Posted on 7/30/2011 10:32 AM

Is Failure to Pay a Breach of Contract?

The Court of Appeals for the Federal Circuit has said the government, acting through the contracting officer, must act impartially and judiciously when it makes decisions.  Penner Installation Corp. v. United States, 89 F. Supp. 545 (Ct. Cl.), aff'd, 340 U.S. 898 (1950).  The Court also has said that this duty is akin to the duty to act in good faith with due regard to the contractor's rights and to cooperate with and not interfere in the contractor's performance.

These duties are implied in every government prime contract and may well also be implied in subcontracts as well.  Failure to discharge these duties clearly is a breach of contract.  Even actions which strain the financial capacity of the contractor, such as delayed payments, are breaches of the government's implied duties.

Thus, it is responsible to conclude that any action of the government which interferes with the contractual rights of the contractor gives rise to breach of contract remedies such as the risky (because it invites litigation of termination for default) stopping of work and recovery of damages.  Recovery of damages will not include all the incidental and consequential damages available in non government contract cases, but it does include the recovery of lost anticipated profits.

What the government risks, among many other things, when it shuts down, partially shuts down, furloughs employees and delays or stops making payments is that contractors will sue for damages. 

So far so good for contractors.  However, the government may assert the sovereign act defense to any claim for breach resulting from a failure to appropriate the necessary funds to make contractual payments.  The failure to make appropriations to pay contractual debts may be a sovereign act.  However, there is precedent for the argument that shutdown of government offices so interferes with the contractor's contractual rights that the doctrine does not defeat a claim for damages based on breach of contract.

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