CLAIMS FOR GOVERNMENT DEFAULT AND FAILURE TO PAY

 

We engage in musings of a contractor’s attorney on the eve of the government's failure to pay its bills.

Much has been written about the possible government failure to extend the debt limit and its effect on contractors. All this really amounts to practical preparation for cash flow being interrupted. What we want to address is the real battleground here in terms of holding the government responsible on its government contracts. There's no doubt a government failure to pay on time is a a breach of the contract and can be redressed in any number of ways including constructive changes. So, there should not be a battleground over whether the government is changing the contract terms by failing to pay (a breach of the contract).

The real battleground is over the application or not of the sovereign act defense. Is the government acting in its sovereign capacity or in its capacity as a contractor? We can see it both ways but that really doesn't answer the question as to whether relief is available for the contractor. In simple terms the government acts in its sovereign capacity when its acts or omissions affect the public generally without reference to any contractor or contract. So far, the judicial tribunals have pretty much stuck to the clear definition and application of the defense to deny recovery for constructive changes if the government acts in a way that affects the public. However, the Supreme Court jn Winstar has held that where a contract is involved one must scrutinize whether the act or omission of the government may well have involved obvious impact on contractual obligations.

Of course, we all say that it's unlikely that the government will default on the debt. And even if it does it will not last long enough to have any real impact on contractors. However, any interruption may be devastating to one or more contractors who may then wish to seek compensation for their losses. We believe a strong case exists to submit claims based on government acts and omissions, call them constructive changes, notwithstanding the obvious defense of sovereign immunity.

The US government is the largest buyer of goods services and construction in the world. The government is very much aware of the magnitude of its contracts and the impact of its actions or inactions under those contracts on the contractors involved and the overall economy. Defaulting on the debt affects government contracts. Defaulting on the debt and the delay of or failure to pay on its contracts is an act of the government in its contractual capacity.

In United States v. Winstar Corp., 578 U.S. 839 (1996), the Supreme Court drew a distinction between a pubic act intended to accomplish a broad government objective and an action tainted by  a government objective of self-relief. 

The lesson from Winstar is that where the government action has the benefit to the government of not having to pay its bills, the sovereign act defense does not apply. In Winstar, Congress changed the law that had a direct impact on private sector saving and loan enterprises. We believe contractors face very much the case here where default will obviously have a direct and predictable impact on contracts. Failure to pay certainly is tainted by self-relief.  Congress may not have targeted government contracts directly. However, Congress knows the impact and if it defaults it should not be able to hide behind sovereign immunity.  Therefore, our conclusion is that one should be prepared to submit claims for damages if in fact the failure to pay occurs.

bill@spriggslawgroup.com