Good Faith in Government Contracts

A well established element of the formation and administration of both commercial and Government contracts is the duty of good faith and fair dealing. This obligation is imputed to all parties to a contract and is defined as “Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.”1

What does “Good Faith” mean? “Good Faith” is defined as “honesty in fact in the conduct or transaction.”2 This concept generally does not include negotiations but it does include the performance and enforcement of the terms of a contract. However, false and fictitious representations, statements or certification made to the Government in a proposal or during negotiations may lead to various sanctions.3 “Good Faith” includes any conduct or inaction or statements that can be characterized as “bad faith” predicated on morality and decency. Hence, subterfuges and evasions will violate the obligation of good faith in performance. There is no comprehensive list of the types of bad faith, but a few recognized examples are: lack of diligence and slacking off, willful rendering of imperfect performance and interference with or failure to cooperate in the other party's performance.4

A violation of the doctrine of “Good Faith” in enforcement may arise when dishonest conduct occurs, or asserting an interpretation contrary to a previous understanding, rejecting performance for false or unstated reasons, and abuse of power to determine compliance.

The corollary to Good Faith is “Fair Dealing.” “Fair Dealing” is defined as the conduct of business with full disclosure.5

This concept is applicable to both parties to a contract including the Government in its contractual capacity. “Claims of a breech of the implied covenant of good faith and fair dealing – including claims that the duties to cooperate and not hinder performance of a contract have been breached – are to be treated like any other claim for breach of contract.”6

The foregoing concept was evident in Daewoo Engineering and Construction Company, Ltd v. United States of America (“Daewoo”), No. 02-1914c, decided by the United States Court of Federal Claims (the “Court”) on October 13, 2006. Daewoo was awarded a contract by the U. S. Corps of Engineers to build a 53 mile road on the Republic of Palau in the North Pacific. The project was scheduled to be completed in 1,080 days for $88 million. The initial bid was $73 million, but because it was substantially below the Government's internal estimate of $100 million, Daewoo was allowed to increase their proposed amount by $15 million to $88.6 million. During the course of construction, Daewoo alleged it was delayed by poor soils, inclement weather and other adverse conditions. As a result, it filed a claim under the Contract Disputes Act7 for an additional $66 million. When the Corps denied the claim, Daewoo filed suit.

At trial, Daewoo was unable to support not only their initial proposal but also their claim. Daewoo was unable to furnish evidence that they had performed due diligence during the pre–award (proposal) process to obtain a clear understanding of the environment at Palau and, therefore prepared and submitted a specious price proposal.

Daewoo performed some work during the first two years of the contract. During this period, Daewoo protested to the Corps that they were encountering differing site conditions.

Eventually Daewoo submitted a certified claim to the Corps of Engineers for $64 million in equitable adjustments including $13.4 million in “incurred damages” and $50 million for anticipatory costs. The Contracting Officer denied the claim and Daewoo appealed to the Court.

The Court's opinion was nothing less than a devastating indictment of Daewoo. The Court stated that “Daewoo had little idea how to bid this contract.” The Court stated that testimony of Daewoo employees were examples of “Daewoo's lack of good faith” and that the claim was a “negotiation ploy.” At trial, Daewoo's employees testified that the incurred damages part of the claim, in the amount of $50.6 million, was intended to “get the Government's attention” presumably so the Government would listen to the complaints of Daewoo and grant some relief. The Court determined that “Daewoo was among the bidders that did not heed the Government's warnings and obtain expert assistance in compiling its bid.” Moreover, there was no basis of estimate (“BOE”) prepared, so no one at Daewoo knew how the productivity rate was calculated or even who calculated it. Furthermore, Daewoo failed to create a critical path that would show project completion according to contract requirements.

The Government made a counter claim of fraud against Daewoo. The Court stated that “Daewoo bid the road construction job improperly and handled its basic management inefficiently.”

The Daewoo Claim was filed under the Contract Disputes Act (“CDA”)8 which has a fraud provision. The Court found that the Daewoo claim of $64 million was fraudulent. “Plaintiff (Daewoo) made the claim for purposes other than a good faith belief that the Government owed Daewoo that amount. Plaintiff in fact did not believe the Government owed it $64 million as a matter or right.” The Court went on to state that “Plaintiff (Daewoo) did not honestly believe that the Government owed it the various amounts stated when it certified the claim.” The Court found Daewoo intentionally inflated their costs and had re-claimed costs that had been rejected in an earlier claim as further evidence of fraud and bad faith. In an 85 page opinion the Court found that “Daewoo did not prove liability. Plaintiff's claim is fraudulent.” Daewoo acted in egregious bad faith. Because of their bad faith, false claims, and fraud, the Court ordered Daewoo to pay $50.6 million to the Government. This was a very expensive lesson to Daewoo of how not to do business with Government.

The moral to this story is to prepare proposals and administer contracts honestly without misrepresenting any material facts.

False statements or false claims can be extremely costly to you, and could lead to felony prosecution. Using a certified claim as a negotiation ploy can lead to disastrous consequences. Preparation of proposals should be conducted as accurately as possible, and performance of the contract should be executed without any subterfuges, evasions or other improper conduct. Don't take any chances by engaging in bad faith conduct - you could lose your company and all you have worked so hard to achieve.

Tom Petruska, Owner
Contracts Unlimited, Incorporated

The foregoing is not legal advice nor is it a legal opinion. Please contact your attorney for legal advice.

Footnotes:

1. Re-statement, Second, Contracts, § 205 (1981)
2. Uniform Commercial Code § 5-102(n)
3. 31 U.S.C. 3729(a) makes illegal any “false or fraudulent claim for payment or approval.”
4. Restatement, Second, Contracts
5. Black's Law Dictionary, 8th edition, 2004
6. TECOM, Inc. v. United States, 66 Fed C. 736 (2005)
7. 41 USC 601-613
8. 41 U.S.C. 601 et seq.

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