The Scope of the Doctrine of Good Faith and Fair Dealing
By: Lori Lange
Published Date: May 20, 2019
In previous blogs, P&A has discussed the doctrine of good faith and fair dealing. The doctrine holds that every contract imposes upon each party a duty of good faith and fair dealing in its performance and enforcement. Neither party may interfere with the other party’s performance and cannot act so as to destroy the reasonable expectations of the other party regarding “the fruits of the contract.” Failure to comply with the duty constitutes a breach of contract.
Recently, the scope of the doctrine of good faith and fair delay arose in an interesting context – whether there was legal uncertainty as to the scope of the duty such that a contractor could not recover legal fees under the Equal Access to Justice Act (“EAJA”). The EAJA authorizes federal courts and the boards of contract appeals to award attorneys’ fees and other expenses to contractors with a net worth under $7 million. Essentially, the EAJA creates an exception to the long-standing “American Rule” that parties to a lawsuit bear their own litigation expenses absent a contractual fee shifting clause. In order to recover under the EAJA, the contractor has to prove, among other things, that the Government’s position in the litigation was not substantially justified and there are no special circumstances that would make the award unjust.
In Application Under the Equal Access to Justice Act of Relyant, LLC, ASBCA No. 59809 (April 22, 2019), the contractor sought to recover its legal fees under the EAJA. In the underlying appeal, Relyant, LLC, ASBCA No. 5909, 18-1 BCA ¶ 37,085 (2018), the Armed Services Board of Contract Appeals (“ASBCA”) granted the contractor’s appeal, holding that the Government breached the duty of good faith and fair dealing by figuratively allowing the contractor to “twist in the wind” for four months by not acting on the contractor’s requests to modify the contract’s statement of work.
In its decision, the ASBCA stated that the some of the tests used to determine if there has been a breach of the duty were imprecise. The ASBCA more narrowly delineated the scope of the doctrine of good faith and fair dealing to say it imposes duties that “fall within the broad outlines set forth by the express terms of the contract, approximating the parties’ intent, as divined by the express terms of the contract, for addressing circumstances not specifically set forth by the contract”. Subsequently, the Federal Circuit in Dobyns v. United States, 915 F.3d 733 (Fed. Cir. 2019), held that the duty must be “’keyed to the obligations and opportunities established in the contract’ so as to not fundamentally alter the parties’ intended allocation of burdens and benefits associated with the contract.”
In the EAJA appeal, the Government contested the contractor’s claim for legal fees, arguing that its position was substantially justified because there was legal uncertainty regarding the extent of the duty of good faith and fair dealing. The ASBCA found otherwise. The ASBCA stated that its holding was no more expansive than pre-existing law so that the Government’s inactions clearly were a breach of the duty. As a result, the Government’s defense of its inactions were not substantially justified.
In its decision, the ASBCA expressed concern over the scope of the doctrine. It will be interesting to see whether future cases will limit the contractor’s ability to use the doctrine of good faith and fair dealing to recover when the Government acts unreasonably in the administration of their contracts.