The U.S. government still owes contractors good faith and fair dealing, a federal appeals court ruling indicates.

Some attorneys believed that good faith and fair dealing had been pared back in previous court cases, but the appellate court’s Feb. 11 ruling in favor of Metcalf Construction Co. v. U.S. is apparently good news for contractors.

Construction industry associations had filed briefs supporting Metcalf, a Hawaii-based general contractor that had been hired by the U.S. Navy in 2002 to build housing units under a design-build contract. The ground conditions involving expansive soils and the presence of chlorate, a pollutant, vastly exceeded what the Navy or Metcalf first believed existed.

Metcalf and the Navy’s contract, set in 2006, required the contractor to complete 212 housing units for about $50 million. The contractor claims it spent about $76 million to complete the work long after the original target date.

The decision also has implications for the way federal contracts divide the risks in design-build contracts and over differing site and ground conditions—the source of many disputes in the construction industry and especially this case.

The federal appeals court in Washington, D.C. overturned all aspects of a prior decision by the U.S. Court of Federal Claims, sending the case back to that court to be decided based on the higher court’s ruling.

With its decision, the Court of Appeals “actually re-established the covenant of good faith and fair dealing [in federal contracts],” says Robynne T. Parkinson, a Mercer Island, Wash.-based attorney who has followed the case closely. “Most commentators believed that the covenant was dead, or at least on life support.”

Design-build companies paid attention to the case because of its potential influence on the risks those companies assume in federal contracts.

The trial court believed the contract put the costs and risk of the ground troubles on Metcalf.

“The trial court,” wrote the appeals court judges, “interpreted the pre-bid site representations and related RFP provisions to be nullified by Metcalf’s investigative responsibilities during performance.”

But the trial court misinterpreted the contracts, wrote the appellate court judges.

“Nothing in the contract’s general requirements that Metcalf check the site as part of designing and building the housing units, after the contract was entered into, expressly or implicitly warned Metcalf that it could not rely on, and that instead it bore the risk of error in, the government’s affirmative representation about the solid conditions.”

Although the information about expansive soil in a revised RFP was “for preliminary information only,” wrote the appeals court judges, the representations meant that while Metcalf would investigate once the work began, it did not bear the risk of errors in pre-contract assertions by the government about the subsurface site conditions.