EXPLAINING THE SOVEREIGN ACT DEFENSE

Senior Judge and former Chief Judge Loren Smith of the Court of Federal Claims (COFC) has just written an opinion explaining the sovereign act defense (which the government can raise in contract disputes) and applying it to a particular fact situation.  He starts by reminding us that when the government acts in its capacity as a contractor, the courts treat the government as a private party.  However, the sovereign acts doctrine shields the government from liability for breach of contract caused by its public and general acts as a sovereign.

The most recent Supreme Court explanation came in the 1996 ruling in United States v. Winstar Corp., 518 U.S. 839 (1996).  There, the Supreme Court held that the sovereign acts defense did not apply because the new minimum capital requirements set by legislation, which abrogated the benefits granted by the government to those financial institutions that had agreed to take over failing thrift institutions, had "the substantial effect of releasing the government from its contractual obligations."

According to the Supreme Court, an act is public and general when its impact upon public contracts is merely incidental to the accomplishment of a broader government objective.  However, the defense does not apply when the government's action is tainted by a governmental object of self-relief.  As Judge Smith points out, the Supreme Court focused on the intent of the government and it found clear evidence in the legislative record that Congress was aware that the legislation would have the effect of releasing the government from its own contractual obligations.

(Judge Smith, by the way,  the applied the defense in a case involving Louisiana's flood control and levy system since the government's conduct was merely incidental to the contract with the private contractor.  The government was shielded by the sovereign act defense.)

So, back to sequestration and whether the government will be successful in asserting the sovereign act defense against claims from contractors.  It's a close call. There is no question but that sequestration has a public and general purpose.  But it also contains a strong element of governmental self-relief from its obligations. The devil is in the legislative history.  If it appears Congress knew and discussed the impact on contracts, the defense probably will fail.  However, we see this issue back at the Supreme Court some years down the road.

bill@spriggslawgroup.com               www.spriggslawgroup.com