from the specifications.
The Government rejected the recommendations and directed the contractor to proceed as set forth in the contract documents. For over a year the contractor tried to negotiate a contract modification, but ultimately decided that its schedule risk was too great and proceeded with the modified foundations. Ultimately the Government granted a contract modification for the design but rejected the claim that the soil conditions were materially different pre-bid and post-award. When construction was complete, the contractor claimed $25 million in additional costs for what had turned into a $75 million project. The Government’s contracting officer rejected the contractor’s claim. The contractor proceeded at the Court of Claims, where it also lost. But from the outset the Court of Claims’ decision was subject to much criticism on the basis that the court had eviscerated well-settled case law by essentially shifting the risk of differing site conditions from owners to contractors (the Associated General Contractors of America, the Associated Builders and Contractors, the Design-Build Institute of America, and AIA all filed amicus briefs in support of Metcalf at the Federal Circuit).
The Federal Circuit’s Decision
The appellate decision at the Federal Circuit overturning the Court of Claims focused on two key components of the analysis at the lower court. First, the Federal Circuit ruled that the Court of Claims had applied an “unduly narrow view” of the Government’s duty of good faith and fair dealing that applies to all government contracts. The lower court had applied the standard set forth in Precision Pine & Timber, Inc. v. United States, 596 F.3d 817 (Fed. Cir. 2010). That case held that the Government does not breach the duty where its actions do not “specifically target” the contract at issue or reappropriate any benefits guaranteed by the contract. For example, the court described a recent case where it had declined to find a breach of the duty of good faith and fair dealing where an independent permitting agency – and not the Government – had unreasonably administered the permitting process and the contractor’s bid assumed that the agency would act reasonably.
In Metcalf, on the other hand, the lower court had improperly ruled 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.” In clarifying this holding, the Federal Circuit stated that “Precision Pine does not impose a specific-targeting requirement applicable across the board or in this case. . . . the court in Precision Pine did not hold that the absence of specific targeting, by itself, would defeat a claim of breach of the implied duty. . . . Whether the Government breached the duty of good faith and fair dealing . . . requires reconsideration under the familiar broader standards [quoted above and in the opinion].”
Second, and the aspect of the holding that is of particular interest to design-builders, the Federal Circuit also rejected the Court of Claims’ holding that, because Metcalf was on notice that it would need to perform more investigation of the site conditions, it was also “on notice that that it could not rely on the [Government’s] ‘information only’ report.” The Federal Circuit ruled that the lower court “thus treated the contract as placing on Metcalf the risk and costs of dealing with newly discovered conditions different from those stated by the Government before the contract became binding. . . . Nothing in the contract’s general requirements that Metcalf check the site as part of designing and building the housing units, after the contract was entered into, expressly or impliedly warned Metcalf that it could not rely on, and that it instead bore the risk of error in, the Government’s affirmative representations about the soil conditions.”
As the court also noted, the Differing Site Conditions clause in the FAR (52.236-2) (similar language also appears in the AIA A201 and EJCDC General Conditions documents) exists to protect both the Government (from inflated bids) and contractors (from increased costs and schedule delays) due to the uncertainty of changed site conditions. “Even requirements for pre-bid inspection by the contractor have been interpreted cautiously regarding conditions that are hard to identify accurately before work begins, so that the duty to make an inspection of the site does not negate the changed conditions clause by putting the contractor at peril to discover hidden subsurface conditions or those beyond the limits of an inspection appropriate to the time time available,” the court wrote.
The Federal Circuit also specifically referenced the “for preliminary information only” disclaimer that the Government had applied to its inaccurate soils report. “That statement merely signals that the information might change (i.e. it is ‘preliminary’). It does not say that Metcalf bears the risk if the ‘preliminary’ information turns out to be inaccurate. We do not think that the language can fairly be taken to shift that risk to Metcalf, especially when read together with the other Government pronouncements, much less when read against the longstanding background presumption against finding broad [Government] disclaimers of liability for changed conditions.”
Implications for Government Contractors & Design-Builders
For both contractors and design-builders, this language is key. It prevents the Government from inserting broad disclaiming language in its bid documents in an effort to shift the risk of unforeseen site conditions or incorrect or incomplete Government-furnished information onto the contractor. In the design-build context, it assumes greater importance. When the Government – as it often does – provides a full set of design documents to a construction contractor, the applicability of the Spearin doctrine is well-settled. Spearin, as you may know, is the implicit warranty that if a contractor builds to the plans and specifications provided by the owner, then it cannot be liable for design-driven defects. In a design-build scenario, the doctrine’s reach is not as clear (because the design-builder, and not the owner, is preparing the plans and specifications).
Spearin – which federal and state courts have applied to both public and private construction projects – also held that general disclaimers requiring the contractor to review the plans and specifications for defects do not shift the burden of design-driven risk from the owner back to the contractor. The Federal Circuit’s decision in Metcalf helps clarify that the Spearin doctrine should also apply in the design-build context. It reaffirmed that the Government cannot disclaim away its Spearin liability (as many feared after the lower court’s decision) and shift the risk of unforeseen site conditions or incorrect Government-furnished information, including plans, reports, or specifications, from which the design-builder will prepare its full set of design documents, to the design-builder.
Expect considerable commentary, client alerts, and other materials, including perhaps additional case law, analyzing Metcalf in the near future, particularly as design-build delivery at the federal and state levels continues to increase. But in the meantime design-builders should be pleased that the Federal Circuit has clarified a holding that would have created many headaches throughout the broader government contracts community.