Legal Insights: Contractor May Pursue Claim for Violation of Implied Contractual Duty Even Where No Express Breach of Contract Occurred

This past spring, the U.S. Court of Appeals for the Federal Circuit permitted a federal contractor to pursue a claim for breach of the implied covenant of good faith and fair dealing under its contract even though the government did not breach an express provision of that contract. Agility Public Warehousing Company KSCP v. Mattis, 852 F.3d 1370 (2017) was an appeal by the contractor from a decision of the Armed Services Board of Contract Appeals finding that the government did not breach the terms of a supply contract.

Contractor Seeks Additional Costs Not Recoverable Under Contract Terms

In 2002, Agility entered into an indefinite delivery/indefinite quantity contract with the Defense Logistics Agency to provide food products to the military in Iraq from distribution facilities in Kuwait. Some of the food was delivered in refrigerated supply trucks. Unfortunately, the refrigerated supply trucks were often subject to major delays in returning to Kuwait when delivery was made to forward operating bases. At forward bases, the military generally lacked cold storage facilities. Without any place else to keep items needing refrigeration, the soldiers at these bases often held the refrigerated trucks on-site to store food.

The need to maintain refrigerated trucks on site caused the average turnaround time for these trucks to increase to 15 days, which was greater than the seven day turnaround time anticipated by the parties when they signed the contract. Some trips, however, greatly exceeded the average, resulting in large expenses for the agency. One 154-day trip cost the government $99,445, which was more than the cost of a truck. Other deliveries resulted in the government paying $82,030, $65,905, and $63,325 for single trips.

In light of these unexpected cost increases, the agency began discussions with Agility about capping the fees for any single trip. These discussions resulted in a modification to the contract which called for a minimum number of days constituting a single trip and a minimum cost for trips. Additional days beyond the minimum trip length would result in increased daily fees. In return for these accommodations by the agency, the modification imposed a maximum number of 29 allowable trip days on Agility. The agency was not required to pay transportation fees beyond the maximum.

Although Agility agreed to the 29 day cap in the contract modification, it claims that it did so with the understanding that it could submit exceptions to the cap if the agency caused delays beyond the length of the cap. The modification does not contain this language, however. Instead, Agility based its argument on an e-mail exchange with the contracting officer. In those e-mails, Agility informed the contracting officer that it would prefer to have the ability to submit exceptions to the 29 day cap if a trip in excess of 29 days is unavoidable despite its best efforts to prevent it. The contracting officer replied that “exceptions to the 29 day rule will only be considered in the form of a claim.” According to Agility, this e-mail amounted to an agreement by the agency to make exceptions to the 29 day cap so long as Agility provided documentation to show that the government caused the delay beyond the 29 days.

Agility subsequently submitted a claim for turnaround delays resulting from trucks held in Iraq by the military for longer than 29 days. The contracting officer denied this claim in reliance on the modification. Agility appealed the claim denial to the ASBCA where the appeal was also denied.Agility appealed again to the Federal Circuit. The Court affirmed the ASBCA’s decision that the government did not commit an express breach of contract. It stated that the contract modification imposing a 29 day cap on all transportation fees resulted in the parties sharing the risk of increased travel time rather than having the agency shoulder the burden alone. The agency did not breach the contract by failing to pay for days beyond the 29 day cap, even when delays beyond the 29 day cap were caused by the military using the trucks for refrigerated storage.

Contractor Permitted to Seek Relief for Breach by Agency of Implied Contractual Duty

Although it found no breach by the agency of an express provision of the contract, the Federal Circuit did not simply affirm the denial of the claim by ASBCA. Instead, it noted that Agility’s belief that it may be entitled to some relief beyond the 29 day cap was not irrelevant. The Court observed that an implied duty of good faith and fair dealing exists in government contracts just as it does between private parties. Although a party to a contract cannot use an implied duty of good faith and fair dealing to expand the other party’s contractual duties beyond those in the express contract or create duties inconsistent with the contract’s provisions, a party might still breach this implied duty by interfering with the other party’s performance or by acting in such a way as to destroy the reasonable expectations of the other party regarding the benefits to be provided by the contract. According to the Court, possible breaches of the implied duty of good faith and fair dealing can include evasion of the spirit of the bargain, lack of diligence and slacking off, willful rendering of imperfect performance, abuse of the power to specify terms, and interference with or failure to cooperate in the other party’s performance.

Applying these principles to Agility’s appeal, the Federal Circuit stated that the government may have breached its implied duty of good faith and fair dealing by unnecessarily delaying the return of Agility’s trucks and by not increasing the military’s on-site food storage capabilities. In other words, if the government simultaneously imposed a cap and engaged in conduct that made it impossible for Agility to perform within that cap, the agency may have breached its implied contractual duties to Agility. Thus, the Federal Circuit sent the appeal back to the ASBCA and instructed the Board to consider whether Agility proved that the government breached its implied duty of good faith and fair dealing.

Significance of Decision

The Federal Circuit’s decision in the Agility case is an important tool that can be utilized by contractors in formulating contract claims. When the government’s acts or omissions impede a contractor’s ability to perform a contract, the contractor may be entitled to relief even if no express term of the contract is breached. Instead, the contractor has the right to maintain that the government interfered with its reasonable expectations of the benefits it would realize under the contract. This legal authority helps to significantly expand the grounds upon which contractors may pursue valid claims.

Ross is a partner in the Albuquerque office of Lewis Roca Rothgerber Christie LLP where his practice emphasizes government contracts. This article is intended for general information only and should not be construed as legal advice or opinion. Any questions concerning your legal rights or obligations in any particular circumstance should be directed to your lawyer.

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