In a recent decision, the U.S. Circuit Court of Appeals for the Federal Circuit has affirmed that the Federal Government does have an implied duty of good faith and fair dealing in conducting its business.
Basic contract details
The contractor agreed to support the U.S. armed forces in Iraq, Qatar, and Kuwait by providing trucks to deliver food to forward operating bases. In May 2002, the Defense Supply Center Philadelphia (part of the Defense Logistics Agency) awarded the indefinite-delivery, indefinite quantity contract, which continued in effect until roughly 2005.
Two types of trucks were used: dry trucks (non-refrigerated) and refrigerated trucks (called reefers). The trucks were loaded in Kuwait. Under military escort, the trucks traveled to bases in Iraq. When the trucks arrived at their destination, the goods were unloaded at either a dining facility or mobile kitchen trailer. The trucks were then to return to Kuwait. The price for dry trucks was $1,600 a truck for a 3-day round trip with $475 for each day over 3 days. The price for reefers was $2,050 a truck for a 3-day round trip with $645 for each day over 3 days. The number of days was based on when the truck was loaded in Kuwait and when it returned to Kuwait. There was no limit placed on the fees if the trucks remained in Iraq for long periods.
Things go awry
The trucks often didn’t return to Kuwait within the expected 3 days. Many of the bases had no cold-storage equipment. So the soldiers at those locations kept the trucks there to store such things as milk, fruits, and vegetables. The average turnaround time for the trucks was 15 days, greater than the expected 7-day turnaround when the contract was awarded. As a result the Government paid $99,445 for a truck that stayed in Iraq for 154 days. There were similar charges for other trucks of $82,030, $65,905, and $63,325. As a result, the contracting officer (CO) observed that the Government was, in essence, paying for entire trucks.
A number of different solutions were implemented to reduce the turnaround time: (1) having transportation liaison officers (employees of the contractor) travel with each truck and (2) assigning squad leaders (Army personnel) to travel with each truck. Even the commanding general in Iraq drafted a policy memorandum that was to reduce the turnaround delays to less than 48 hours. The record is unclear whether the draft was ever signed or even issued. In any event, the delays continued.
On September 19, 2004, the CO and the contractor then executed Modification 27 to the contract. This modification provided that the Government would pay for delays of up to 29 days, but not more than 29 days (29-day cap for calculating payment). The contractor agreed to the modification while at the same time expressing reservations that the modification could mean that the contractor could incur large losses if the trucks were kept more than 29 days. In an email, the CO indicated that the contractor could submit claims for trucks kept more than 29 days if the delay was unavoidable and despite the Government’s best efforts to prevent it. In the words of the CO, “exceptions to the 29-day rule will only be considered in the form of a claim.” [Emphasis added.] The modification also changed the prices for round trips and indicated the Government would only pay for delays caused by the Government (the destination not having the ability to unload the cargo).
Contractor submits claims
On February 24, 2005, the contractor sent its first claim for trucks that stayed in Iraq beyond 29 days. The claim was $2,951,335 and covered September 16 to December 31, 2004. At this point, the CO said the Government had already paid $8.7 million for the 467 trucks involved and she didn’t want to pay another $2.9 million. She asked for cost verification data so that she could determine whether the contractor was losing money or could show that the 29-day cap was unreasonable, unfair, or inequitable. She also indicated that if the evidence showed that the cap was unreasonable, unfair, or inequitable, she would consider paying the additional amount.
On March 9, 2005, the contractor told the CO that it would submit claims for any trucks that were kept beyond 29 days. The CO objected, and the contractor responded by indicating that the Government’s keeping the trucks beyond 29 days was in violation of the contract that said the Government was not to use the trucks for storage purposes.
On May 25, 2005, the contractor submitted a claim for $4,161,020 for trucks kept beyond 29 days during January and February 2005. On October 26, the contractor submitted a claim for $1,138,370 for trucks kept more than 29 days during March 2005. On November 17, 2005, the CO denied the claims. The CO indicated she wanted actual cost data to determine whether the contractor’s costs had actually exceeded the amount already paid for the deliveries.
Equitable adjustment sought
On December 18, the contractor informed the contractor that it would pursue a request for equitable adjustment for $13.1 million related to trucks kept in Iraq for longer than 29 days. On April 9, 2007, the CO denied the claims because—
- Modification 27 imposed a 29-day cap.
- The contractor had failed to offer evidence that the amount already paid was unfair, unreasonable, or inequitable.
- The amount already paid was (a) fair, reasonable, and equitable and (b) in line the intent of Modification 27.
The contractor then appealed the CO’s decision to the Armed Services Board of Contract Appeals (ASBCA). After a 10-day hearing, the board denied the contractor’s appeal in August 2016. On November 30, 2016, the contractor appealed to the U.S. Circuit Court of Appeals for the Federal Circuit, asserting that the Government—
- Breached the express terms of the contract.
- Breached its promise to consider exceptions to Modification 27.
- Breached its implied duty of good faith and fair dealing.
- Constructively changed the contract.
The contractor did not directly challenge any of the board’s factual findings, but argued that the board has misinterpreted the contract, the modifications, and the agreement to consider exceptions.
Express terms of contract
The contractor maintained that the Government expressly breached the contract by using the trucks for storage purposes. The board found that Modification 27 abrogated the provision about the Government not using the trucks for storage. The court affirmed the board’s decision.
Promise to consider exceptions
The contractor maintained that the Government should have considered its claims for the trucks kept in Iraq past 29 days. The board found that the Government had only agreed to consider, not pay any claim, and that the CO had made no guarantee that a claim would be paid. Furthermore, this claim is based on a few lines in an email message and not included in the language of Modification 27. Although the court affirmed the board’s decision, it pointed out that the CO’s offer to consider claims for trucks kept beyond 29 days did relate to the good-faith claim.
Implied duty of good faith and fair dealing
The contractor maintained the Government had breached its duty of good faith and fair dealing when conducting its business. The board found that it didn’t need to consider this issue. The court vacated the board’s decision, but provided no opinion of the merits of the contractor’s claim. The court pointed out that a party may breach its implied duty by interfering with another’s performance or acting in a way to destroy the other party’s expectations about the benefits of the contract. The court pointed out this may be done by—
- Evading the spirit of the bargain.
- Lack of diligence and slacking off.
- Willful rendering of imperfect performance.
- Abuse of power to specify terms.
- Interference with or failure to cooperate in the other party’s performance.
The court suggested that the Government may have breached its implied duty of good faith by interfering with the contractor’s ability to perform its duties by unnecessarily delaying the return of the contractor’s trucks and not increasing its onsite food storage capabilities.
The Government constructively changes a contract when the contractor performs work beyond the contract requirements without a formal order, either by an informal order or because of the fault of the Government. The board also found that it didn’t need to consider this issue. But the contractor maintained the Government constructively changed the contract by increasing rather than decreasing the instances in which the contractor’s trucks were forced to stay at their destination sites and be used for storage. The court ruled that because the board never addressed this issue, the board’s decision also had to be vacated so that this issue could be considered.
As of the date of this blog post (May 15, 2017), this litigation continues before the ASBCA and has yet to be resolved.
Lessons to be learned
When carrying out a contract involving the military in a war zone, it’s probably a relief to know that the doctrines of good faith, fair dealing, and constructive change can be the basis for an equitable adjustment.
However, both the contractor and the CO can be faulted for not thoroughly exploring what was going to happen if the trucks were kept more than 29 days. Of course, they can be easily forgiven because they were trying to keep our nation’s military personnel safe and well fed. But obviously, offering to consider a claim is not the same as having a clear promise to pay for the delays in a written statement of how the issue was to be settled.
To paraphrase a statement often attributed to Samuel Goldwyn: An oral assurance isn’t worth the paper it’s written on.
For more information, see Agility Public Warehousing Company v. Mattis, 852 F.3d 1370 (Fed. Cir. 2017).
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