The duty of good faith and fair dealing in contract law is, admittedly, a bit poorly named. It does not require that a party act in bad faith to breach it. You do not need to act nefariously to run afoul of it. But then the question arises: What is it? How does one breach it? This was (among other things) a question explored in a recent Court of Federal Claims decision regarding an Small Business Innovative Research (SBIR) contract. We will look at that decision’s review of the duty of good faith and fair dealing here in a 2-part series.
In Sunrez Corp. v. United States, No. 21-568, 2025 WL 731834 (Fed. Cl. Mar. 7, 2025), Sunrez Corporation (Sunrez) was a company that had regularly had SBIR contracts with the federal government. It received another such contract from the USAF in 2014 to develop composite pallets for cargo deployment. At the same time, the USAF issued a similar contract to the University of Dayton regarding a separate pallet. The USAF approve of the university’s pallet, but did not move forward with Sunrez’s pallets as its pallets did not pass initial testing. Further, the USAF determined Sunrez’s technical data package (TDP) didn’t comply with contract requirements.
Under the contract, the USAF obtained data rights to all technical data generated and included in a TDP, with the exception of previously developed technology. There the government only gets limited rights (provided the contractor properly discloses and marks the same). Apparently, at some point, the USAF determined that it was seeking data that went beyond its rights, but still needed Sunrez’s TDP before it could award a higher level contract like Sunrez wanted. A dispute arose, and this was resolved by a clause granting the USAF only limited rights in the data to placate Sunrez’s concerns. All the same, the USAF, upon receiving the TDP, determined it did not accurately reflect the final product or include information on the pallet’s core, as it was lacking detail.
Sunrez then submitted a claim to USAF, seeking $132 million under the Contract Disputes Act. Part of Sunrez’s reasoning for this was its claim that the USAF “engaged in numerous breaches designed to hinder Sunrez’s performance of the Contract and impermissibly retaliate against Sunrez for refusing to give up its rights.” In other words, a claim of breach of the duty of good faith and fair dealing. Sunrez’s claim was essentially that the USAF breached the duty of good faith and fair dealing in requiring the TDP, its lack of testing of the pallets, its decision not to move forward with Sunrez for a next level SBIR contract, and its lack of communications with Sunrez. Due to the length of the decision and to help keep things clearer, we don’t note the background of these claims now, but will go over them for each claim below.
COFC Overview
In its analysis, the court first noted the basic principles of the duty of good faith and fair dealing. The duty of good faith and fair dealing is implied in every contract on each party to the contract. It is inherent to the contract. The duty can also be described as a duty not to hinder and a duty to cooperate. Under the same, parties are required not to interfere with another party’s rights under the contract. A party fails to abide by this duty when it interferes and acts so as to destroy the other party’s reasonable expectations regarding the benefits of the contract.
An example of such a breach is when the government awards a contract with some substantial benefit to entice a contractor, only to then eliminate that benefit after awarding the contract. The idea is that a breach involves actions that go against the spirit of the contract. Things like lack of diligence, willfully providing imperfect performance, not reasonably cooperating with another party’s reasonable requests under the contract. Technically, the contract may not speak to such actions, but when one looks at the facts, it becomes apparent what’s going on. A breach of the duty of good faith and fair dealing doesn’t need to involve a breach of the express provisions of the contract. In essence, the principle can be summed up as follows: When considering the facts, did the alleged breaching party act in a manner that basically undermined the contract in some way?
The TDP
The first question was the TDP. Sunrez argued that USAF undermined Sunrez’s data rights by requiring delivery of the TDP. Sunrez argued that the level of detail in the TDP that the USAF wanted would essentially undermine its data rights by having to give over too much information. It based this on a policy directive regarding the SBIR program. The court rejected this argument as, while a breach of the duty of good faith and fair dealing need not involve a breach of a provision of the contract, the breach has to involve undermining some actual right under the contract. The contract required the delivery of a level III TDP if Sunrez wanted a next level award. The fact some outside evidence on SBIR policy exists was not relevant to this consideration since the contract was clear and unambiguous.
Testing of Pallets
Sunrez’s second argument on the duty of good faith and fair dealing was that the USAF breached this duty by not testing Sunrez’s prototype pallets. Essentially, because Sunrez had not provided the TDP, the USAF refused to submit the pallet designs for airworthiness certification and to move to Phase III of the SBIR. The court again disagreed with Sunrez’s claim. Here, there was nothing in the contract that promised such testing would occur. The government never had to perform testing under the contract, in fact the only obligation was on Sunrez to provide pallets that would meet the testing requirements if it was tested. Furthermore, the government did in fact conduct testing, and the pallet prototype failed the test.
Summary
There are more matters to go over with this case as it touched on many issues, to say nothing of the fact there are still good faith and fair dealing issues to go over. We will go over those in a subsequent post, but, for now, here’s some observations: Sunrez’s main issue here was that the contract clearly required that they provide the level III TDP despite their protestations. The government insisting that Sunrez fulfill its express obligations under the contract is not going to be a strong argument that the government is breaching the duty of good faith and fair dealing. If anything, the government arguably could have argued that it was Sunrez that was breaching the duty of good faith and fair dealing by not providing a properly detailed TDP in an attempt to protect its data rights.
We will go into further detail on our thoughts on this case and the duty of good faith and fair dealing in our next post on this decision.
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