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Government Contractors

The Implied Covenant of Good Faith and Fair Dealing

In this era of sequestration, some government contracting offices are engaging in practices regarding contractors that the contractors believe are unfair or inconsistent with the terms of their contracts. Contractors need to know what the rules are in regard to the government’s duty to treat them fairly, and what recourse contractors have if the government does not meet that duty. However, keep in mind that the following discussion is not intended to and does not constitute legal advice. Instead, this is intended to provide you with general knowledge concerning the rules of federal contracting.

The government’s obligation to treat contractors fairly is expressly stated in the Federal Acquisition Regulation (“FAR”). Specifically, FAR 1.602-2(b) directs contracting officers to ensure that contractors receive “impartial, fair, and equitable treatment.” Similar expressions of fairness are contained in other sections and FAR provisions such as FAR 32.503-6 regarding suspension or reduction of cost based progress payments, 32.603 concerning debt collection and the various inspection clauses that require the government not to conduct inspections in a way that unduly delays the contractor in performance of the contract. However, because most of these expressions of fairness are only included in FAR sections that are intended to provide guidance to contracting officers, it is open to debate whether these non-contract clauses can provide a contractor with a basis for a claim if the government does not comply.

While basing a claim upon a FAR section that is not included in a contract is problematic for contractors, there is a contract clause that specifically requires the government to treat contractors fairly. Because this clause is not found in the FAR or any FAR supplement, many contractors, and many contracting officers for that matter, may not be familiar with this clause – the implied covenant of good faith and fair dealing.

The implied covenant of good faith and fair dealing is a product of English common law that was imported into the U.S. by the original English colonists. As an element of the common law, by operation of law it is a part of every contract entered into in the U.S., including contracts between private parties and the government. In this regard, it operates similar to the Christian Doctrine with which many contractors are conversant.

As the name implies, this contract term requires the government and contractor to deal fairly and in good faith with one another in regard to the contract. To accomplish this, the clause imposes obligations on both contracting parties that include the duty not to interfere with the other party’s performance and not to act as to destroy the reasonable expectations of the other party regarding the benefits of the contract. In practice, this means that the government cannot do an act that is prohibited, either expressly or implicitly, by the contract, or fail to do an act that would be required of the government under the contract.

It should be noted that this clause does not apply just to acts of the contracting officer. Instead, it applies to the government as a contracting party. Thus, it would apply to those acting on behalf of the government in its relations with the contractor. This expansive application usually involves government inspectors who engage in overzealous inspections or apply overly strict interpretations of contract requirements to reject work. However, in some circumstances it might be appropriate to apply the clause against Defense Contract Audit Agency (“DCAA”) findings.  For example, if a contracting officer were to merely adopt a DCAA finding without critically examining the finding, this could give the contractor a basis for a claim against the government.

When a contracting party commits a material breach of a contract, this breach normally relieves the non-breaching party of any further performance obligations under the contract. In other words, the non-breaching party is entitled to stop work. Further, the non-breaching party is usually entitled to receive the profit it would have realized on the contract had it not been breached. However, in government contracting, many breach of contract actions are treated differently. Because the government does not want its contractors to stop work in case of a government breach, most actions by the government that would be considered a breach of a commercial contract are treated as constructive changes to the contract. That is the case with a breach of the implied covenant of good faith and fair dealing. Thus, if the government breaches its duties under this contract clause, the contractor’s remedy is to seek an equitable adjustment to the contract.

For more information, please contact a member of the Government Contractors team.

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