LET THE GOVERNMENT CONTRACT:The Sovereign Has The Right, And Good Reason,To Shed Its Sovereignty When It Contracts

Stuart B. NibleyJade Totman

April 14, 2012

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I. THE PROBLEM: THE UNDERSTANDABLE BUT MISGUIDED JUDICIAL INSTINCT TO OVER-PROTECT THE SOVEREIGN WHEN IT ACTS IN ITS CONTRACTING CAPACITY

Originally, we had planned to discuss in this article a was

intended to cover a number of topics and decisional patterns in

which some decisions issued by the United States Court of Appeals

for the Federal Circuit have had the effect of over-protecting

the federal Federal government Government in its contractual

relationships, to the detriment of all constituents to the

government contracting process. Decisions we that this article

might have discussed in this regard relate to application of

mutual obligations to file claims under the Contract Disputes

Act;1 the disproportionate application of massive forfeitures and

penalties to contractors in situations in which they, like the

governmentGovernment, were victims;2 and a series of decisions

from Am-Pro Protective Agency, Inc. v. United States3 through

Precision Pine & Timber, Inc. v. United States,4 that address the

government’s Government’s rights and responsibilities when it

acts in its contracting capacity rather than in its sovereign

1 41 U.S.C. §§ 7101-7109; see, e.g., M. Maropakis Carpentry, Inc. v. United States, 609 F.3d 1323 (Fed. Cir. 2010); Parsons Global Servs., Inc. v. Sec’y of the Army, CAFC No. 2011-1201 (Apr. 20, 2012).2 See, e.g., Long Island Sav. Bank, FSB v, United States, 503 F.3d 1234 (Fed. Cir. 2007).3 Am-Pro Protective Agency, Inc. v. United States, 281 F.3d 1234 (Fed. Cir. 2001).4 Precision Pine & Timber, Inc. v. United States, 596 F.3d 817 (Fed. Cir. 2010).

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capacity. These decisions appear to apply the law, and the

application of law to fact, incorrectly.5 They also appear to

promote bad policy.

This The aforementioned assertions are not intended is not

to ascribe bad improper motives to the judges who issued these

decisions such as Maropakis or Am-Pro;. Iin fact, the theme that

seems to underlie these decisions is a recognition that the

sovereign is, after all, the sovereign6 ; the sovereign must be

accorded sovereign rights7 ; and it is the judiciary’s charge to

protect these sovereign rights.8

We Ultimately, this article only discusses settled on one

topic, those decisions that address the Government’s rights and

responsibilities when it acts in its contracting capacity rather

than in its sovereign capacitythe last of the three we mention

above. This The difference between the Government acting in its

sovereign capactity and acting in its contracting capacitytopic

has importance and relevance not only in the judicial world but

also in the practical world of government contracting.9 The

topic is the continuing confusion expressed in decisions of the

federal judiciary regarding the right of the government, the

5 [Need Source – maybe Schooner’s new Maropakis article?]6 7 8 9

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sovereign, to contract. The path to this discussion is well-

worn;. Iit is not the path less taken.10 Tomes of expert

commentary, case law and academic work product lend considerable

guidance, and some misguidance, to this topic. 11 On the one

hand, it seems folly to tread where other experts have led the

discussion;. Oon the other hand, the topic is one that builds

upon prior analysis that, unfortunately, twists and turns upon

itself, raising spectors and mischiefs that were once thought put

to rest.12 And so, discussion of prior analysis is not only

warranted, but inevitable.13

Jurisprudence in recent decades on concerning this topicthe

the Government’s contracting power in comparison to its sovereign

10 Robert FrontFrost, “The Road Not Taken,” Mountain Interval (1920).11 See, e.g., Tecom, Inc. v. United States, 66 Fed. Cl. 736 (2005); W. Stainfield Johnson, “The Federal Circuit’s Great Dissenter and her ‘National Policy of Fairness to Contractors,’” 40 Pub. Cont. L.J. 275 (Winter 2011); Ralph C. Nash, “Postscript: Breach of the Duty of Good Faith and Fair Dealing,” 24 No. 5 Nash & Cibinic Rep. ¶ 22 (May 2010); W. Stanfield Johnson, “Mixed Nuts and Other Humdrum Disputes: Holding the Government Accountable Under the Law of Contracts Between Private Individuals,” 32 Pub. Cont. L.J. 677 (Summer 2003); Joshua I. Schwartz, “The Status of the Sovereign Acts and Unmistakability Doctrines in the Wake of Winstar: An Interim Report,” 51 Ala. L. Rev. 1177 (Spring 2000); Assembling Winstar: Triumph of the Ideal of Congruence in Government Contracts Law,” 26 Publ. Cont. L.J. 481 (Summer 1997).12 13 We invoke Mark Twain’s musing about the challenges of original thought and advancing upon the well-conceived thoughts of others is particularly salient here: “How lucky Adam was. He knew when he said a good thing, nobody had said it before.” Notebook, Mark Twain. [Totally insufficient, I know – we’ll have to trackdown a copy].

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power in recent decades has involved discussion discussedof a

Core Tenet, and three interwoven but distinct Principles which

flow from the Core Tenet.14 The Core Tenet has served as the

foundation for decisions of the United States Supreme Court,15

the Court of Appeals for the Federal Circuit,16 and tribunals

below17 when deciding disputes between the government Government

and its contractors, as well as the standards that govern such

disputes. The Core Tennet has been most succinctly defined, and

is most often presented,18 byIn recent years, it is the Supreme

Court’s plurality decision in United States v. Winstar Corp.,19

quoting Justice Brandeis,20 that is most frequently quoted when

invoking the Core Tenet:

“[w]When the United States enters into contract relations,

its rights and duties therein are governed generally by the law

applicable to contracts between private individuals.” 21 22

14 15 16 17 We refer to the United State Court of Federal Claims and its predecessor the United States Claims Court, as well as the Boards of Contract Appeals, as “the tribunals below.” 18 See, e.g., United States v. Winstar Corp., 518 U.S. 839 (1996).19S. 839 (1996).20 Lynch v. United States, 292 U.S. 571 (1934).21 Lynch v. United States, 292 U.S. 571 (1934).22 Id. 518 U.S. 839, 895 (1996).

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Judicial analysis of thise Core Tenet has discussed three

other, distinct but related Principles that are subsidiary to the

Core Tenet: Principle 1 — the presumption of good faith;23

Principle 2 — the duty of good faith and fair dealing (and its

corollaries, the duty to cooperate and not to hinder);24 and

Principle 3 — the sovereign acts doctrine.25 Each is a unique

Principle. It is important to keep that in mindWhen assessing

when assessing their the applicability to of each Principle to a

particular set of facts, it is important to remember that each is

a unique principle.26

Principle 1 (the presumption of good faith) is an

evidentiary standard that provides that a plaintiff alleging that

the government Government is liable for damages due to the acts

or omissions of government employees acting in their sovereign

23 24 25 Many decisions have addressed the separate but related doctrine, the unmistakability doctrine, in tandem with the sovereign acts doctrine. See, e.g., Winstar, 518 U.S. at __. Timber Prods. Co. v. United States, No. 01-627c, 2011 WL 6934815 (Fed. Cl. Dec. 29, 2011). Most recent decisions issued by the Federal Circuit and tribunals below forego discussion of the unmistakability doctrine and address its effects in the context of discussion of the applicability of the sovereign acts doctrine in a particular situation, and this article follows that trend. See, e.g, Precision Pine, 596 F.3d at ___; Firemen’s Fund Ins. Co. v. United States, 92 Fed. Cl. 598 (2010); Aecom Gov’t Servs., Inc., 10-2 BCA ¶ 34, 577 (A.S.B.C.A. Oct. 13, 2010); Am. Gen. Trading & Contracting, WLL, ASBCA No. 56758, 12-1 BCA ¶ 34,905 (A.S.B.C.A. Dec. 13, 2011) at _____. We have followed that practice here. 26

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capacity must prove by clear and convincing evidence that the

government employees acted with subjective bad intent, bad faith,

or animus towards the plaintiff.27 In other words, government

employees acting in their sovereign capacities — e.g, enacting

legislation, regulating, taxing — are presumed to act in good

faith.28 Principle 1 applies exclusively in the sovereign

arenato the Government’s exercise of its sovereign power;. I it

does not apply in the contractual arenao the Government’s

exercise of its contractual power, where the government acts in

its contracting capacity rather than in its sovereign capacity.29

Principle 2 (the duty of good faith and fair dealing) is a

principle of contract law that is implied into every contract,

including each government contract.30 It providesThe Principle

provides that each party to a contract owes the other the duty to

cooperate, and not to hinder the other party’s performance, and

to take all actions necessary to permit the other party to enjoy

the benefit of the bargain it anticipated when it contracted.31

Principle 2 applies only in the contractual arena, not in the

27 28 29 A limited exception to this rule applies when a contractor specifically alleges that government employees acting in their contractual capacity acted in bad faith, with intent to harm the contractor, with animus.30 31

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sovereign arena.32 It is a principle Principle 2 is one of

mutuality, fundamental to bilateral contracting33 ;. I it arises

in the context of a government contracts dispute when a

contractor alleges that the government Government has breached

the duty of good faith and fair dealing (failed to cooperate or

hindered the contractor’s performance).34 Breach of the duty

supplied by Principle 2 is proven by a preponderance of

evidence.35 Principle 1 (the presumption of good faith ─

sovereign arena) is irrelevant to the applicability of Principle

2.36 Application of Principle 2 (the duty of good faith and fair

dealing) does not involve assessment of subjective intent, bad

faith, or animus on the part of government employees.37 Rather,

application of Principle 2 is made determined by assessing

objective criteria — i.e.in other words, asking if the did the

government’s Government’s alleged acts and omissions deprive the

contractor of a benefit it reasonably anticipated it would

receive when it executed the contract.?38 In this regard,

32 33 34 35 36 37 As we noted, the exception is when a contractor specifically alleges that government employees acted with intent to harm the contractor, and that this bad faith itself breached the contractual duty of good faith and fair dealing. 38

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Principle 1 and its subjective intent (bad faith) analysis have

no relevance in the contracting arena.

Principle 3 (the sovereign acts doctrine) is imnplicated

when an action the government Government takes or fails to take

in its sovereign capacity — e.g., for example, when enacting

legislation — has the effect of depriving a government contractor

of a benefit the contractor reasonably expected when it

contracted with the governmentGovernment.39 Principle 3,

therefore, assesses sovereign acts that have effect in the

contractual arena.40 Stated very generally, case law has

provided that, when the government Government acts in its

sovereign capacity in a “public and general” manner, it is

shielded from liability for damages arising from contractor

allegations that the sovereign act breached the government’s its

alleged breach of its duty of good faith and fair dealing under a

government contract.41 Conversely, if the government Government

acts in its sovereign capacity with primary intent to erase

contract obligations already existing, the sovereign acts

doctrine will not relieve the government Government from

liability to a contractor who claims breach of the duty of good

faith and fair dealing by reason of the sovereign act.42

39 40 41 42

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Unfortunately, as recognized by Justice Souter, writing for the

Supreme Court in Winstar, recognized that a particular sovereign

act can have both “public and general” effects and intent as to

its insofar as prospective application, and adverse effects and

intent as to its retrospective application.43

The Principles described above were applied for many years

before and after Winstar with recognition of their distinct, but

related, characters.44 However, the Federal Circuit’s decisions

in Am-Pro Protective Agency, Inc. v. United States,45 and

Precision Pine & Timber, Inc. v. United States46 now have placed

the three Principles into a “judicial fondue pot” that melts the

concepts of each Principle and merges them into a single

standard.47 This The new, single standard created by recent

Federal Circuit decisions relies exclusively and erroneously on

analysis of subjective intent on the part of government

employees, on concepts of “specifically targeted” conduct, bad

faith,and animus on the part of government employeesanalysis,

even where the government Government acts under consideration are

taken solely in the contractual arena.48 It is far from clear

43 Winstar, 518 U.S. at 839.44 45 Am-Pro Protective Agency, Inc. v. United States, 281 F.3d 1234 (Fed. Cir. 2002).46 Precision Pine & Timber, Inc. v. United State, 596 F.3d 817 (Fed. Cir. 2010).47 48

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thatWhile the the drafters of theCourt in Precision Pine decision

may not have intended this to conflate the rules governing the

Government’s contractual acts with those governing its sovereign

actsresult.,49 However, the imprecise language and analysis in

that decision have led to this result.50 As a result of

decisions like Precision Pine, A a number of judges have imported

the subjective intent analysis applicable only under Principle 1

into their analysis of Principles 2 and 3.51

The effect is of conflating the rules governing the

Government’s contractual acts with those governing its sovereign

acts is not only to create law and guidance that is highly

confusing, but also to erode substantially the Core Tenet, both

as a legal principle and as a beacon to guide government

employees acting in the contractual arena as they administer

contracts and its impact on the actions of government

employees.52 By eroding the Core Tenet in the government

contracting arena, judicial decisions undermine the government’s

Government’s credibility at the bargaining table; an air of

distrust develops as contractors and government contract

49 See infra (discussing Timber Prods. Co. v. United States, No. 01-267C, 2011 WL 6934815 (Fed. Cl. Dec. 29, 2011); Fireman’s Fund Ins. Co. v. United States, 92 Fed. Cl. 598 (2010).50 See infra, White Buffalo Const., Inc. v. United States, 101 Fed. Cl. 1 (2011); Metcalf Const. Co. v. United States, No. 07-0777C, 2011 WL 6145128 (Fed. Cl. Dec. 9, 2011); D’Andrea Bros. LLC v. United States, 96 Fed. Cl. 205 (2010).51 52

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administrative personnel realize that the acts and omissions of

government personnel cannot subject the government Government to

liability under the bilateral obligations otherwise implied into

every contract — the government will not be held to the same

standards that apply to all other contracting parties.53

The Federal Circuit needs to issue a cleaner articulation of

how the three Principles work together and alone, where they

overlap, and where they do not, and how alone and together they

support the Core Tenet. The Federal Circuit is ultimately the

forum responsible for ensuring that fairness and neutrality guide

the government’s Government’s contracting activities, including

resolution of disputes.54 The government Government chartered

the United States Court of Claims — the Federal Circuit’s

predecessor — in 1855, as a forum to adjudicate claims brought

against the United States by Mexican-American War veterans.55

Six years later, for the sake of fairness, Abraham Lincoln

petitioned Congress to increase the Court of Claims’ jurisdiction

53 See discussion at III.B infra. As we state there, our analysis here does not involve consideration of ethics (although ethical considerations of course apply). Our analysis states a fundamental premise of business and contracts administration. Parties to a contract begin their analysis of what they must do under a contract with reference to what is required of them to enable them to enjoy the benefit of the contractual bargain and to avoid liability for failure to perform. 54 55 2 Wilson Cowen et al., The United States Court of Claims: A History (1978).

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and powers.56 And, concerned by the Court of Claims’ inability

to render final judgments against the government, President

Lincoln reminded Congress in 1861, as follows:

It is important that some more convenient means should be

provided, if possible, for the adjustment of claims against the

government, especially in view of their increased number by

reason of war. It “[i]t is as much the duty of the government to

render prompt justice against itself in favor of its citizens as

it is to administer the same between private individuals.” . . .

It was intended by the organization of the Court of Claims mainly

to remove [the investigation and adjudication of claims against

the government] from the halls of Congress; but while the court

has proved to be an effective and valuable means of

investigation, it in great degree fails to effect the object of

its creation for want of power to make its judgments final.

Fully aware of the delicacy, not to say the danger, of the

subject, I commend to your careful consideration whether this

power of making judgments final may not properly be given to the

court . . .57

56 See A. Lincoln, First Annual Message (Dec. 3, 1861).57 Id. (emphasis added).

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Since 1861, this President Lincoln’s clarion call for

fairness often has been revived and reiterated;.58 Iin fact, it

is chiseled into the entrance to the Federal Circuit’s

courthouse.59 Moreover, it Lincoln’s call for fairness now

underscores the Federal Acquisition Regulation (“FAR”), which was

“established for the codification and publication of uniform

policies and procedures for acquisition by all executive

agencies.”60 In its the FAR’s “Statement of [G]uiding

[P]rinciples,” the FARit advises that “[t]he vision for the

Federal Acquisition System is to deliver on a timely basis the

best value product or service to the customer [i.e., the

government], while maintaining the public’s trust and fulfilling

public policy objectives.”61 The FAR affirms that government

procurements must be done “with integrity, fairness, and

openness.”62

The practical effect ofIf the Federal Circuit provided

clarification regarding the Principles, the practical effect

would be to give the tribunals, regulators, federal employees

58 See, e.g., M. Maropakis Carpentry, Inc. v. United States, 609 F.3d 1323, 1335 n.3 (Fed. Cir. 2010) (Newman, J., dissenting).59 Id. (noting engraving reminding all entrants that “[i]t is as much the duty of the government to render prompt justice against itself in favor of its citizens as it is to administer the same between private individuals”).60 FAR 1.101.61 FAR 1.102(a) (emphasis added).62 FAR 1.102(b)(3) (emphasis added).

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involved with contracting, and contractors clear guidance about

the respective rights and responsibilities they possess under

government contracts.63 Such clarification would begin to remove

the ill effects of the judiciary’s well-meaning but misguided

decisions that over-protect the government Government in its

contracting capacity.64 By providing clear and well-articulated

clarification, the Federal Circuit would give meaning to the

Supreme Court’s imperative — Let the government contract.65

II. CONFLATION AND CONSIDERABLE CONFUSION IN THE APPLICATION OF THREE DISTINCT LEGAL PRINCIPLES IN THE CONTEXT OF DECIDING GOVERNMENT CONTRACTS DISPUTES: THE PRESUMPTION OF GOOD FAITH; THE DUTY OF GOOD FAITH AND FAIR DEALING; AND THE SOVEREIGN ACTS DOCTRINE

A. The Evolution Of The Core Tenet In The Decisions Of The Supreme Court: The Sovereign Has The Right To Contract, The Right To Shed Its Sovereignty To Pursue Commerce In The Marketplace

For nearly eighty years, Supreme Court decisions have

emphasized the importance of allowing the federal Federal

Ggovernment to enjoy the benefits of and to be held accountable

for the obligations it creates through bilateral contracting.66 ;

Tthese decisions flow from a civil war era decision issued by the

Court of Claims, a case colloquially known as Deming’s Case.67

In 1861 — coincidentally, just as President Lincoln invoked the

63 64 65 66 67 See Israel Deming v. United States, 1 Ct. Cl. 190 (1865).

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goal of fairness and exhorted Congress to strengthen the Court of

Claims’ remedial powers — Israel Deming contracted with the

government Government to provide daily rations to the U.S. Marine

Corps.68 However, later that year, and again in 1862,69 the

Congress imposed new, generally applicable duties that increased

Deming’s costs, leading him to perform his contract at a

financial loss.70 Deming sued. to recover his losses.71

In the Court of Claims, Deming argued that Congress had “in

effect imposed new conditions upon [his] contracts, and that

thereby he has suffered $3,558.48 [in] damages.”72 Unfortunately

for Deming, the Court of Claims dismissed his claims.73 The

Court of Claims, In in its “seminal”74 decision, the court held

that the government’s Government’s general actions as a sovereign

are immune from liability—or, as put by the court:

A contract between the government and a private party cannot

be specially affected by the enactment of a general law. . . . In

form, the claimant brings this action against the United States

68 Id.69 The U.S. government renewed its contract with Mr. Deming in 1862. See id.70 See id.71 72 Id.73 74 Joshua I. Schwartz, “Liability for Sovereign Acts: Congruence and Exceptionalism in Government Contracts Law,” 64 Geo. Wash. L. Rev. 633, 652 (April 1996).

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for imposing new conditions upon his contract; in fact he brings

it for exercising their sovereign right of enacting laws.”75

Importantly, however, the court distinguished the

government’s Government’s actions as a sovereign from the

government’s Government’s actions as a contractor.76 The court

advised:

But the government entering into a contract, stands not in the

attitude of the government exercising its sovereign power of

providing laws for the welfare of the State. The United States

as a contractor are not responsible for the United States as a

lawgiver. Were this action brought against a private citizen,

75 Deming’s Case, 1 Ct. Cl. at 190. In the words of the Court:A contract between the government and a private party cannot be specially affected by the enactment of a general law. . . . In form, the claimant brings this action against the United States for imposing new conditions upon his contract; in fact he brings it for exercising their sovereign right of enacting laws.” (emphasis in original).

76 Deming’s Case, 1 Ct. Cl. at 190. The Court specifically stated that:

[T]he government entering into a contract, stands not in the attitude of the government exercising its sovereign power of providing laws for the welfare of the State. The United States as a contractor are not responsible for the United States as a lawgiver. Were this action brought against a private citizen, against a body corporate, against a foreign government, it could not possibly be sustained. In this court the United States can be held to no greater liability than other contractors in other courts.

See also Joshua I. Schwartz, “Liability for Sovereign Acts: Congruence and Exceptionalism in government Contracts Law,” 64 Geo. Wash. L. Rev. 633, 652 (April 1996) (“According to Deming, then, the United States should be regarded as though it were two separate entities, the sovereign and the contractor-government.”).

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against a body corporate, against a foreign government, it could

not possibly be sustained. In this court the United States can

be held to no greater liability than other contractors in other

courts.77

Thus, the government Government should be held accountable

as any other private party would be when it acts in its

contracting capacity.78 Mr. Deming lost his case only because he

sought to hold the government to a standard of liability that was

greater than that which would apply to private parties. 79 An apt

summary of this holding comes from Joshua Schwartz:

The general lawmaking actions of the sovereign should not be

attributed to the government as contractor and are therefore not

to be regarded as breaching the contractor’s obligations under

the contract. This bifurcation allocates the risk of general

77 Deming’s Case, 1 Ct. Cl. at 190 (emphasis added).78 79 In other words, absent a risk allocating provision in his contract, Deming would not have been able to sue a private party for breach of contract on the basis that the U.S. Government had passed a law increasing duty fees. See Joshua I. Schwartz, “Liability for Sovereign Acts: Congruence and Exceptionalism in Government Contracts Law,” 64 Geo. Wash. L. Rev. 633, 652 (April 1996). Professor Schwartz noted that:

The general lawmaking actions of the sovereign should not be attributed to the government as contractor and are therefore not to be regarded as breaching the contractor’s obligations under the contract. This bifurcation allocates the risk of general government action that interferes with the performance of a government contract in the same manner that the risk is allocated in a similar nongovernment contract.

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government action that interferes with the performance of a

government contract in the same manner that the risk is allocated

in a similar nongovernment contract.80

Seventy years later, in Lynch v. United States, the Supreme

Court arrived at a similar conclusion.81 In Lynch, the

beneficiaries of government-issued, World War I-era, “War Risk”

insurance policies sued the gGovernment for payment on the

policies.82 In his majority opinion, Justice Brandeis left no

doubt that the insurance policies were binding contracts, and

that the “War Risk policies, being contracts, [were] property and

create[d] vested rights” for the beneficiaries.83 Further,

Justice Brandeis reaffirmed that — despite the government’s

Government’s general privilege of sovereign immunity — the

government’s Government’s contracts subjected the governmentit to

liability.84 Indeed, he Justice Brandeis noted that “Congress,

as if to emphasize the contractual obligation assumed by the

United States when issuing war risk policies, conferred upon

80 Joshua I. Schwartz, “Liability for Sovereign Acts: Congruence and Exceptionalism in Government Contracts Law,” 64 Geo. Wash. L. Rev. 633, 652 (April 1996) (emphasis added).81 Lynch v. United States, 292 U.S. 571 (1934).82 Id.83 Id. at ___; see also Joshua I. Schwartz, “Liability for Sovereign Acts: Congruence and Exceptionalism in Government Contracts Law,” 64 Geo. Wash. L. Rev. 633, 675 (April 1996).84 See id. at ___.

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beneficiaries the same legal remedy which beneficiaries enjoy

under policies issued by private contractors.”85

Although Lynch did not involve a procurement contract,86

courts routinely recall its language when articulating the

distinction between acts the Ggovernment takes in its sovereign

capacity and acts it takes in its contracting capacity.87

Justice Brandeis declared that “[v]alid contracts are property,

whether the obligor be a private individual, a municipality, a

State or the United States.”88 In language that affirms the

importance of judicial neutrality towards the gGovernment and

government contractors, he stated: “Punctilious fulfillment of

contractual obligations is essential to the maintenance of the

credit of public as well as private debtors.”89 Significantly,

Justice Brandeis stated the “Core Tenet” denoted in this article:

“[W]hen the United States enters into contract relations, its

rights and duties therein are governed generally by the law

applicable to contracts between private individuals.”90

85 Id.86 Writing for the majority, Justice Brandeis noted that “[t]hese contracts, unlike others, were not entered into by the United States for a business purpose.” Id. at ___.87 See, e.g., Cherokee Nation of Ok. v. Leavitt, 543 U.S. 631, 646 (2005); United States v. Winstar Corp., 518 U.S. 839, 884-85 (1996).88 Lynch, 292 U.S. at ___.89 Id. at ___.90 Id. (emphasis added); see also Joshua I. Schwartz, “Liability for Sovereign Acts: Congruence and Exceptionalism in Government Contracts Law,” 64 Geo. Wash. L. Rev. 633, 675 (April 1996) (discussing Lynch, and noting majority’s holding that

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Sixty years later, in United States v. Winstar Corp., the

Supreme Court again examined the rights and responsibilities the

government bears in its contracting capacity.91 The Court’s

plurality opinion articulated the same, fundamental conclusions,

often using the same language, that which Justice Brandeis had

articulated in issuing the majority opinion in Lynch.92

Winstar’s plurality opinion again stressed the significance of

the Core Tenet to the judiciary’s resolution of government

contracts disputes.93 It Winstar also considered the application

of Principle 3 (the sovereign acts doctrine) as a defense when a

contractor alleges that the government Government has breached a

contract.94 In so doingexamining the sovereign acts defense, it

Winstar set the stage for the judiciary’s subsequent assessment

of the application and interplay of the Core Tenet and the three

Principles.

Winstar is a product of the 1980s’ savings and loan, or

“thrift,” crisis.95 In the early 1980s, thrifts rapidly began to

“[t]he United States are as much bound by their contracts as are individuals”) (internal quotation marks and citation omitted).91 Winstar, 518 U.S. at 839.92 See United States v. Winstar Corp., 518 U.S. 839Id., 884-85 (1996) (“As Justice Brandeis recognized, ‘[p]unctilious fulfillment of contractual obligations is essential to the maintenance of the credit of the public as well as private debtors.’” (citation omitted)).93 94 95 Id. at 843-48 (recounting history of “[t]he modern savings and loan industry”); see also Joshua I. Schwartz, “Assembling

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fail.96 In response, the Ggovernment encouraged healthy thrifts

to acquire failing thrifts—also known as “supervisory mergers”—

and offered, as inducement, favorable accounting standards for

the healthy, acquiring thrifts.97 In 1989, however, Congress

enacted the Financial Institutions Reform, Recovery, and

Enforcement Act (“FIRREA”),98 which altered the thrifts’

accounting standards, eliminating the once-favorable treatment.99

Winstar: Triumph of the Ideal of Congruence in Ggovernment Contracts Law?,” 26 Pub. Cont. L.J. 481, 482 (Summer 1997).96 United States v. Winstar Corp., 518 U.S. 839,at 845 (1996). As recounted in Justice Souter’s plurality opinion, with “the combination of high interest rates and inflation in the late 1970’s and early 1980’s,” many thrifts suffered as “the costs of short-term deposits overtook the revenues from long-term mortgages[.]” Id. As a result, “435 thrifts failed between 1981 and 1983.” Id.97 Id. at 847-48 (“[T]he principal inducement for these supervisory mergers was an understanding that the acquisitions would be subject to a particular accounting treatment that would help the acquiring institutions meet their reserve capital requirements imposed by federal regulations.”). Among the accounting incentives: the recognition of supervisory goodwill, the ability to amortize goodwill assets, and the “double counting” of cash as a tangible and intangible asset to meet capital requirements. Id. at 849-53.; see See also Joshua I. Schwartz, “Assembling Winstar: Triumph of the Ideal of Congruence in Government Contracts Law?,” 26 Pub. Cont. L.J. 481, 484 (Summer 1997) (:

“To encourage and facilitate these supervisory mergers, the federal thrift agencies allegedly promised the acquiring entities that they would enjoy favorable regulatory accounting treatment that would permit them to treat the amount by which the purchase price paid exceeded the market value of the insolvent thrift institutions as goodwill that could be used to satisfy capital requirements imposed by regulators.”).

98 Pub. L. No. 101-73, 103 Stat. 183.99 United States v. Winstar Corp., 518 U.S. 839,at 856-57 (1996).

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FIRREA’s impact was “swift and severe,”100 and the revised

financial standards drove once-healthy thrifts to the brink of

insolvency.101

The three Winstar plaintiffs/respondents had acquired

failing thrifts through supervisory mergers.102 In FIRREA’s wake,

two of the plaintiffs/respondents were seized and liquidated,

while the third narrowly avoided the same fate.103 The three sued

and “claimed that the application of [the] new, statutorily

mandated standards constituted a breach of the agreements that

they had entered into with federal regulators in connection with

the supervisory mergers that they had undertaken.”104 The Court

of Federal Claims and, later, the en banc Federal Circuit,105

100 Id. at 857.101 Id. at 857-58.102 103 Id. at 858.104 Joshua I. Schwartz, “Assembling Winstar: Triumph of the Ideal of Congruence in Government Contracts Law?,” 26 Pub. Cont. L.J. 481, 485 (Summer 1997); see also Winstar, 518 U.S. at 858 (“Believing that [government agencies] had promised them that the supervisory goodwill created in their merger transactions could be counted toward regulatory capital requirements, respondents each filed suit against the United States . . . .”).105 Initially, on interlocutory appeal, a divided panel of the Federal Circuit reversed the Court of Federal Claims. See Winstar, 518 U.S. at 859. However, the Federal Circuit reheard the case en banc and reversed its first decision. Id.

Stanfield Johnson has illuminated Judge Newman’s critical role as the dissenting judge on the original Federal Circuit panel. See W. Stanfield Johnson, “The Federal Circuit’s Great Dissenter and Her ‘National Policy of Fairness to Contractors,’” 40 Pub. Cont. L.J. 275, 284-85 (Winter 2011). He Mr. Johnson describes her Judge Newman’s dissenting opinion as “rare because it ultimately prevailed—and can be said to have had a significant impact on the Federal Circuit’s contract jurisprudence.” Id.

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agreed with the plaintiffs/respondents.106 The Federal Circuit

concluded that the Ggovernment had formed express contracts with

the plaintiffs/respondents, and that these contracts were

predicated on the Ggovernment’s promise of favorable

accounting.107

The Supreme Court granted certiorari for the express purpose

of evaluating whether and to what extent government contracts are

governed by general contract law (the Core Tenet) — and, in

particular, to evaluate the viability of the Ggovernment’s unique

defenses of “unmistakability” and “sovereign acts”(Principle

3).108 Justice Souter—joined by Justices Stevens, Breyer, and (in

part) O’Connor—authored the Court’s plurality opinion.109 In

Further, his description of her dissenting opinion harkens to the normative goals of neutrality, as he describes her emphasis on “the bargaining of contracts, the essentiality of the government’s commitments, and the financial benefits to the government.” Id. at 286 (“She commented that ‘governmental responsibility is not a new idea in this nation’s law’ and sovereign acts are ‘not a boundless justification for government non-liability.’” (citations omitted)).

Judge Newman joined the en banc majority. Id. According to Mr. Johnson, Winstar is the “high-water mark” in Judge Newman’s “persistent—and largely lonely—advocacy of fairness in the adjudication of contractor disputes with the sovereign.” Id. at 333 (citation omitted).106 Winstar, 518 U.S. at 858-59.107 Id at 859.108 See id., 518 U.S. at 860 (“We took this case to consider the extent to which special rules, not generally applicable to private contracts, govern enforcement of the governmental contracts at issue here.”).109 See generally idId. Justice Breyer wrote a separate concurring opinion. Id. at 910. Justices Scalia, Kennedy, and Thomas concurred in the judgment, with Justice Scalia writing separately. Id. at 919. Chief Justice Rehnquist and Justice

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discussing the defense of unmistakability and the application of

the sovereign acts doctrine, tThe purality opinion examined when

it is appropriate to apply the sovereign acts doctrine to shield

the gGovernment from liability for breach damages for which the

governmentit would otherwise be liable.110 Under the facts of

Winstar, the Count found that the sovereign acts doctrine did not

shield the Ggovernment from liability.111

Many have attempted to find a consensus in the Court’s

plurality and separately written opinions.112 While it is not the

purpose of this article to cover this same groundissues already

discussed at length by other authors, it has been persuasively

argued that the Court’s majority affirmed the Court’s prior

application of the Core Tenet.113 Consequently, of critical

Ginsberg dissented. Id. at 924.110 111 See generally iId.112 See, e.g., Rodger D. Citron, “Lessons from the Damages Decisions Following United States v. Winstar Corp.,” 32 Pub. Cont. L.J. 1 (Fall 2002); Joshua I. Schwartz, “The Status of the Sovereign Acts and Unmistakability Doctrines in the Wake of Winstar: An Interim Report,” 51 Ala. L. Rev. 1177 (Spring 2000); Thomas R. Gilliam, Jr., Note, “Contracting with the United States in its Role as Regulator: Striking a Bargain with an Equitable Sovereign or a Capricious Siren?,” 18 Miss. C. L. Rev. 247 (Fall 1997); Joshua I. Schwartz, “Assembling Winstar: Triumph of the Ideal of Congruence in Government Contracts Law?,” 26 Pub. Cont. L.J. 481 (Summer 1997).113 See Joshua I. Schwartz, “Assembling Winstar: Triumph of the Ideal of Congruence in Government Contracts Law?,” 26 Pub. Cont. L.J. 481, 489-533 (Summer 1997) (describing Justice Souter’s plurality opinion, which supports applicability of general common law); id. at 533-34 (describing support for the same principle in Justice Breyer’s opinion); id. at 543 (describing Justice Scalia’s opinion, which appears to support this principle, as

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import for this article is the language used by Justice Souter’s

language is critically important for this article, as it arguably

reflects a consensus of the Court and indisputably reaffirms what

Justice Brandeis advised in Lynch: “[W]hen the United States

enters into contract relations, its rights and duties therein are

governed generally by the law applicable to contracts between

private individuals.”114 Justice Souter recognized that the

“practical capacity to make contracts” is, by itself, “the

essence of sovereignty.”115

The Winstar opinion plurality stressed that the judiciary

undermines the Ggovernment’s ability to contract —- in effect, it

well).114 Winstar, 518 U.S. at 895 (quoting Lynch, 292 U.S. 571,at 579 (1934)) (internal quotation marks omitted). In addition to Lynch, Justice Souter recited other caselaw supporting the application of general contract law to government contracts. See, e.g., id. at 884 n.28 (“[T]he Federal government, as sovereign, has the power to enter contracts that confer vested rights, and the concomitant duty to honor those rights . . . .”) (quoting Bowen v. Public Agencies Opposed to Social Sec. Entrapment, 477 U.S. 41, 52 (1986) (emphasis added))); id. at 886 n.31 (“It is no less good morals and good law that the government should turn square corners in dealing with the people than that the people should turn square corners in dealing with their government.” (quoting Heckler v. Comm. Health Servs. of Crawford Cty., Inc., 467 U.S. 51, 61 n.13 (1984) (emphasis added))); id. (“It is very well to say that those who deal with the government should turn square corners. But there is no reason why the square corners should constitute a one-way street.”) (quoting Fed. Crop Ins. Corp. v. Merrill, 332 U.S. 380, 387-88 (1947) (Jackson, J., dissenting))); id. at 895 n.39 (“The United States does business on business terms.” (quoting Clearfield Trust Co. v. United States, 318 U.S. 363, 369 (1943))); id. (“The United States, when they contract with their citizens, are controlled by the same laws that govern the citizen in that behalf.” (quoting United States v. Bostwick, 94 U.S. 53, 66 (1877) (emphasis added))).115 Winstar, 518 U.S. at 895.Id.

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interferes with the Ggovernment’s sovereign right to contract —

when it treats the Ggovernment differently than it would treat a

private party to a contract.116 Justice Souter notes, as an

“essential point” from precedent, that the Ggovernment, in its

contracting capacity, should be “put [] in the same position that

it would have enjoyed as a private contractor.”117 When the

judiciary over-protects the Ggovernment when resolving government

contract disputes, it inhibits the gGovernment’s freedom to

contract, with “the certain result of undermining the

government’s credibility at the bargaining table and increasing

the cost of its engagements.”118

In Winstar, the Court wrestled with the need to define and

reassess the circumstances under which it is appropriate to

relieve the gGovernment from liability for payment of damages for

breach of contract by reason of the exercise of a sovereign act

(Principle 3, the sovereign acts doctrine).119 The plurality

rejected the Ggovernment’s argument that all gGovernment actions

(in Winstar, enactment of legislation) that are designed to

advance the general welfare (i.e., that are “public and general”

in nature) automatically invoke the sovereign acts doctrine.120

116 117 Id. at 892 (discussing Horowitz v. United States, 267 U.S. 458, 461 (1925)) (emphasis added).118 Id. (emphasis added).119 120

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The plurality recognized that, sometimes, the gGovernment acts in

a way that blurs the divide between the gGovernment’s role as

sovereign and its role as contractor.121 :

The government argues that “[t]he relevant question [under these cases] is whether the impact [of governmental action] ... is caused by a law enacted to govern regulatory policy and to advance the general welfare.” Brief for United States 45. This understanding assumes that the dual characters of government as contractor and legislator are never “fused” (within the meaning of Horowitz) so long as the object of the statute is regulatory and meant to accomplish some public good. That is, on the government’s reading, a regulatory object is proof against treating the legislature as having acted to avoid the government’s contractual obligations, in which event the sovereign acts defense would not be applicable. But the government’s position is open to serious objection.

To address the phenomenon of the

121 Id. at 893. The plurality went on to note that:The government argues that “[t]he relevant question [under these cases] is whether the impact [of governmental action] ... is caused by a law enacted to govern regulatory policy and to advance the general welfare.” Brief for United States 45. This understanding assumes that the dual characters of government as contractor and legislator are never “fused” (within the meaning of Horowitz) so long as the object of the statute is regulatory and meant to accomplish some public good. That is, on the government’s reading, a regulatory object is proof against treating the legislature as having acted to avoid the government’s contractual obligations, in which event the sovereign acts defense would not be applicable. But the government’s position is open to serious objection.

Id. (emphasis added).

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gGovernment acting at once as sovereign and

contractor, the plurality recognized that it

is important to examine the multiple effects

that can follow from a Ggovernment action

rather than merely the motive that led to the

effects.122 The plurality recognized that, in

certain circumstances, finding the

Ggovernment liable for breach of contract

damages when it takes a sovereign act (e.g.,

enactment of legislation) should not be seen

as blocking the gGovernment’s ability to take

the sovereign act.123 As to the those without

existing contracts at the time theA sovereign

act is taken,will be considered the act is

“public and general”; ” for those who don’t

have extant contracts at the time of the act,

but, as to those with contracts that will be

adversely affected by the sovereign act, the

act subjects the gGovernment to breach

damages by those who have extant contracts

that will be adversely affected.124 This

distinction is not made to conflate or

122 123 124

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confuse the rights and obligations the

government Government has when it acts in its

sovereign capacity vis-à-vis those it has

when it acts in its contracting capacity. ;

Rrather, it is to say that a single

Ggovernment act may be sovereign in nature in

some respects, and therefore shield the

Ggovernment from exposure with regard to the

“public and general” effects of the act, and

at the same time contractual in nature in

other respects, and thus subject the

gGovernment to liability for breach damages

with regard to adverse effects on existing

government contracts.125

The Supreme Court’s decisionss in Winstar’s wake have

continued to affirm the Core Tenet — that, when contracting, the

Ggovernment is bound by general contract law.126 For example, in 125 Id. at 881. The plurality stated further:

The government’s position is mistaken, however, for the complementary reasons that the contracts have not been construed as binding the government’s exercise of authority to modify banking regulation or of any other sovereign power, and there has been no demonstration that awarding damages for breach would be tantamount to any such limitation.

Id.126 See, e.g., Cherokee Nation of Ok. v. Leavitt, 543 U.S. 631, 644, 646 (2005); Mobil Oil Exploration & Prod. Se., Inc. v. United States, 530 U.S. 604, 607-08 (2000).

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Mobil Oil Exploration & Producing Southeast, Inc. v. United

States, the Court analyzed whether legislation enacted subsequent

to the gGovernment’s execution of offshore drilling leases

granted to the plaintiffs/petitioners breached gGovernment

obligations under the leases.127 Even with the intricate

regulatory framework applicable to offshore energy exploration,128

the Court’s analysis began with the “basic contract law

principle[],” (the Core Tenet) announced in Lynch and reaffirmed

in Winstar.129 Then, in a decision “peppered with references to

the Restatement of Contracts, as well as citations to contract

law treatises by Professors Williston, Corbin, and Farnsworth,”

the Court rejected the “variety of statutes and regulations

which, the U.S. claimed, justified its actions.”130

B. An Overview of The Principles That Govern the Rights And Obligations The Government Enjoys In Its Sovereign Capacity Compared With Those It Enjoys In Its Contracting Capacity

127 See generally Mobil Oil, 530 U.S. 604 (Add Pincite).128 Thomas J. Madden and Andrew S. Gold, “Supreme Court Holds Government to Same Standards as Private Party in Breach Action; Future of ‘Sovereign Acts’ Defense in Doubt,” 42 No. 27 Gov. Con. ¶ 277 (July 19, 2000).129 Mobil Oil, 530 U.S. 604,at 607-08 (2000) (emphasis added).130 Thomas J. Madden and Andrew S. Gold, “Supreme Court Holds Government to Same Standards as Private Party in Breach Action; Future of ‘Sovereign Acts’ Defense in Doubt,” 42 No. 27 Gov. Con. ¶ 277 (July 19, 2000). Only pre-existing statutes and regulations would have allowed the government to skirt its obligations, and even pre-existing statutes and regulations incorporated into the leases “should not be read to include subsequent statutes.” Id.

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Nearly every decision that has dealt with these issues in

the federal judiciary has acknowledged the universal

applicability of the Core Tenet: “When the United States enters

into contract relations, its rights and duties therein are

governed generally by the law applicable to contracts between

private individuals.”131 However, a number of judges have

neglected the Core Tenet when evaluating the application of one

or more of the trio of Principles that underlie the Core Tenet.132

These judges have employed considerable conflation, melting,

borrowing, and ignoring of one or more of the Principles.133

The fundamental problem is the unwillingness of some judges

to employ rigorous analysis to ensure recognition that the rights

and effects that define and follow from sovereign acts are

distinct from the rights and effects that define and follow from

government contractual acts.134 The problem derives from certain

decisions issued by the Federal Circuit regarding the three

Principles, perpetuated recently in some decisions issued by the

tribunals below.135 Accordingly, let us first briefly examine the

fundamentals of each of the three Principles that are subordinate

to the Core Tenet, which together shape this area of law. We

131 132 133 134 135

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then analyze how some decisions issued by the Federal Circuit and

the tribunals below have merged the three distinct Principles

into tangled confusion.136

Each of the three Principles is properly understood by

examining whether or not the principle has applicability 1) in

the context of the Ggovernment acting in its sovereign capacity;

2) in the context of the gGovernment acting in its contracting

capacity, or 3) in situations relating solely to Principle 3,

where the gGovernment acts in a way that has sovereign effects as

to the general public, but contractual effects as to contractors

adversely affected by the sovereign act. Broadly stated, the

operative rule is that each of the three Principles operates only

in one of the two arenas (the sovereign arena or contractual

arena), not in both arenas — although, with this rule has some

important exceptions.137 But it is the rule, not the exceptions,

that matters. Yet;nonetheless, decisions of the Federal Circuit

and some decisions of tribunals below have melted the boundaries

and distinctions that separate the two arenas.138

Let us restate our understanding of the three legal

Principles and the law that governs them:139

136 137 138 139 The statement of the Principles here is the authors’ articulation based on their understanding of the applicable case law. We state the Principles first in our own words, then

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a) Principle 1: The Presumption Of Good Faith

The presumption of good faith presumes that gGovernment

employees act properly and in good faith when they perform their

professional duties. This Principle 1 applies in the sovereign

arena, not in the contractual arena, with limited exception. The

exception —is that the presumption can apply in a dispute in the

contractual arena, but only if (with very few exceptions), the

contractor to the dispute alleges bad faith on the part of one or

more government employees.140 Where a contractor in a contract

dispute alleges bad faith on the part of one or more government

employees, fora have imported the evidentiary rule that applies

in the sovereign arena — the requirement that the contractor

prove by clear and convincing evidence subjective bad faith or

animus on the part of the government employee(s).141

Absent invocation by the contractor in a dispute, the

presumption of good faith has no relevance in the contractual

arena (with the limited regulatory/contractual exception noted).

Principle 1 belongs in the sovereign arenarelates exclusively to

the Government’s sovereign powers.

follow with discussion of the case law that has led us to our understanding. 140 Regulatory bodies have created a small number of exceptions where regulations and/or contract clauses commit action or inaction to the discretion of applicable government employees, such as the Termination for Default clause; [other examples]. But these are very few in number; an increase would run afoul of the Core Tenet and the Supreme Court decisions discussed above.141

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b) Principle 2: The Duty of Good Faith and Fair Dealing, And Its Corollaries, The Duty To Cooperate and Not To Hinder

This Principle 2 applies in the contractual arena, not in

the sovereign arenato the Government’s contractual powers, rather

than to its sovereign powers. The Principle is a fundamental

precept of contract law,. It which posits that each party to a

contract owes a duty to the other to allow the other to enjoy the

fruits of its contractual bargain.142 The duty involves

affirmative obligations, such as the duty to perform actions that

are foreseeable at the time of contracting necessary to enable

the other party to enjoy the fruits of its bargain (the duty to

cooperate).143 It also involves obligations of restraint, such as

the duty not to take action that will frustrate the other party’s

ability to enjoy the fruits of its bargain (the duty not to

hinder).144 The duty applies with equal force to both parties to

a contract.145 Courts at every level have stated that the

Ggovernment and contractors alike are subject to the duty.146

Establishing a breach of the duty of good faith and fair

dealing involves assessment of objective evidence. It is not

necessary when assessing an alleged breach of the duty to examine

142 [Should be able to just go with a basic restatement of contracts provisions]143 144 145 146

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the intent of the allegedly breaching party. Again, the question

is: does a preponderance of evidence establish that one party

breached its duty to cooperate and not to hinder the other party

in the performance of the contract? Evidence of the subjective

bad intent of the allegedly breaching party (including the

gGovernment) can, but need not be, evidence that is assessed in

determining if a preponderance of evidence exists to establish a

breach of the duty.147

Principle 2 is inapplicable to the Government’s exercise of

its sovereign power, but it is of principal importance to the

Government’s exercise of its contractual powerhas no place in the

sovereign arena, but occupies a paramount perch in the

contractual arena.

c) Principle 3: The Sovereign Acts Doctrine

As the name implies, this Principle 3 springs from the

sovereign arenaapplies to the Government’s sovereign capacity.

However, unlike Principle 1 (the presumption of good faith), it

can become an important consideration in applying Principle 2

147 As we discuss in more detail below, it is remarkable to discover that the rules that fall from Principle 1 are often merged into those that govern Principle 2 for no other reason than that both Principles use the term “Good Faith.” With no more than this lily pad to stand on, a number of decisions have reasoned a breach of the duty of good faith and fair dealing requires a showing of bad faith, bad intent on the part of the government, which can only be overcome by rebutting the presumption of good faith, wrongly imported in these misguided decisions from the sovereign arena into the contractual arena. Discussed at Heading_____infra.

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(the duty of good faith and fair dealing), but only in certain

circumstances.

In simplistic terms, Principle 3 stands for the proposition

that the sovereign is the sovereign, and except in rare

instances, no entity can be seen to take action that would strip

the sovereign of its powers.148 The sovereign acts doctrine

enters the contractual arena when the government Government is

alleged to have breached a government contract through its

exercise of a sovereign power that deprives a contractor of all

or a portion of the benefit the contractor reasonably expected to

receive from a pre-existing contract with the gGovernment.149 In

such instances, the contractor alleges that the gGovernment’s

exercise of its sovereign power — for example, enactment of

legislation — has the effect of frustrating the contractor’s

ability to enjoy the fruits of the bargain that it anticipated

when it contracted with the gGovernment.150

As might be expected, and as we discussed above, this

Principle 3 is among those rare issues pertaining to government

contracts law that has found its way to the Supreme Court more

than once in the last two decades.151 In both Winstar and Mobil

Oil, the Court found it necessary to assess whether or not the 148 149 Discussed at Heading ____ infra.150 151 See discussion in Heading _____ supra of Winstar and Mobil Oil.

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sovereign acts doctrine should relieve the gGovernment of its

obligation to fulfill its duties under certain of its

contracts.152 The Court in these decisions relied, and arguably

expanded upon, precedent.153 The decisions have been interpreted

to articulate a rule that establishes that the gGovernment is

shielded from liability for breach of contract if the effects of

its sovereign act are “public and general” in nature.154

Conversely, if at least part of the motivation for and effect of

the gGovernment’s exercise of sovereignty is to deprive a

contractor of benefits it reasonably believed it would derive

from a contract with the gGovernment, the gGovernment cannot be

shielded from liability for breach damages.155 Thus, if the

“sovereign act” is the enactment of legislation and it is this

sovereign act that allegedly caused a breach of contract, the

question is whether the legislation has broad and general effect

and applies in a “public and general” manner, or conversely, has

effects that fall primarily upon a class of entities within which

the complaining contractor falls.156 As the plurality in Winstar

recognized, merely because it is proper to find that the

gGovernment owes one or more contractors damages due to the

152 153 154 155 156

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adverse effects that fall from a sovereign act does not mean that

the finding of liability blocks the gGovernment’s ability to

pursue the sovereign act.157

The underpinning of the sovereign acts doctrine is that,

except in limited circumstances that invoke the unmistakability

doctrine, the gGovernment cannot contract away its sovereign

powers.158 For example, the gGovernment cannot through contract

agree to refrain from enacting certain legislation or from

regulating in a certain way.159 The sovereign acts doctrine

prevents private parties, including contractors, from enjoining

the sovereign from exercising its powers.160 It exempts the

gGovernment from the fundamental rule of contract law that a

party to a contract cannot blame its own breach on the

impossibility of performance when its own acts or inactions

created the impossibility.161 And, it recognizes that this rule

should not be applied to gGovernment contract disputes in a way

that would have the effect of blocking the government from

exercising sovereign powers.162 In discussing the origins and

purposes behind the sovereign acts doctrine, Justice Souter

157 158 159 160 161 162

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stressed that the doctrine was conceived to work with the Core

Tenet, not against it:

An even more serious objection is that allowing the government to avoid contractual liability merely by passing any “regulatory statute” would flout the general principle that, “[w]hen the United States enters into contract relations, its rights and duties therein are governed generally by the law applicable to contracts between private individuals.” Lynch v. United States, 292 U.S., at 579, 54 S.Ct., at 843. Careful attention to the cases shows that the sovereign acts doctrine was meant to serve this principle, not undermine it.163

C. Some Decisions Of The Federal Circuit And Tribunals Below Have Created Confusion

Some Federal Circuit decisions and a number of decisions

issued by tribunals below have applied these Principles in loose

fashion, mixing and matching concepts, importing some aspects of

each in certain situations, and leaving other aspects behind.164

Precision Pine exacerbated the problem, and the judges of the

tribunals below have struggled to interpret the decision.165 Some

have merely thrown up their hands and relied upon the facts to

transport them out of the morass.166

For example, the presumption of good faith (Principle 1),

which is enjoyed by government employees when they act in their

the Government’s sovereign capacity, should not be applied when 163 Winstar, 539 U.S. at 839.164 165 166

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private contractors allege that the gGovernment has breached the

implied duty of good faith and fair dealing (Principle 2), which

the gGovernment accepts in its contracting capacity.

Nevertheless, some Federal Circuit judges appear to have confused

the two Principles, giving murky precedent to the tribunals

below.167 Here, we discuss: (1) the differences between these

Principles; and (2) the confusion following the Federal Circuit’s

decisions in Am-Pro Protective Agency, Inc. v. United States;

Centex Corp. v. United States, and Precision Pine & Timber, Inc.

v. United States.

1. Principle 1: (the presumption of good faith applicable in the sovereign arena) is separate and distinct from Principle 2 (the implied duty of good faith and fair dealing applicable in the contractual arena)

As we have discussed earlier, Principle 1 is unrelated to

Principle 2.168 And, as we stated above, the conflation of the

two Principles by some federal Federal judges has been the

subject of extensive analysis and commentary, and we do not wish

to retrace that analysis completely.169 However, this article’s

topic warrants articulation of some of that analysis as a

building block for the discussion that follows.170

167 168 169 170 See, e.g., Stuart B. Nibley, “Unraveling the Mixed Messages that government Procurement Personnel Receive: Message 1: Act Absolutely in the Government’s ‘Best Interests’: Message 2: Act

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On the one hand, Principle 2 (the implied duty of good faith

and fair dealing) is succinctly stated in the Restatement

(Second) of Contracts: “Every contract imposes upon each party a

duty of good faith and fair dealing in its performance and its

enforcement.”171 Here, “good faith” means “faithfulness to an

agreed common purpose and consistency with the justified

expectations of the other party[.]”172 Although a party acting in

subjective bad faith can breach this duty, a breach does not

require proof of subjective bad faith.173 Indeed, the

Restatement’s examples of breach demonstrate that proof of

subjective bad faith is not necessary to prove breach of the

contractual duty of good faith and fair dealing:

Subterfuges and evasions violate the obligation of good faith in performance even

‘Ethically,’” 36 Pub. Cont. L.J. 23, 25-26 (Fall 2006) (contrasting the implied duty of good faith and fair dealing with the presumption of good faith); see also Karen L. Manos, “Changes—Constructive changes—Breach of implied duty to cooperate and not hinder performance,” 2 Gov’t Con. Costs & Pricing § 87:6 (2d ed., March 2011) (“[T]he implied duty to cooperate . . . is an aspect of the implied obligation of good faith and fair dealing, [and] it should not be confused with the presumption of good faith.”); Ralph C. Nash, “Postscript: Breach of the Duty of Good Faith and Fair Dealing,” 24 No. 5 Nash & Cibinic Rep. ¶ 22 (May 2010) (contrasting these principles in light of Precision Pine & Timber, Inc. v. United States, 596 F.3d 817 (Fed. Cir. 2010)); Ralph C. Nash, “The government’s Duty of Good Faith and Fair Dealing: Proving a Breach,” 23 No. 12 Nash & Cibinic Rep. ¶ 66 (Dec. 2009) (contrasting these principles in light of U.S. Court of Federal Claims decisions).171 Restatement (Second) of Contracts § 205 (emphasis added).172 Id., Comment A (“Meanings of ‘good faith.’”) (emphasis added).173 See id., Comment D (“Good faith performance.”).

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though the actor believes his conduct to be justified. But the obligation goes further: bad faith may be overt or may consist of inaction, and fair dealing may require more than honesty. A complete catalogue of types of bad faith is impossible, but the following types are among those which have been recognized in judicial decisions: evasion of the spirit of the bargain, lack of diligence and slacking off, willful rendering of imperfect performance, abuse of power to specify terms, and interference with or failure to cooperate in the other party’s performance.174

Further, the Restatement extends the duty of good faith and fair

dealing to “the assertion, settlement and litigation of contract

claims and defenses,”175 and again, the Restatement does not limit

breach to proof of subjective bad faith:

The obligation is violated by dishonest conduct such as conjuring up a pretended dispute, asserting an interpretation contrary to one’s own understanding, or falsification of facts. It also extends to dealing which is candid but unfair, such as taking advantage of the necessitous circumstances of the other party to extort a modification of a contract . . . . Other types of violation[s] have been recognized in judicial decisions: harassing demands for assurances of performance, rejection of performance for unstated reasons, willful failure to mitigate damages, and abuse of power to determine compliance or to terminate the contract.176

These examples demonstrate that, in the context of the duty of

good faith and fair dealing, the term “bad faith” refers to the

174 Id., Comment D (emphasis added).175 Id., Comment E (“Good faith in enforcement.”).176 Id.

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absence of good faith, not to conduct taken with subjective bad

faith, intent to injure, or animus.177

On the other hand, we have Principle 1, provides that

gGovernment employees acting in their sovereign capacities, e.g.

legislating, regulating, and taxing, are presumed to act in good

faith.178 Here, subjective bad faith is the touchstone: this

presumption “can be overcome only by ‘clear and convincing’

evidence of subjective bad faith, which means personal animus.”179

The presumption that government employees act in good faith did

not spring from contract law.180 Rather, it “has its roots in

English law” as an evidentiary presumption created to shield the

gGovernment from liability otherwise caused by discretionary,

sovereign action.181 In the mid-twentieth century, it Principle I

177 See, e.g., W. Stanfield Johnson, “Mixed Nuts and Other Humdrum Disputes: Holding the Government Accountable Under the Law of Contracts Between Private Individuals,” 32 Pub. Cont. L.J. 677, 704 (Summer 2003) (“‘[B]ad faith’ is simply ‘the other side of the coin’ or a lack of good faith.”).178 179 W. Stanfield Johnson, “Needed: A Government Ethics Code and Culture Requiring its Officials To Turn ‘Square Corners’ when Dealing with Contractors,” 19 No. 10 Nash & Cibinic Rep. ¶ 47 (October 2005) (emphasis in original).180 See Tecom, Inc. v. United States, 66 Fed. Cl. 736, 757-69 (2005); see also W. Stanfield Johnson, “Mixed Nuts and Other Humdrum Disputes: Holding the Government Accountable Under the Law of Contracts Between Private Individuals,” 32 Pub. Cont. L.J. 677, 703-04 (Summer 2003) (“There is no such rule in the general law of contracts. . . . A very different concept of ‘good faith and fair dealing’ pervades contract law.”).181 See Tecom, Inc. v. United States, 66 Fed. Cl. 736,at 757-69 (2005). In modern jurisprudence, the good faith presumption appears to have emerged in personnel disputes. See W. Stanfield Johnson, “Mixed Nuts and Other Humdrum Disputes: Holding the

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appeared in American U.S. government-contracts settings, but was

“largely restricted” to the adjudication of claims arising out of

discretionary government actions such as contract terminations.182

Since then, courts have occasionally but sparingly applied this

presumption to other areas of government contracts law.183 With

few exceptions, the courts have not applied the presumption — and

Government Accountable Under the Law of Contracts Between Private Individuals,” 32 Pub. Cont. L.J. 677, 699 (Summer 2003) (“[T]he rule finds its genesis in personnel disputes[.]”); see, e.g., Gonzales v. West, 218 F.3d 1378, 1381 (Fed. Cir. 2000) (applying presumption when veteran challenged disability rating assigned by Department of Veterans Affairs); Robinson v. U.S. Postal Serv., No. 99-3460, 2000 WL 674674 at *2 (Fed. Cir. May 23, 2000) (“Penalty decisions are judgment calls best left to the discretion of the employing agency, and the presumption is that Government officials have acted in good faith.”). But see Major Bryan O. Ramos, “Never Say Die: The Continued Existence of the government Officials’ Good Faith Presumption in Federal Contracting Law and the Well-Nigh Irrefragable Proof Standard After Tecom,” 63 A.F. L. Rev. 163, 166-70 (2009) (insisting that the presumption of good faith is well-established as an historical principle in government contracts law); Linda P. Armstrong, Walter H. Pupko, and Donald M. Yenovkian II, “Federal Procurement Ethical Requirements and the Good Faith Presumption,” 20 No. 6 Nash & Cibinic Rep. ¶ 29 (June 2006) (same).182 See W. Stanfield Johnson, “Needed: A Government Ethics Code and Culture Requiring its Officials To Turn ‘Square Corners’ when Dealing with Contractors,” 19 No. 10 Nash & Cibinic Rep. ¶ 47 (October 2005); see also Ralph C. Nash, “The Government’s Duty of Good Faith and Fair Dealing: Proving a Breach,” 23 No. 12 Nash & Cibinic Rep. ¶ 66 (Dec. 2009); W. Stanfield Johnson, “Mixed Nuts and Other Humdrum Disputes: Holding the Government Accountable Under the Law of Contracts Between Private Individuals,” 32 Pub. Cont. L.J. 677, 700 (Summer 2003).183 See, e.g., Galen Med. Assocs., Inc. v. United States, 369 F.3d 1324, 1328-30 (Fed. Cir. 2004) (applying presumption when assessing agency action in bid protest challenge under Administrative Procedure Act, 5 U.S.C. § 702); Precision Standard, Inc. v. Widnall, No. 97-1096, 1997 WL 794107 at *3 (Fed. Cir. Dec. 30, 1997) (applying standard when private contractor appealed termination for default); Ralph C. Nash, “The Government’s Duty of Good Faith and Fair Dealing: Proving a

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its heavy evidentiary burden — to resolution of disputes between

the gGovernment and its contractors.184

2. The Federal Circuit’s Ddecisions in the pPast dDecade in tThis aArea of lLaw hHave bBeen iInconsistent and cConfusing, Effectively Importing the Concept of Subjective Bad Faith From Principle 1 (The Presumption of Good Faith) Into Application of Principles 2 (Duty of Good Faith and Fair Dealing) and 3 (Sovereign Acts Doctrine).

a. Am-Pro Protective Agency, Inc. v. United States

In 2002, the Federal Circuit decided Am-Pro Protective

Agency, Inc. v. United States.185 In Am-Pro, a private contractor

(“Am-Pro”) alleged that the Ggovernment was liable for additional

employee compensation costs Am-Pro incurred during contract

performance.186 The gGovernment argued that Am-Pro had already

released its claims; Am-Pro responded that its purported releases

were made under duress and thus were void.187 On a motion for

summary judgment, the Court of Federal Claims found for the

Breach,” 23 No. 12 Nash & Cibinic Rep. ¶ 66 (Dec. 2009) (discussing application of presumption to terminations for default).184 See, e.g., W. Stanfield Johnson, “Mixed Nuts and Other Humdrum Disputes: Holding the Government Accountable Under the Law of Contracts Between Private Individuals,” 32 Pub. Cont. L.J. 677, 701 (Summer 2003) (“Indeed, government contract tribunals have held government officers to standards of ‘good faith’ in other contractual dealings, applying tests more akin to the general law of contracts, and without presumption and without wresting through unnatural issues of malice, personal animus, or specific intent to injure.”).185 Am-Pro Protective Agency, Inc. v. United States, 281 F.3d 1234 (2002).186 Id. at 1236-38. 187 Id. at 1237-38.

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gGovernment, and on appeal, the Federal Circuit affirmed.188

Curiously, the Federal Circuit’s ruling ignored the relevant

standards for the implied duty of good faith and fair dealing

(Principle 2), which — given the facts alleged by Am-Pro — might

have been breached.189 For example, aside from the mere “absence

of good faith,” Am-Pro’s allegations suggested a genuine issue of

material fact regarding the contracting Contracting oOfficer’s

evasion of the spirit of the bargain, interfering with Am-Pro’s

performance, taking advantage of necessitous circumstances, and

abusing her authority.190

Instead, the Federal Circuit began and ended its analysis

with “[t]he presumption that government officials act in good

faith,” or Principle 1.191 The court emphasized the considerable

burden of proof that a plaintiff must meet to overcome the

188 189 Specifically, Am-Pro alleged that the contracting officer threatened to cancel Am-Pro’s contract and “adversely impact [its] ability to contract with other agencies” if Am-Pro maintained its original claims. Id. at 1237. Am-Pro withdrew its claims and “effectively releas[ed] the government from any future claims[.]” Id. at 1237-38.190 Id.; sSee also Restatement (Second) of Contracts § 205, Comments D & E. Stanfield Johnson has re-assessed Am-Pro under the Restatement’s standards for good faith and fair dealing, and he has argued that, “under the law of contracts between private individuals, Am-Pro could not have been decided as it was.” W. Stanfield Johnson, “Mixed Nuts and Other Humdrum Disputes: Holding the Government Accountable Under the Law of Contracts Between Private Individuals,” 32 Pub. Cont. L.J. 677, 705 (Summer 2003). Further, “Am-Pro [does not] appear to be consistent with prior government contract precedent dealing with duress and good faith in performance . . . .” Id.191 Am-Pro, 281 F.3d at 1239.

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presumption: “[W]e are ‘loath to find to the contrary of [good

faith], and it takes, and should take, well-nigh irrefragable

proof to induce us to do so.’”192 Then, before weighing Am-Pro’s

allegations under this burden, the court withdrew somewhat from

its application of a subjective intent standard, noting that “the

presumption of good faith, as used here, applies only in the

situation where a gGovernment official allegedly engaged in fraud

or in some other quasi-criminal wrongdoing.”193 Finally, the

court found no genuine issue of material fact with regard to the

contractor’s allegations that the gGovernment had acted with

subjective bad faith.194 According to the court, Am-Pro had not

shown that: (1) “the government ‘had a specific intent to injure’

Am-Pro”; (2) the contracting officer’s threats were “‘motivated

alone by malice’”; (3) there was “a proven ‘conspiracy . . . to

get rid of [Am-Pro]’”; (4) the “governmental conduct [] was

‘designedly oppressive’”; or (5) the contracting officer had

“animus toward’ Am-Pro.”195

Following Am-Pro, a number of decisions have merged the

presumption of good faith’s burden of proof — “well-nigh

irrefragable proof” of subjective bad faith, or personal animus

192 Id. (citations omitted) (emphasis added) (“[O]ur court and its predecessor have often used the ‘well-nigh irrefragable’ language to describe the quality of evidence to overcome the good faith presumption . . . .”).193 Id. (emphasis added). 194 See 281 F.3dId. at 1243.195 Id. at 1241 (citations omitted).

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(Principle 1) — into the standard private contractors must meet

to prove the Ggovernment’s breach of the duty of good faith and

fair dealing (Principle 2).196 The concept of subjective “bad

faith” is often discussed in connection with the duty of good

faith and fair dealing. Some judges now require proof by clear

and convincing evidence of “bad faith,” or personal animus, not

just the absence of good faith (such as slacking, lack of

diligence, failure to cooperate), to prove breach of the duty of

good faith and fair dealing.197 Notably, some decisions, such as

that of the Court of Federal Claims in Tecom, have expended

considerable effort to clarify the distinction between the

presumption of good faith (Principle 1) vis-à-vis the duty of

good faith and fair dealing (Principle 2).198 However, the

196 See, e.g., Ralph C. Nash, “The Government’s Duty of Good Faith and Fair Dealing: Proving a Breach,” 23 No. 12 Nash & Cibinic Rep. ¶ 66 (December 2009); see also W. Stanfield Johnson, “Mixed Nuts and Other Humdrum Disputes: Holding the Government Accountable Under the Law of Contracts Between Private Individuals,” 32 Pub. Cont. L.J. 677, 703 (Summer 2003) (predicting that, “[i]f Am-Pro is not seen as an aberration [] by a renewed application of general contract law, its precedential effect would be to grant government contracting officials a dangerous license to ignore those obligations of good faith and fair dealing in contractual actions that government contract law has already adopted from the law of contracts between private individuals”).197 See, e.g., Ca. Human Dev. Corp. v. United States, 87 Fed. Cl. 282 (2009); Keeter Trading Co. v. United States, 85 Fed. Cl. 613 (2009); N. Star Alaska Housing Corp. v. United States, 76 Fed. Cl. 158 (2007).198 See, e.g., Universal Shelters of Am., Inc. v. United States, 87 Fed. Cl. 127, 144-45 (2009) (Wolski, J.); Tecom, Inc. v. United States, 66 Fed. Cl. 736, 757-72 (2005) (Wolski, J.); see also Helix Elec., Inc. v. United States, 68 Fed. Cl. 571, 586-88

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confusion persists, and as it does, government contracts as

bilateral deals become further imbalanced, with private

contractors and the gGovernment assuming much different rights

and responsibilities.199

b. Centex Corp. v. United States

The Federal Circuit’s decision in Centex v. United States

addressed the same issue the courts had addressed in Winstar — a

suit for breach of contract damages filed by a trust company

(“the contractor”) that had acquired failed thrifts pursuant to

agreements with the Federal Savings and Loan Insurance

Corporation under which the contractor and gGovernment expected

that the contractor would enjoy certain tax benefits. 200 The

gGovernment’s subsequent enactment of the Guarini legislation

deprived the contractor of the tax benefits it had expected it

would enjoy through the execution and performance of the

(2005) (Williams, J.); cf. Jay Cashman, Inc. v. United States, 88 Fed. Cl. 297, 308 n.15 (2009) (Allegra, J.) (“While most cases seem to suggest that there can be no violation of the duty to cooperate without a showing of bad faith, that view is not universal.”).199 See, e.g., discussion at heading III.A.1; White Buffalo Const., Inc. v. United States, 101 Fed. Cl. (2011); Metcalf Const. Co. v. United States, No. 07-777C, 2011 WL 6145128 (Fed. Cl. Dec. 9, 2011); D’Andrea Bros. LLC v. United States, 96 Fed. Cl. 205 (2010).200 See Centex v. United States, 395 F.3d 1283 (Fed. Cir. 2005); see also Stuart B. Nibley, “Unraveling the Mixed Messages that Government Procurement Personnel Receive: Message 1: Act Absolutely in the gGovernment’s ‘Best Interests’: Message 2: Act ‘Ethically,’” 36 Pub. Cont. L.J. 23, 27-28 (Fall 2006) (discussing Centex). Soon after, the Federal Circuit decided First Nationwide Bank v. United States, 431 F.3d 1342, 1353 (Fed. Cir. 2005), a similar case with a similar outcome.

50DSMDB-3050080v1

contract.201 The Federal Circuit’s decision in Centex not only

hewed to the Winstar plurality’s reasoning, it also rounded it

out and introduced Principle 2 to the analysis.202

The Federal Circuit began with a straightforward recitation

of the duty of good faith and fair dealing (Principle 2).203

However, the court then confronted the question of when it should

consider legislation to be a sovereign act that shields the

gGovernment from liability for breach of contract damages

(Principle 3).204 The Ggovernment asserted that the Guarini

legislation was an insulating exercise of sovereign power.205 The

Federal Circuit concluded that it the Guarini legislation was did

not serve to insulate the Government from liability because it

was not because the legislation had been “specifically targeted”

at reappropriating contractual benefits and abrogating

contractual obligations.206 The Federal Circuit followed Winstar

in finding that the imposition of damages for the Ggovernment’s

breach of contract did not block the gGovernment’s right to

exercise its taxing authority in a public and general manner.:

The Federal Circuit noted that

201 202 Compare [Centex at x] with [Winstar at Y].203 Id.Centex, 395 F.3d at 1304 (affirming that it “imposes obligations on both contracting parties” and “applies to the government just as it does to private parties”).204 Id. at 1305-11.205 206 Id.

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As noted above, the government’s assertion that a contract

cannot preclude Congress from changing the tax laws does not

fairly characterize the issue we are called on to decide.

T”[t]he question raised by this case is whether the government is

liable in damages for breach of the contract when Congress enacts

specifically targeted legislation that appropriates for the

government a portion of the benefits previously available to the

contractor.” The Supreme Court’s decision in Winstar establishes

that while a contract may not interfere with Congress’s power to

enact tax legislation, the contract may nonetheless bind the

government to pay damages in the event such legislation is found

to breach the contract. As the plurality opinion in Winstar

noted,Applying the plurality decision from Winstar, the court

further held that while “[o]nce general jurisdiction to make an

award against the government is conceded, a requirement to pay

money supposes no surrender of sovereign power by a sovereign

with the power to contract.... The [t]he Government cannot make a

binding contract that it will not exercise a sovereign power,

but[] it can agree in a contract that if it does so, it will pay

the other contracting party the amount by which its costs are

increased by the Government’s sovereign act.”207 Winstar, 518 U.S.

at 881, 116 S.Ct. 2432, citing Amino Bros. Co. v. United States,

178 Ct.Cl. 515, 372 F.2d 485, 491 (1967). Finally, the court 207 Id. at ___ (citing Winstar v. United States, 518 U.S. at 881, 116 S.Ct. 2432).

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stated, “Thus, a claim for damages arising from the breach of a

contract by an act of Congress does not bar Congress from

exercising its taxing power; it merely ensures that if the

exercise of that power breaches a particular contractual

obligation, the injured party will have redress for the breach.

Based on that fundamental principle underlying Winstar, we reject

the government’s characterization of the claim for damages as a

request to enjoin the enactment of legislation.208

In Centex, Tthe court held that the gGovernment had breached

its duty of good faith and fair dealing.209 Unfortunately, a

number of decisions subsequent to Centex have primarily focused

on the that decisiondecision’s use of the term “specifically

targeted,” such that some judges have required contractors to

prove subjective bad faith or animus (associated with Principle

1) to prove that the gGovernment breached the contractual duty of

good faith and fair dealing (Principle 2).210

208 Id at ___ (emphasis added).209 Id. at 1311, 1314. 210 See, e.g., Precision Pine & Timber, Inc. v. United States, 596 F.3d 817, 829-30 (Fed. Cir. 2010); D’Andrea Bros. LLC v. United States, 96 Fed. Cl. 205, 221-22 (2010).

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c. Precision Pine & Timber Co. v. United States

The Federal Circuit’s treatment of these issues in a more

recent decision, Precision Pine & Timber Co. v. United States,211

is rooted in Centex’s language and analysis.212 However, the

Precision Pine decision discussed Principles 2 and 3 in a way

that not only appeared to invoke Principle 1, which had no

application to the matter, but which has also led to the merging

of all three Principles.213 Precision Pine has enabled judges who

are so inclined to melt the distinctions between the three

governing Principles even more, leading to more, not less,

confusion.214 So what is in the presumption of good faith/duty of

good faith and fair dealing/sovereign acts doctrine fondue pot

after Precision Pine?

In Precision Pine, the Federal Circuit reversed the Court of

Federal Claims, which had found that that gGovernment had

breached both an express warranty and the implied duty not to

hinder the contractor (Precision Pine) in its performance of

fourteen timber harvesting contracts.215 Although the Federal

Circuit reversed on both issues, we address the first issue, the

alleged breach of express warranty, only insofar as it pertains

211 Precision Pine, 596 F.3d at 817 (Fed. Cir. 2010).212 Precision Pine also relies on First Nationwide Bank, which immediately followed Centex. See supra note [ ].213 See, e.g., Precision Pine, 596 F.3d at ___.214 215 Id. at 820.

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to the second issue, which involves allegations of the

gGovernment’s breach of the duty not to hinder the contractor’s

performance.216

As to the second issue, the Federal Circuit found that the

lower court erred when it held that the gGovernment had breached

the duty of good faith and fair dealing (the duty not to hinder)

by consuming more time than the tribunal found appropriate to

allow removal of a court-ordered suspension of timber harvesting

contracts.217 A federal district court in Arizona had ordered

timber harvesting under the contracts in Arizona suspended until

the Forest Service

… “consulted with the U.S. Fish and Wildlife Service about the

pertinent land resource management plans.”218 See Silver v.

Babbitt, 924 F.Supp. 976, 989 (D.Ariz.1995). The order explained

that such consultation was required under § 7 of the Endangered

Species Act, 16 U.S.C. § 1536, due to the recent listing of the

Mexican spotted owl as an endangered species.219 The fourteen

contracts remained suspended until completion of the consultation

process in December 1996.220

216 217 218 See Silver v. Babbitt, 924 F.Supp. 976, 989 (D. Ariz. 1995).219 220 Id. at 819-820.

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The contractor alleged that its timber harvesting contracts

included an express warranties that the Forest Service had

complied with the requirements of the Endangered Species Act.221

The Federal Circuit rejected this argument, finding that the

contracts did not include express warranties.222

The Federal Circuit also reversed the tribunal below with

regard to the alleged breach of the implied contractual duty of

good faith and fair dealing (duty not to hinder — Principle

#2).223 As summarized by the Federal Circuit, tThe trial court

found that the Forest Service unreasonably delayed the resumption

of the timber harvesting contracts in several ways, as follows:

The trial court found that Forest Service’s actions during the

suspension resulted in the suspension being unreasonably long.

Precision Pine I, 50 Fed.Cl. at 70-71. Specifically, the trial

court concluded that the Forest Service hindered the contracts

because twelve days elapsed after the Arizona district court’s

order in Silver before the Forest Service requested formal

consultation. Id. at 70. The trial court also found the two-

month delay that preceded the actual start of formal

consultations unreasonable; the Forest Service spent this period

formulating and revising its Biological Assessment to include

requested information. Id. at 48. Finally, the trial court

221 222 Id. at 824-825. 223

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found the Forest Service unreasonably delayed the consultation

process by failing to provide a legally sufficient Biological

Opinion that conformed to a joint stipulation with the

environmental groups in Silver. Id. at 48-50, 71. ; Ithe trial

court supported its findings by citing to the Arizona district

court,n support of this finding, the trial court cited the

Arizona district court, “which had reprimanded the Forest Service

on several occasions for attempting to resume timber harvesting

while the injunction remained in effect.”224

It is important to study the Federal Circuit’s ruling on

this issue.225 The Federal Circuit, in reversing the findings of

the trial court, articulated two reasons why it found that the

contractor was not entitled to recover damages in relation to

alleged breaches of the gGovernment’s duty not to hinder

(Principle 2): “[t]he Forest Service’s actions during these

formal consultations were (1) not ‘specifically targeted’ [at the

contractor], and (2) did not reappropriate any ‘benefit’

guaranteed by the contracts, since the contracts contained no

guarantee that Precision Pine’s performance would proceed

uninterrupted.”226

224 Id. at 828-829 (emphasis added). 225 Id. at 828-831.226 Id. at 829.

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We believe tThe order in which the decision Precision Pine

decision addressed these two reasons has caused confusion in the

tribunals below, at least within the Court of Federal Claims.227

In some ways, the Federal Circuit creates a straw man issue with

regard to its consideration of the contractor’s allegations that

the gGovernment breached its duties of good faith and fair

dealing (the duty not to hinder).228 As we have stated, the court

first found that the timber harvesting contracts did not include

express warranties guaranteeing that performance would not be

suspended by reason of the Forest Service’s consultation with the

EPA under the Endangered Species Act.229 The court then stated

that, “[b]ecause the suspensions were authorized, the only

remaining question is [was] whether the Forest Service’s actions

during the suspensions violated the implied duty of good faith

and fair dealing.”230 Thus, the court waitsed until the second

reason (for finding no breach of the duty of good faith and fair

dealing) to announce that there can be no breach of the implied

duty of good faith and fair dealing under the circumstances

because there were no express warranties under the contract:;

importantly, the court stated that “[t]

227 228 229 Id.230 Id. at 828 (emphasis added).

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The implied duty of good faith and fair dealing cannot

expand a party’s contractual duties beyond those in the express

contract or create duties inconsistent with the contract’s

provisions.”231 Thus, the court found that because the parties

had not contemplated a guarantee of uninterrupted performance, it

found that Precision Pine had no expectation, and no express

warranty, that the Forest Service wouldn’t delay performance due

to its other statutory obligations. Id. at 1304-06; see also

Agredano, 595 F.3d at 1280-82, 2010 WL 537160, at *2-3. In these

contracts, CT 6.01 and CT 6.25 make clear that one “benefit” the

parties did not contemplate, and which Precision Pine is thus not

entitled to under the contracts, is the guarantee of

uninterrupted performance. Cf. id. (noting that the benefit

eliminated by subsequent government action was an “important part

of the contract consideration” and one “they reasonably expected

the government not to withhold”). Because Precision Pine had no

reasonable expectation that its contracts would be unaffected by

the listing of a new species like the Mexican spotted owl, the

Forest Service’s actions did not destroy Precision Pine’s

reasonable expectations under the contract. Id. at 1304; see

also Restatement (Second) of Contracts § 205.232

231 232 Id. at 831 (emphasis added).

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Having found that the contracts did not include express

warranties, the court could have disposed of the allegation of

the breach of the duty of good faith and fair dealing without

further discussion.; Iin other words, the court could have

articulated its second reason first (that no “benefit” or

reasonable expectation for the contractor existed that could be

frustrated by any type of government action or inaction,

sovereign or otherwise); the Federal Circuit, and it could have

thereby avoided the confusion it created by stating its first

reason first.233

However, the court did not do this. Rather, the court began its

discussion of its ruling with regard to consideration of

Principle 2 (the duty of good faith and fair dealing, including

the duty not to hinder) with language charged with tones of

subjective bad intent.234 It did so byThe court began by

discussing the legal standard that should be applied to assess

the gGovernment conduct in question before it discussed the

nature of the gGovernment conduct in question — i.e., whether or

not the government Government conduct under review involved the

government acting in its sovereign capacity, or in its

233 234 The court didbegan its discussion, as virtually all fora within the federal judiciary do in dealing with this issue, begin its discussion with the standard invocation of the Core Tenet. Id. at 828. It promptly abandoned the Core Tenet in its analysis.

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contracting capacity, or both.235 As we have discussed, the

relevant legal standard to be applied depends upon the nature of

the gGovernment conduct that is being reviewed.236 In Precision

Pine, however, the court first articulated the legal standard

that is to be applied before it explained whether or not the

gGovernment conduct under review was sovereign, or contractual,

in nature.237 The court addressed the sovereign acts doctrine

(Principle 3) in its opinion.238 However, Precision Pine never

mentions the sovereign acts doctrine by name, nor does it mention

the first aspect of consideration under the sovereign acts

doctrine (Principle 3) — whether or not the gGovernment’s

sovereign act was “public and general” in nature.

This The Precision Pine analysis has led to considerable

confusion.239 Precision Pine failed to articulate crisply the

individual Principles and sub-considerations at work.240 As an

initial problem, the court’s articulation of a portion — but only

a portion — of the sovereign acts doctrine (“specifically

targeted” v. “public and general”) allows, if not encourages,

judges to apply Precision Pine in all instances in which a

235 236 237 238 239 240

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contractor has alleged that the gGovernment has breached its duty

of good faith and fair dealing, not merely instances involving

sovereign acts.241 This Precision Pine’s imprecise articulation

of the sovereign acts doctrine enables judges who are so inclined

to merge the three Principles into a single, incorrect,

articulation of law.242 Only after it articulated the legal

standard to be applied did the Federal Circuit explain that its

legal standard applies to the government’s actions only in its

sovereign capacity, not its contractual capacity.243

So, the first significant problem with Precision Pine is

that its imprecise analysis and explanation of the applicable

Principles fuel the confusion that already existed in the case

law. The decision invites, and indeed has resulted in, judicial

inattention to the crucial distinction between the gGovernment

acting in its sovereign capacity and the gGovernment acting in

its contractual capacity, leading some judges to apply the

241 242 243 Eventually, after articulating the legal standard to be applied, the court explains that the Government conduct in question is sovereign in nature. Id. 830. Even then, the court does not articulate this clearly — it never mentions the term “sovereign acts”; it never begins its analysis with the “public and general” in nature consideration of the application of the sovereign acts doctrine that leads to its articulation of the “specifically targeted” consideration. Iit simply announces the “specifically targeted” standard, and subsequently points out that it finds that the conduct in question is sovereign in nature.nature.

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Precision Pine “specifically targeted” standard to actions the

gGovernment takes strictly in its contracting capacity.244

Second, the same imprecision in the decision invites the

tribunals below to impute the concepts of subjective bad faith

from Principle 1 (the presumption of good faith) into

applications of Principles 2 (the duty of good faith and fair

dealing) and 3 (the sovereign acts doctrine).245 Precision Pine

dealt with Principles 2 (the duty of good faith and fair dealing)

and 3 (the sovereign acts doctrine).; Iit did not deal with

Principle 1 (the presumption of good faith).246 The court cited

Principle 2 and its basic premises, as well as the Core Tenet,

but quickly moved on.247

In addressing Principle 3, the court never mentioned

“sovereign acts” or addressed the legal underpinning (“public and

general”) supporting Principle 3.248 Instead, it used language

applicable to Principle 1: “misbehavior”, “the old bait and

switch”, “a governmental bait and switch or double-crossing.”249

These are words of bad intent, not applicable to Principle 2 (the

duty of good faith and fair dealing) and only marginally

244 245 246 247 Id. at 828.248 249

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connected with Principle 3 (sovereign acts doctrine).250 It also

merged Principle 2 (the duty of good faith and fair dealing) with

concepts that belong exclusively with Principle 1 (the

presumption of good faith). The court avoided language on the

one side of the Principle 3 coin — i.e., whether or not the

sovereign act that allegedly led to the deprivation of the

contractor’s benefit of the bargain was “public and general” in

nature. Instead, the court focused on the other, negative, side

of Principle 3 — i.e., “specifically targeted,” “bait and

switch,” “double-crossing,” and “misbehavior,” terms imported

from Principle 1.251 :

Not all misbehavior, however, breaches the implied duty of good faith and fair dealing owed to other parties to a contract. See First Nationwide, 431 F.3d at 1350 (noting that not all governmental action that affects existing government contracts violates the implied duty of good faith and fair dealing).

Cases in which the government has been found to violate the implied duty of good faith and fair dealing typically involve some variation on the old bait-and-switch. First, the government enters into a contract that awards a significant benefit in exchange for consideration. Then, the government eliminates or rescinds that contractual provision or benefit through a subsequent

250 See, supra, discussion under Heading II.B.251 Id.at 829. For example, the Court said, “Not all misbehavior, however, breaches the implied duty of good faith and fair dealing owed to other parties to a contract. Cases in which the government has been found to violate the implied duty of good faith and fair dealing typically involve some variation on the old bait-and-switch.” Id.

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action directed at the existing contract. See, e.g., id. at 1350-51; Centex Corp. v. United States, 395 F.3d 1283, 1304-07 (Fed.Cir.2005); see also Hercules, 516 U.S. 417, 116 S.Ct. 981, 134 L.Ed.2d 47. The government may be liable for damages when the subsequent government action is specifically designed to reappropriate the benefits the other party expected to obtain from the transaction, thereby abrogating the government’s obligations under the contract. Centex, 395 F.3d at 1311.

* * *

There are no similar indicia of a governmental bait-and-switch or double crossing at work here. We conclude that there was no breach of the government’s implied duty of good faith and fair dealing because the Forest Service’s actions during these formal consultations were (1) not “specifically targeted,” and (2) did not reappropriate any “benefit” guaranteed by the contracts, since the contracts contained no guarantee that the Precision Pine’s performance would proceed uninterrupted. Cf. id. at 1306.

The Federal Circuit’s migration from Centex to Precision

Pine has had the effect of importing the subjective intent

standard into analysis of the applicability of the sovereign acts

doctrine (Principle 3) and the duty of good faith and fair

dealing (Principle 2) in a number of instances,s. Thiswhich has

further merged the three Principles into a single Principle

dependent upon a subjective intent analysis.252

252

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A third problem with Precision Pine emerges from its less-

than-crisp analysis and application of the three Principles and

their sub-considerations.253 The decision and its predecessors

show no evidence that the Federal Circuit considered the

possibility that a sovereign act can be both “public and general”

and “specifically targeted” in nature.254 The Federal Circuit’s

focus solely on bad motive (“specifically targeted” language)

sullies the analysis.255 With regard to the application of

Principle 3, courts do better to turnshould first first to

Justice Souter’s articulation of the “public and general”

consideration of a gGovernment sovereign act.; Aas Justice

Souter noted, and Professor Schwartz has analyzed so

thoroughly,256 it is possible that the gGovernment can pursue a

sovereign act that has “public and general” effect prospectively,

going forward, but has the effect of depriving one or more

contractors of the benefit of their contractual bargains with

regard to its retrospective application.257 Finding that the

253 254 255 256o. Wash. L. Rev. 633 (Apr. 1, 1996).257 See Winstar Corp. v. United States, 518 U.S 839 (1996); Joshua I. Schwartz, “The Status of the Sovereign Acts and Unmistakability Doctrines in the Wake of Winstar: Au luterim Report,” 51 Ala. L. Rev. 1177 (Spring 2000); Joshua I. Schwartz, “Assembling Winstar: Triumph of the Ideal of Congruence in Government Contracts Law?,” 26 Pub. Cont. L.J. 481 (Summer 19979); Joshua I. Schwartz, “Liability for Sovereign Acts: Congruence and Exceptionalism in Government Contracts Law,” 64

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gGovernment has breached its duty of good faith and fair dealing

by frustrating contractor rights does not necessarily mean that

the sovereign act under review must be viewed solely in a binary

manner — i.e., either as a prospective sovereign act, or as a

retrospective act specifically targeted at existing contracts.258

The sovereign act, such as legislation, may be properly motivated

as to its prospective application — i.e., a proper exercise of

the gGovernment’s “public and general” right to legislate — but

at the same time, it may subject the gGovernment to liability

with regard to existing contracts retrospectively affected by the

legislation.259 In such instances, motive becomes less relevant.

In his plurality decision in Winstar, Justice Souter

examined the conundrum presented by attempting to protect both

the gGovernment’s right to be unfettered in its exercise of its

sovereign powers and the gGovernment’s need to create enforceable

contracts with benefits and obligations.260 The Precision Pine

decision lost sight of Justice Souter’s assessment of the

sovereign acts doctrine: “The application of the doctrine thus

turns on whether enforcement of the contractual obligation

alleged would block the exercise of a sovereign power of the

Geo. Wash. L. Rev. 633 (Apr. 1, 1996).258 259 260

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government.”261 The gGovernment argued in each case that any

exercise of sovereign authority that was designed to accomplish

some public good warranted application of the sovereign acts

doctrine.262 Justice Souter recognized that the analysis is not

so simple, and that the gGovernment may at times act in its

contractual capacity when it exercises a sovereign power.263

Referring to the gGovernment’s “dual characters as contractor and

legislator,” he recognized that a specific sovereign act may be

undertaken to effect affect “some public good,” but at the same

time may be designed to relieve the government of obligations it

has accepted through contracts.264 :

The government argues that “[t]he relevant question [under

these cases] is whether the impact [of governmental action] ...

is caused by a law enacted to govern regulatory policy and to

advance the general welfare.” Brief for United States 45. This

understanding assumes that the dual characters of government as

contractor and legislator are never “fused” (within the meaning

of Horowitz ) so long as the object of the statute is regulatory

and meant to accomplish some public good. That is, on the

government’s reading, a regulatory object is proof against

treating the legislature as having acted to avoid the

261 Winstar, 518 U.S. at 879 (emphasis added). 262 263 264 Id. at 893.

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government’s contractual obligations, in which event the

sovereign acts defense would not be applicable. But the

government’s position is open to serious objection.265

Justice Souter found that the concept of finding the

gGovernment liable for damages for the retrospective application

of a sovereign power is not incompatible in all instances with

recognizing the gGovernment’s right to exercise sovereign power

prospectively.266 : Justice Souter reasoned that the neither the

contracts themselves, nor the award of damages, has the affect of

limiting the Government’s ability to “exercise authority to

modify banking regulations.”

The government’s position is mistaken, however, for the

complementary reasons that the contracts have not been construed

as binding the government’s exercise of authority to modify

banking regulation or of any other sovereign power, and there has

been no demonstration that awarding damages for breach would be

tantamount to any such limitation.267

265 Id. at 893 (emphasis added). 266 267 Id. at 881. See also the Court’s reference to this concept in Footnote 35 of the Opinion:

“See Speidel, Implied Duties of Cooperation and the Defense of Sovereign Acts in Ggovernment Contracts, 51 Geo. L.J. 516, 542 (1963) (“[W]hile the contracting officers of Agency X cannot guarantee that the United States will not perform future acts of effective government, they can agree to compensate the contractor for damages resulting from justifiable acts of the United

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Precision Pine states the rule too narrowly, with language

that leads to imprecision.268 Courts should be careful to limit

their focus on evidence of sovereign subjective intent when they

assess the applicability of the sovereign acts doctrine

(Principle 3), (just as they should avoid introducing

considerations of subjective intent when considering the

application of Principle 2 — the duty of good faith and fair

dealing).269 The sovereign’s motive behind its exercise of a

sovereign act (e.g., enactment of legislation) may be pure, and

therefore appropriate as to its prospective effect, but less

pure, and therefore inappropriate as to its retroactive effect270 .

In other words, the sovereign’s desire to see the prospective

application of legislation may not involve “misbehavior,” “bait

and switch,”or “double crossing” (negative aspects of subjective

intent), and yet that same legislation may have the effect of

negating contractor rights under existing contracts (which may or

may not be motivated by bad intent).271 Thus, application of a

standard that examines a sovereign act solely on the basis of

States in its ‘sovereign capacity’ “ (footnotes omitted)).”

Id. at 890, n.35 (emphasis added).268 269 270 [I think we should just cite Precision Pine for a lot of this – let me know what you think]271

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single motive — particularly a negative motive (“specifically

targeted” action) — is too limited.

In sum, courts should assess the effect/effects of a

sovereign act to at least the same degree that they assess the

sovereign’s motive.272 Examination by motive alone leads to the

binary analysis that hampers the Federal Circuit’s analysis in

Precision Pine, and now some decisions in the tribunals below.273

Examination by effect recognizes that, as to some effects, a

sovereign act may create liability on the part of the

gGovernment, but as to other effects, it may not.274 Injection of

the concepts that reside with Principle 1 (Presumption of Good

Faith) — such as subjective intent, and particularly, bad intent

(“misbehavior” and “bait and switch or double crossing”) — into

analysis of the applicability of Principles 2 and 3 is a recipe

for melted Principles.

III. THE ILL EFFECTS THAT FOLLOW THE OVER-PROTECTION OF THE GOVERNMENT AND CONFLATION OF THE THREE LEGAL PRINCIPLES

A. In the Wake Of The Federal Circuit’s Decision In Precision Pine: The Federal Circuit’s Imprecise Language And Analysis Have Led To Messy Results As Tribunals Below Try To Determine What Is Left Of The Three Principles.

1. Some Decisions Issued After The Federal Circuit’s Decision In Precision Pine Have Conflated And Confused The Three Principles, Applying Precision Pine’s Legal Analysis To Situations Where Only

272 273 274

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Government Contractual Acts, Not Sovereign Acts, Were Involved

Some judges have concluded from Precision Pine that the

Federal Circuit intended that they apply the decision’s language

and analysis not only to situations in which the government acts

in its sovereign capacity, but also to situations in which the

government acts solely in its contractual capacity.to both the

Government’s sovereign acts and its contractual acts.275 These

cases have not involved sovereign acts. Indeed these cases have

not involvedNone of these cases involved sovereign acts to which

to apply the sovereign acts doctrine (Principle 3) — no

legislation, no environmental permitting, no regulatory action —

merely allegations that the government breached its contractual

duty of good faith and fair dealing (Principle 2) through action

or inaction entirely associated with the contracts at issue.; In

in these cases, the contractor has merely complained that the

gGovernment breached the duty of good faith and fair dealing in

administering the contracts at issue.276 And yet, the judges in

these cases applied the legal standard that the Federal Circuit

articulated in Precision Pine, which dealt solely with sovereign

acts, not government contractual acts.277

275 276 277

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In White Buffalo Construction, Inc. v. United States,278 a

contractor asserted both that the gGovernment had breached its

duty of good faith and fair dealing in administering its

construction contract and that the government Government had

acted in bad faith by converting a termination for default into a

termination for convenience to avoid breach damages (liability

for lost profits).279 Our discussion concerns the first

allegation.280 The contractor alleged that the Ggovernment

breached its contractual duty of good faith and fair dealing by

concealing a differing site condition on the construction site,

by failing to pursue certain permits required to enable

performance and, by misrepresenting that the gGovernment had

pursued the permits, and by other acts that had the effect of

hindering the contractor’s performance.281

In assessing these allegations, the court imported the bad

intent (“bad faith”) standard applicable under Principle 1 (the

presumption of good faith) to its consideration of the

applicability of Principle 2 (the duty of good faith and fair

dealing) by citing to the standard articulated in Precision Pine,

278 , 101 Fed. Cl. 1 (2011).279 White Buffalo Construction, Inc. v. United States, 101 Fed. Cl. 1 (2011).280 It appears that the contractor alleged both breach of the duty of good faith and fair dealing (Principle 2) and bad faith (Principle 3) in contract administration, which may have contributed to the court’s conflation of the Principles. 281

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which dealt with Principle 3 (the sovereign acts defense).282 The

court paid the standard homage to the Core Tenet and noted that

the duty of good faith and fair dealing is implied into every

contract:283

Generally, every contract includes an implied duty of good

faith and fair dealing. Precision Pine & Timber, Inc. v. United

States, 596 F.3d 817, 828 (Fed.Cir.2010) (quoting Restatement

(Second) of Contracts § 205); Bannum, Inc. v. United States, 80

Fed.Cl. 239, 246 (Fed.Cl.2008). The covenant of good faith and

fair dealing is an implied duty that imposes obligations on both

contracting parties that include the duty not to interfere with

the other party’s performance and not to act so as to destroy the

reasonable expectations of the other party regarding the fruits

of the contract. See Centex Corp. v. United States, 395 F.3d

1283, 1304 (Fed.Cir.2005).284

The court then conflated Principles 1 and 2, stating that a

contractor can only prove breach of the duty of good faith and

fair dealing (Principle 2) by overcoming the presumption of good

faith — i.e., by proving bad faith, government “specific intent

282 Id. The court citing to the standard articulated in Precision Pine, which dealt with Principle 3 (the sovereign acts defense).283 Id. at 13. 284 Id. at 13.

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to injure” the contractor — by clear and convincing evidence

(Principle 1):.

When the government’s conduct is called into question,

“government officials are presumed to act conscientiously and in

good faith in the discharge of their duties.” Bannum, 80 Fed.Cl.

at 249 (citing Spezzaferro v. Fed. Aviation Admin., 807 F.2d 169,

173 (Fed.Cir.1986)); Kalvar Corp. v. United States, 543 F.2d

1298, 1301 (Ct.Cl.1976). Thus, in order to overcome the

presumption of good faith, “a plaintiff must present clear and

convincing evidence of bad faith.” Bannum, 80 Fed.Cl. at 249

(citing Am—Pro Protective Agency v. United States, 281 F.3d 1234,

1238—39 (Fed.Cir.2002)) (internal quotation omitted). Further,

to demonstrate that the government has acted in bad faith, “a

plaintiff must allege and prove facts constituting a specific

intent to injure [the] plaintiff on the part of a government

official.” Pratt v. United States, 50 Fed.Cl. 469, 479

(Fed.Cl.2001) (citing Texas Instruments, Inc. v. United States,

991 F.2d 760, 768 (Fed.Cir.1993)).285

The court brushed aside the contractor’s argument that the

court had wrongly conflated Principles 1 and 2 and expressly

285 Id. (emphasis added). The court noted that “government officials are presumed to act conscientiously and in good faith in the discharge of their duties” and therefore, “a plaintiff must present clear and convincing evidence of bad faith” in order to overcome that presumption.

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stated that both Principles involve proof of bad faith on the

part of gGovernment:

White Buffalo claims that “ ‘[t]he presumption of good faith

conduct of government officials has no relevance’ “with respect

to “ ‘claims that the duties to cooperate and not hinder

performance of a contract have been breached,’ “ and in such

cases, proof of a violation need not be by clear and convincing

evidence. Moreland Corp. v. United States, 76 Fed.Cl. 268, 291

(2007) (brackets in original) ( quoting Tecom, Inc. v. United

States, 66 Fed.Cl. 736, 771 (2005)). Pl.’s Post Trial Rep. Br.

at 9. The Court finds it unnecessary to address this question as

under either the heightened presumption standard or under a

lesser standard, White Buffalo has failed to establish that the

government intended to harm White Buffalo, and, thus, acted in

bad faith. 286

In so ruling, the court used the standard Precision Pine so

articulated for the sovereign acts doctrine (Principle 3) in a

case that did not involve any sovereign acts, but only

contractual acts.287 The court imported the subjective intent and

bad faith (“specific intent to injure”) concept from the

presumption of good faith (Principle 1), to assess whether or not

286 Id. 287

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the gGovernment had breached its contractual duty of good faith

and fair dealing (Principle 2).288

The same outcome befell the contractor in Metcalf

Construction Co. v. United States.289. In Metcalf, Tthe court

completely merged the three distinct Principles into one.290 The

court stated its understanding that Precision Pine requires that,

in order to prove that the government breached its contractual

duty of good faith and fair dealing, a contractor must to prove

subjective bad intent on the part of government personnel - bad

faith, intent to specifically injure the contractor — in all

situations, not merely situations that involve sovereign acts or

where the contractor specifically alleges bad faith.291 Like

those in White Buffalo, the facts in Metcalf involved government

acts that were taken solely in the contractual arena, not in the

sovereign arena: “Therein, Metcalf claimed that the Navy

breached the Contract by failing to administer it in good

faith.”292 No sovereign acts were at issue in the case, only acts

of contract administration.293

288 289 Metcalf Construction Co. v. United States, No. 07-777C, 2011 WL 6145128 (Fed. Cl. Dec. 9, 2011).290 291 292 Id. at 6 (emphasis added). 293 It is possible that the contractor contributed to some of the confusion because, according to the court’s decision, the contractor claimed that the government subjected it “to numerous instances of bad faith conduct,” and that the government had

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The court in Metcalf found that the gGovernment engaged in

the same type of conduct referenced in the Restatement (Second)

of Contracts and in many judicial decisions as the archetypical

conduct that establishes breach of the duty of good faith and

fair dealing — failure to promptly take action necessary to allow

the contractor to perform, poor communication and acts of

retaliation. The Court noted:

The record establishes that there was a retaliatory aspect

to some of the noncompliance notices that the Navy issued…

* * *

Having made this determination, the court would be remiss if

it did not state that the court was singularly unimpressed with

the bona fides of CO Matsuura. TR 117—219 (court examining Ms.

Matsuura). It is clear to the court that Ms. Matsuura’s lack of

knowledge and experience significantly contributed to the lack of

trust and poor communication that plagued the 212 Project at the

beginning. It also appeared that other members of the Navy team

actually were making the decisions, as best evidenced by the

“breached its duty of good faith and fair dealing.” Thus, the contractor might have specifically alleged bad faith as well as breach of the duty of good faith and fair dealing. This does not, however, explain the court’s conflation and melting of the legal standards.

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significant delay in promptly investigating the soil expansion

issue.294

Under Winstar, Malone, and other precedent, the type of

failure to cooperate and the hindrances evidenced by the

gGovernment in Metcalf would be more than enough to establish

that, as an objective matter, the gGovernment had breached the

duty of good faith and fair dealing it owed to the contractor.295

In Malone, the Federal Circuit found that a cContracting oOfficer

engaged in the same type of non-cooperative behavior that marked

the Ccontracting Oofficer’s behavior in Metcalf — the Contracting

Officer had been “evasive” in refusing to answer questions that

would direct the contractor’s continued performance; he refused

to answer the contractor’s “explicit question concerning whether

the standard of workmanship had changed”; and he failed to allow

the contractor to know the true performance requirements yet

continued to make progress payments to the contractor.296

294 Id. at 27-30 (emphasis added). Indeed, the court there noted that “the record establishes that there was a retaliatory aspect to some of the noncompliance notices that the Navy issued.” Id. 295 296 Malone v. United States, 849 F.2d 1441, 1445 (Fed. Cir. 1988). The court in Malone found that the Contracting Officer had been “evasive” in refusing to answer questions that would direct the contractor’s continued performance; he refused to answer the contractor’s “explicit question concerning whether the standard of workmanship had changed”; and he failed to allow the contractor to know the true performance requirements yet continued to make progress payments to the contractor. Id.

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The Federal Circuit in Malone assessed the Contracting

Officer’s actions under a reasonableness standard and the

criteria discussed in the Restatement (Second) of Contracts:

According to Restatement (Second) of Contracts § 241(e) (1981),

“the extent to which the behavior of [a] party failing to perform

. . . comports with standards of good faith and fair dealing” is

a significant factor in determining whether that party’s breach

is material. The Restatement also states that “subterfuges and

evasions violate the obligation of good faith,” as does lack of

diligence and interference with or failure to cooperate in the

other party’s performance.297

The Federal Circuit in Malone did not inject elements of

subjective intent, bad faith, or animus into its assessment of

whether the government Government had breached its duty of good

faith and fair dealing.298 Rather, it interpreted this the

Government’s duty of good faith in a way that makes it consistent

with the Core Tenet — that the gGovernment and its contractors

owe certain reciprocal duties to one another.299

297 Id. (internal citations omitted). The court specifically stated that: “According to Restatement (Second) of Contracts § 241(e) (1981) . . . ‘subterfuges and evasions violate the obligation of good faith,’ as does lack of diligence and interference with or failure to cooperate in the other party’s performance.”298 299

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The court in Metcalf cited Malone, but nonetheless read

Malone in a way that effectively requires contractors to

demonstrate the kind of subjective bad faith that the Restatement

(Second) and Malone do not require.300 The Metcalf court added

the word “only” to its paraphrase of the Malone ruling, which

makes it appear as if Malone is in line with Precision Pine’s

“specifically targeted” standard, which it is not.:

Precision Pine, 596 F.3d at 829; see also Malone v. United States, 849 F.2d 1441, 1445—46 (Fed.Cir.1988) (holding that only where the CO’s “evasive conduct misled [plaintiff] to perform roughly 70% of its contractual obligation in reliance on a workmanship standard” was the issue of breach of good faith and fair dealing invoked).301

Malone did not state that only the facts before it would suffice to prove a breach of the government’s Government’s duty of good faith and fair dealing, as Metcalf suggests.302

Thus, turning away from the Malone reasonableness and

Restatement (Second) standard, the Metcalf court determined that

the sufficiency of the gGovernment’s contract administration acts

should be assessed under the Precision Pine standard.303 By so

doing, the court injected the subjective intent, bad faith, 300 301 Metcalf, 2011 WL 6145128 at *11. The Metcalf court summarized Malone as “holding that only where the CO’s ‘evasive conduct misled [plaintiff] to perform roughly 70% of its contractual obligation in reliance on a workmanship standard’ was the issue of breach of good faith and fair dealing invoked.” Id. (emphasis added). 302 303

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specifically – targeted concept into the assessment of not only

gGovernment sovereign acts, but also gGovernment acts taken

solely in the realm of contract administration:

In addition, our appellate court requires that a breach of the

duty of good faith and fair dealing claim against the government

can only be established by a showing that it “specifically

designed to reappropriate the benefits [that] the other party

expected to obtain from the transaction, thereby abrogating the

government’s obligations under the contract.” Precision Pine,

596 F.3d at 829; see also Centex Corp. v. United States, 395 F.3d

1283, 1304—07 (Fed.Cir.2005) (affirming trial court’s judgment

that government breached the implied covenant of good faith and

fair dealing when Congress enacted targeted tax legislation

depriving Plaintiffs of “a substantial part of the benefit of

their contract with [the government]”). Short of such

interference, it is well established that federal officials are

presumed to act in good faith, so that “[a]ny analysis of a

question of governmental bad faith must begin with the

presumption that public officials act conscientiously in the

discharge of their duties.” See Kalvar Corp. v. United States,

543 F.2d 1298, 1301 (Ct.Cl.1976) (internal quotation marks and

citation omitted); see also Spezzaferro v. Fed. Aviation Admin.,

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807 F.2d 169, 173 (Fed.Cir.1986) (“government officials are

presumed to carry out their duties in good faith.”).304

The court in Metcalf simply followed the lead of the Federal

Circuit in Precision Pine by injecting language tinged with

subjective bad intent — “misbehavior” — in assessing whether the

government’s Government’s conduct breached its duty of good faith

and fair dealing:

See Precision Pine, 596 F.3d at 829 (observing that “[n]ot all

misbehavior ... breaches the implied duty of good faith and fair

dealing”).305

Relying upon the imprecise language and analysis in

Precision Pine, the Metcalf court merged all three Principles

into one, all swirling around the concept of subjective intent,

bad faith, specifically – and targeted animus.306

304 Id. (emphasis added). The Metcalf court thereby conflated the bad faith analysis to be performed when evaluating the Government’s sovereign actions with the analysis to be performed when evaluating the Government’s contractual actions. 305 Id. at 27 (emphasis added) (citing Precision Pine as “observing that “[n]ot all misbehavior ... breaches the implied duty of good faith and fair dealing”).306 Id. Elsewhere, in D’Andrea Brothers LLC v. United States, 96 Fed. Cl. 205 (2010), the Ccourt applied the court also applied the subject bad faith standard to another also to a situation in which there were no sovereign acts involved, only government acts taken in the contractual arena.

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Other decisions issued subsequent to Precision Pine have

avoided interpreting the confusing legal standard the Federal

Circuit set out in Precision Pine by reversing the order in which

the decisions discuss issues.307 We stated in our discussion of

Precision Pine thatAs noted earlier, one of the factors that

contributescontributing to the confusion surrounding Precision

Pine is the order in which the Federal Circuit addressed its

reasons for finding that the contractor should not prevail with

regard to its allegation that the government had breached its

duty of good faith and fair dealingthe issues it was confronted

with.308 Specifically, in Precision Pine, the court waited until

after it articulated the “specifically targeted” legal standard

to rule that the contractor could not pursue its allegation of

breach of the duty of good faith and fair dealing, as the

contractor had no right to expect the benefit under the contract

that it alleged the gGovernment’s sovereign act negated.309 The

court found that the contractor had no right to assume that the

gGovernment (the Forest Service in that case) had taken all

necessary actions to warrant that the contractor’s performance

would remain uninterrupted — i.e., there was no reasonable

expectation of benefit.310

307 308 309 310

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A number of judges have found it unnecessary to interpret

the precise meaning and applicability of Precision Pine’s

“specifically targeted” standard because they have addressed the

benefit issue first.311 In AECOM Government Services, Inc.,312 the

contractor alleged that the gGovernment breached its duty of good

faith and fair dealing when Congress enacted legislation that had

the effect of subjectinged the contractor to F.I.C.A. (Federal

Insurance Contributions Act)certain taxes that its offshore

subsidiaries were not required to pay at the time the contractor

executed its pertinent government contract had not been liable

for at the time the contract was formed. 313 Thus, AECOM involved

a sovereign act, not a government Government contractual act, and

the Government thus. The government asserted the sovereign acts

doctrine as a defense to the contractor’s claim.314 e in defense.

The court board cited to the Restatement (Second) of Contracts,

but then quoted Precision Pine’s “old bait and switch” and

“specifically targeted” language.315 The court board rejected the

contractor’s reliance upon Centex. The court, and stated that,

unlike the government Government contract in Centex, AECOM’s

311 312 GovenA No. 56861, 10-2 BCA ¶ 34,577at (A.S.B.C.A, Oct. 13, 2010).313 AECOM Government Services, Inc., ASBCA No. 56861, 10-2 BCA ¶ 34,577, at (pincite).314 315

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contract did not contain a “bargained-for-benefit.”316 . Rather,

AECOM’s contract was silent as to the contractor’s responsibility

to pay F.I.C.A. taxes, and therefore, the board held that the

Government “did not breach its implied duty of good faith and

fair dealing:

Unlike the contracts in Centex, AECOM’s contract did not

contain a bargained-for benefit. AECOM’s contract was silent

with respect to the tax status of offshore subsidiaries. As a

result, we conclude that the government did not breach its

implied duty of good faith and fair dealing. Precision Pine, 596

F.3d at 829.

It is undisputed that the FAR does not provide a basis for

relief from after-imposed F.I.C.A. taxes. Accordingly, the

government’s motion for summary judgment is granted only as to

the implied duty of good faith and fair dealing. AECOM’s motion

for partial summary judgment is denied for the reasons stated

above..317

Thus, while the Board carefully quoted the legal standard for

Principle 3 (the sovereign acts doctrine) from Precision Pine,

its decision rested not on that standard, but rather on its

determination that there was no bargained-forno contractual

316 317 Id.

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benefit that could be targeted by the gnew

legislation.overnment’s legislation that created an after-imposed

F.I.C.A. obligation for the contractor.318

318 Id. The decision might be questioned in this regard. The decision discusses the purposes behind Congress’s decision to enact the HEART Act, which imposed the F.I.C.A. obligations on offshore subsidiaries of U.S. companies. , because Tthe decision quotes from the Congressional Record. The quote contains language, suggesting that Congress’s intent for the HEART Act was not only “public and general” in nature, but also “specifically targeted” at existing government contracts:The Congressional Record for 20 and 22 May 2008 contain the following comments regarding the HEART Act:

[Sen. Baucus (D-MT)]: This bill is paid for by requiring that companies that do business with the Federal government pay their employment taxes. The bill makes sure that foreign subsidiaries of U.S. parent companies that have contracts with the Federal government pay employment taxes for their employees. 154 CONG. REC. S4773 (daily ed. May 22, 2008).

[Sen. Grassley (R-IA)]: The bill also ensures that U.S. employers of Americans working abroad pursuant to a government contract pay Social Security and Medicare taxes, regardless of whether they operate through a foreign subsidiary. Id.

AECOM Gov’t Servs., Inc., 10-2 BCA ¶ 34,577 (A.S.B.C.A. Oct. 13 2010) (emphasis added.) Congress recognized that certain government contractors were deriving tax advantages by using offshore subsidiaries and wished to extinguish that benefit. Despite the inapposite legislative history, Tthe AECOM decision ruled was forced to conclude that while the that the contractors were enjoying that the benefit of tax-exempt holdingsbenefit, they had no right to assume at the time they contracted that the benefit flowed from the contract, or that Congress could not take that benefit away.

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2. Other Decisions Have Employed Careful Analysis In Attempts To Partially Undo Some Of The Melting Of The Three Principles That Has Followed The Federal Circuit’s Decisions In Am-Pro And Precision Pine

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Virtually all tribunals that have considered contractor

allegations that the gGovernment has breached contractual duties

of good faith and fair dealing (Principle 2) since the Federal

Circuit issued its February 2010 decision in Precision Pine have

addressed Precision Pine’s language and analysis.319 Two

decisions issued by the Court of Federal Claims, Firemen’s Fund

Insurance Co. v. United States,320 and Timber Products Co. v.

United States,321 dealt with factual situations similar to those

presented in White Buffalo and Metcalf. All four cases dealt

with contractor allegations that the gGovernment breached its

contractual duty of good faith and fair dealing (Principle 1)

through actions taken solely in the contractual arena, and none

of the cases involved sovereign acts.322 No sovereign acts were

involved. The White Buffalo and Metcalf decisions ignored this

the fact that those cases involved no sovereign acts;323 fact,

while however, the Firemen’s Fund and Timber Product decisions

recognized the importance of this fact, and used it to help

explain some of the Precision Pine’s confusing language and

319 320 Firemen’s Fund Insurance Co. v. United States, 92 Fed. Cl. 598 (2010)..321 Timber Products Co. v. United States, No. 01-627C. 2011 WL 6934815 (Fed. Cl. 2011) No. 01-627C. 2011 WL 6934815 (Fed. Cl. Dec. 29, 2011).322 323

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analysis that has fostered confusion.324

One of the contractor’s allegations in Firemen’s Fund was

that the gGovernment breached the duty of good faith and fair

dealing (Principle 2) it owed a construction contractor’s

surety325 when the gGovernment waited many months before informing

the contractor’s surety of its disapproval of a site rewatering

plan.326 The gGovernment cited the language and analysis in

Precision Pine as a defense to the contractor’s claim.327 The

court, as others have consistently done (whether they have

followed the Principles or not), began its discussion with a

recitation of the Core Tenet and Principle 2:

“The United States, no less than any other party, is subject

to this covenant.” Precision Pine, 596 F.3d at 828 ( citing

First Nationwide Bank, 431 F.3d at 1349).

“Both the duty not to hinder and the duty to cooperate are

aspects of the implied duty of good faith and fair dealing.” Id.

at 820 n. 1 ( citing Essex Electro Eng’rs, 224 F.3d at 1291).

The specifics of the parties’ duties under this covenant are

dependent on the particular circumstances of the case. See

324 325 Firemen’s Fund completed the construction project as surety following the contractor’s bankruptcy. 326 327

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Milmark Servs., Inc. v. United States, 731 F.2d 855, 859

(Fed.Cir.1984).

The government breaches these duties when it acts

unreasonably under the circumstances, viz., if it unreasonably

delays the contractor or unreasonably fails to cooperate. See C.

Sanchez & Son, 6 F.3d at 1542 (“The government must avoid actions

that unreasonably cause delay or hindrance to contract

performance.”); Commerce Int’l Co. v. United States, 167 Ct.Cl.

529, 338 F.2d 81, 86 (1964) (determining that “breach of [the]

obligation of reasonable cooperation” depends upon “particular

contract, its context, and its surrounding circumstances”).328

After the court paid homage to the Core Tenet and Principle

2, The courtit then stated that it was appropriate to comment

further on the Federal Circuit’s ruling in Precision Pine on the

issue of breach of the duty of good faith and fair dealing

(Principle 2) because the government had insisted in Firemen’s

Fund that the Precision Pine ruling applied to “all of

plaintiffs’ claims involving government-caused delay,” not merely

those that could be considered sovereign actsinsisted that

Precision Pine applied to all of the contractor’s claims:.

Because defendant trumpets the decision as a deus ex machina for

all of plaintiffs’ claims involving government-caused delay, and 328 Id. at 675 (emphasis added).

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because Precision Pine’s holding as to the implied duty of good

faith and fair dealing impacts the allegations of government-

caused delay in the Board claims differently from those

implicated by plaintiffs’ labor claim, a further analysis of

Precision Pine and its holding is warranted.329

The court then explained that the Federal Circuit’s ruling

in Precision Pine applied only to situations that involve

sovereign acts and government conduct that arises outside the

context of contract administration (Principle 3):

Precision Pine’s two-part test for whether the government

breaches the implied duty of good faith and fair dealing must be

read in this particular context, a situation where the

government’s alleged wrongful conduct does not arise directly out

of the contract, i.e., key to the alleged breach are actions

involving another government actor or a third party. (emphasis

added) See, e.g., Bateson-Stolte, 305 F.2d at 388-89 (finding no

breach of Corps’s duty of good faith and fair dealing because

Corps-as a separate government agency-could not be charged with

knowledge of location and wage-rate impact of unrelated project).

In Precision Pine the alleged breach occurred during a period of

suspended contract performance, during which the Forest Service

breached its statutory duty arising under the ESA, a duty owed

not to the plaintiff, but to the Fish and Wildlife Service. 329 Id. at 676.

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Similarly, in the two cases primarily relied on by the Federal

Circuit, First Nationwide and Centex, Congress was alleged to

breach the implied duties in contracts between the plaintiffs and

the Federal Savings and Loan Insurance Corporation. See First

Nationwide, 431 F.3d at 1344-45; Centex, 395 F.3d at 1304-06. It

is in this context, where the government conduct giving rise to

the allegation of breach does not arise directly out of the

contract, that the Federal Circuit clarified the rule that the

government’s liability attaches when the “subsequent government

action is specifically designed to reappropriate the benefits the

other party expected to obtain from the transaction.” Precision

Pine, 596 F.3d at 829. Here, by contrast, the Corps’s obligations

arise out of its Contract with the Joint Venture, and the alleged

breach involves the Corps’s performance under the Contract..330

Finding that Precision Pine did not apply to the facts

presented, the court in Firemen’s Fund stated that the standard

set out in Malone and its progeny (Principle 2) continued to

govern situations in which an alleged government Government

failure to cooperate or hinder performance arises from acts the

gGovernment has taken in its contractual capacity, not in its

sovereign capacity:

330 Id. at 677 (emphasis added).

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The court concludes that Precision Pine does not foreclose

consideration of whether the Corps breached its contractual duty

of good faith and fair dealing based on the standards set forth

in Malone and its progeny. As explained in detail above, the

facts giving rise to Precision Pine’s holding are sufficiently

distinguishable from this case. Moreover, nothing in Precision

Pine overrules the prior cases cited. Cf. Precision Pine, 596

F.3d at 830 ( citing Malone, 849 F.2d at 1445-46).331

The facts in Timber Products presented a somewhat more

complicated situation than those in Fireman’s Fund.332 However,

the court carefully analyzed the nature of the gGovernment acts

and omissions at issue.333 In Timber Products, tThe contractor

alleged that the gGovernment had breached the contractual duty of

good faith and fair dealing (Principle 2) by awarding timber sale

contracts prior to performing required environmental surveys.334

The contractor alleged that the gGovernment awarded the contracts

relying upon an interpretation of applicable environmental law

that it knew would be unlikely to prevail in a pending federal

district court action.335 The gGovernment asserted the sovereign

acts doctrine in defense, claiming that the gGovernment’s

331 Id. at 678.332 333 334 335

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obligation to observe and execute environmental laws was a

sovereign act.336

The court disagreed with the Government, finding that the

contractor’s allegation was aimed at the gGovernment’s decision

to award the contracts prior to performing the required surveys,

not rather than the Ggovernment’s failure to perform the

necessary environmental surveys.337 The court stated that the

duty breached ran specifically to the contractor, not to third

parties or the public in general, as did the duty in Precision

Pine.338

The court followed Firemen’s Fund in tracing outlining when

Precision Pine does and does not applies,y and when it does not

apply, and in affirming that the “reasonableness” standard

articulated in Malone and similarly reasoned decisions applies

when the government acts under review arose solely in the

contractual arena, rather than in the sovereign arena:.339

Defendant, relying on Precision Pine, submits that the legal

standard for assessing whether the government breached the

implied duties to cooperate and not hinder performance is whether

the government: (1) took an action “specifically targeted” at

Plaintiff, and (2) “reappropriate[d] the benefits [Plaintiff]

336 337 338 339

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expected to obtain from the transaction, thereby abrogating the

government’s obligations under the contract.” 596 F.3d at 829—30.

The “specifically targeted” standard in the cases relied

upon by the Precision Pine court— First Nationwide and Centex—was

articulated in the context of analyzing whether the government

action, there the Guarini legislation, was a sovereign act—a

general and public act of broad application taken by the

sovereign in its sovereign, governmental capacity—the type of act

which would have defeated government’s liability. See First

Nationwide Bank v. United States, 431 F.3d 1342 (Fed.Cir.2005);

Centex, 395 F.3d at 1307. Under the sovereign acts doctrine, the

government cannot be held liable for an obstruction to the

performance of a particular contract resulting from the

government’s public and general acts as a sovereign. Horowitz v.

United States, 267 U.S. 458, 461, 45 S.Ct. 344, 69 L.Ed. 736

(1925); Yankee Atomic Elec. Co. v. United States, 112 F.3d 1569,

1574 (Fed.Cir.1997).FN13

The sovereign acts doctrine attempts to “balance[ ] the

government’s need for freedom to legislate with its obligation to

honor its contracts by asking whether the sovereign act is

properly attributable to the government as contractor.” United

States v. Winstar Corp., 518 U.S. 839, 896, 116 S.Ct. 2432, 135

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L.Ed.2d 964 (1996). This balancing “is not a hard and fast rule,

but rather a case-specific inquiry that focuses on the scope of

the [governmental act] in an effort to determine whether, on

balance, that [act] was designed to target prior governmental

contracts.” Yankee Atomic Elec., 112 F.3d at 1575 (emphasis

added). Thus, the “specifically targeted” language in First

Nationwide and Centex was articulated in the context of resolving

the government’s sovereign acts defenses, and was not broadly

asserted as replacing the reasonableness standard for determining

whether there was a breach of the implied duty of good faith and

fair dealing. See Centex, 395 F.3d at 1307 (noting that the

sovereign acts doctrine does not apply to “legislation targeting

a class of contracts to which the government is a party”). Given

its reliance on Nationwide and Centex, Precision Pine should not

be interpreted as creating a wholly new standard, and displacing

the well entrenched reasonableness standard for determining

whether there was a breach of the implied duties.

Precision Pine did not purport to overrule or depart from

Scott Timber, American Export, Sanchez, Fuller or Malone v.

United States, 849 F.2d 1441 (Fed.Cir.1988). As the Court of

Federal Claims recognized in Fireman’s Fund Insurance Company v.

United States, 92 Fed.Cl. 598 (2010), “Precision Pine does not

foreclose consideration of whether [the government] breached its

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contractual duty of good faith and fair dealing based on the

standards set forth in Malone and its progeny.” 92 Fed.Cl. at 677

—78 (citing Malone v. United States, 849 F.2d 1441

(Fed.Cir.1988)). In short, the Fireman’s Fund court found the

reasonableness standard was not changed by Precision Pine,

stating:

The government breaches [the covenant of good faith and fair

dealing] when it acts unreasonably under the circumstances, viz.,

if it unreasonably delays the contractor or unreasonably fails to

cooperate. See C. Sanchez & Son, 6 F.3d at 1542 (“The government

must avoid actions that unreasonably cause delay or hindrance to

contract performance.”); Commerce Int’l Co. v. United States, 167

Ct.Cl. 529, 338 F.2d 81, 86 (1964) (determining that “breach of

[the] obligation of reasonable cooperation” depends upon [the]

“particular contract, its context, and its surrounding

circumstances”).

Precision Pine, the Federal Circuit’s most recent

explication of the implied duty of good faith and fair dealing,

does not change the standards cited above.

92 Fed.Cl. at 675—76.

In addition to holding that Precision Pine does not

foreclose the use of the reasonableness standard for determining

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breaches of the implied duty of good faith and fair dealing, the

Fireman’s Fund court limited the “specifically-targeted” test

articulated in Precision Pine to its context: “a situation where

the government’s alleged wrongful conduct does not arise directly

out of the contract, i.e., key to the alleged breach are actions

involving another government actor or a third party.” 92 Fed.Cl.

at 677.340

Applying the law to the facts, the court found that:

1) the gGovernment’s conduct arose from a duty owed to the

contractor, not to third parties; 2) accordingly,therefore, the

gGovernment’s conduct should be assessed under a reasonableness

standard (Principle 2), not a “specifically targeted” or other

subjective intent standard (Principle 1) or Precision Pine’s

articulation of Principle 3 (the sovereign acts doctrine); and 3)

the gGovernment conduct (award of contracts knowing that a court

was likely to enjoin performance) violated the duty of good faith

and fair dealing (Principle 2) it owed the contractor.. The

court stated:

Unlike Precision Pine, the Forest Service’s obligations here

ran directly to Timber Products under the Jack Heli contract, not

to a third party under a statute or a different contract, and the

alleged breach directly impacted Timber Products’ ability to

340 Timber Prods., 2011 WL 6934815 at *22-23. (emphasis added).

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perform under this contract. As such, the Scott Timber

reasonableness standard, not Precision Pine’s specifically-

targeted standard, applies.341

As the court in Scott Timber recognized, a breach of the

implied duty of good faith and fair dealing may occur “as” a

contract is awarded. 86 Fed.Cl. at 117.342

The Court finds that the government acted unreasonably and

breached its duties to cooperate and not hinder performance by

awarding the timber sale knowing of the risk of an injunction and

suspension, but never telling Timber Products. Because of these

breaches, the government’s liability is not limited to out-of-

pocket expenses.343

341 Id. at 24.342 Id. at 25343 Id.at *1; Am. Gen. Trading & Contracting, WLL, 12-1 BCA ¶ 34,905 (A.S.B.C.A. Dec. 13, 2011).

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B. The Practical Effects Of The Conflation Of The Three Principles

It would be easy to dismiss the melting of the Core Tenet

and the three Principles by the Federal Circuit and some judges

of tribunals below as merely an unfortunate legal detour. What

more is it than case law gone awry? That would not be the first

time this has happened, nor will it be the last, some might

argue. Like the environment, case law tends to heal itself if

left alone. Isn’t this somewhat of an overblown academic

exercise?

No, we think not. Justices Souter344 and Breyer,345 the panel

that decided Malone and panels that decided several decisions

similarly reasoned, Judge Newman346 and several other judges, and

many commentators and scholars from Stanfield Johnson347 to

Professors Nash348 and Scwhartz,349 think notunderstand the pivotal

importance of this question. We have already examined to some

extent how As demonstrated previously, the Federal Circuit’s use

344 United States v. Winstar Corp., 518 U.S. 839 (1996)345 Mobil Oil Expl. & Prod. Se., Inc. v. United States, 530 U.S. 604 (2000).346 W. Stanfield Johnson, “The Federal Circuit’s Great Dissenter and the ‘National Policy of Fairness to Contractors,’” 40 Pub. Cont. L.J. 275 (Winter 2011)347 Id.348 Ralph C. Nash, “Postscript: Breach of the Duty of Good Faith and Fair Dealing,” 24 No. 5 Nash & Cibinic Rep. ¶ 22 (May 2010).349 Joshua I. Schwartz, “The Status of the Sovereign Acts and Unmistakability Doctrines in the wake of Winstar: An Interim Report,” 51 Ala. L. Rev. 1177 (Spring 2000); Joshua I.Schwartz, “Assembling Winstar: Triumph of the Ideal of Congruence in Government Contracts Law,” 26 Pub. Cont. L.J. 481 (Summer 1997).

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of imprecise language and analysis regarding this important area

of government contracts law has caused considerable confusion

within the federal judiciary.350 Over time, the practical effects

could be even more corrosive to the relationship between the

gGovernment and its contractors.351

At the heart of the Core Tenet is the concept that it is not

only good and fair to contractors to place them on an equal

footing with the gGovernment when they enter and perform

government contracts, but it is good and fair to the government

Government as well.352 If the Ggovernment cannot be trusted as a

reliable partner in contracting, the pool of entities willing to

contract with the Ggovernment will shrink, and those that remain

willing to contract will inject risk factors into their pricing.

In the end, the gGovernment will pay more, and therefore, — the

taxpayer will pay more.. As the Supreme Court has stated:

Injecting the opportunity for unmistakability litigation

into every common contract action would, however, produce the

untoward result of compromising the government’s practical

capacity to make contracts, which we have held to be “of the

essence of sovereignty” itself. United States v. Bekins, 304

U.S. 27, 51—52, 58 S.Ct. 811, 815, 82 L.Ed. 1137 (1938).FN28 From

a practical standpoint, it would make an inroad on this power, by

350 351 352

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expanding the government’s opportunities for contractual

abrogation, with the certain result of undermining the

government’s credibility at the bargaining table and increasing

the cost of its engagements. As Justice Brandeis recognized,

“[p]unctilious fulfillment of contractual obligations is

essential to the maintenance of the credit of public as well as

private debtors.” Lynch v. United States, 292 U.S., at 580, 54

S.Ct., at 844.353

Standards, including legal principles, drive conduct. This

is not a matter of ethics; it is a matter of human nature, and

business. How many businesses, or individuals, pay more taxes

than they are required to pay? They may contribute generously to

charities, but few if any pay more taxes than they are required

to pay.354 Government procurement and contract administration

employees are obligated to obtain the best value for the taxpayer

money they are charged with spending.355 They are obligated to

pursue the most favorable conditions and outcomes they can

obtain.356 If they know that they cannot subject the Ggovernment

to liability by squeezing contractors until the contractors give

extra-contractual concessions during contract performance, they

353 See Winstar, 518 U.S. at 839 (emphasis added).354 355 356

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will, and arguably are obligated to, squeeze the contractors.357

Squeezing would include delay, threats of termination or negative

past performance reports, evasion of responses, and any other

acts and omissions that fall well short of specific intent to

injure a contractor, but have the practical effect of preventing

the contractor from realizing the benefits it reasonably

anticipated when it entered its government contract.

The same would be true if the balance were tipped in favor

of the contractor side. Government contracts clients ask, “What

are we required to do?” when seeking advice about compliance with

a regulation or contract provision. They may decide that it is

prudent as a business matter to foster their long term

relationship with a government customer — i.e., to do more than

that which is required of them by contract or regulation in a

particular circumstance. However, a determination of what is

required is almost always a starting point. If a lower level of

performance is required, decision-making starts at that point; if

a higher level of performance is required, decision-making starts

at the point.

Again, although consideration of ethics may be relevant to

this analysis, the analysis does not rest on considerations of

ethics. People in business are busy; they do not get to some

tasks; they mean no harm to their contracting partners when they

357

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miss response deadlines. Absent use of risk-shifting provisions,

universal rules of contracting make a party who contracts with

another liable to the other for delays in performing tasks that

would allow the other to enjoy the benefits of the contract the

two have executed. The Precision Pine language and analysis, and

the manner in which some tribunals have interpreted the language

and analysis, negate these universal rules of contracting, and

substantially erode the Core Tenet.358

Left as is, application of the conflated Principles

articulated in Precision Pine and some of its progeny will likely

lead to deterioration of government-contractor relations,

undermine the government’s credibility at the bargaining table,

and lead to higher procurement costs. The Federal Circuit should

find occasion to revisit its articulation and analysis of the

Principles that govern this area of the law to give clear

guidance to the tribunals below, regulators, government contract

administration personnel, and contractor personnel. Such

analysis would do well to avoid over-protection of the government

as contractor, and, to pay heed to the Supreme Court’s advice —

Let the government contract.

358

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