Consider this hypothetical: The federal government notifies a contractor in a conflict zone of changes to site access security protocols due to external threats. These security protocol changes starkly contrast with the contract’s protocol provisions and will significantly and negatively impact the contractor’s performance by increasing the time and effort for cleared workers to obtain daily access to the project site. The changes will also interfere with material deliveries to the site. When the contractor submits a request for equitable adjustment for direct costs and a time extension resulting from the protocol changes, the contracting officer denies the request. The federal government’s denial is due, in part, to its position that the directive is a sovereign act that does not justify a contract adjustment. Can the federal government avoid liability for the added costs and time resulting from a deviation to the agreement solely by invoking the Sovereign Act Doctrine? As set forth below, the answer likely depends on whether the government’s action is related to a broader policy goal.
The Sovereign Act Doctrine – The Government’s Defense To Claims
Many claims arising out of federal contracts relate to constructive changes to the contract. To pursue a constructive change claim, the contractor must demonstrate that it was required to perform extra-contractual work without a formal change order and that the extra-contractual work was either ordered by the government or caused by the fault of the government. These claims frequently arise where government action or inaction prevents a contractor from proceeding in the most efficient manner. The contractor bears the burden of proving its entitlement to an adjustment, including establishing liability, causation, and injury by a preponderance, as well as proving its damages with sufficient certainty. Even if the contractor can satisfy these burdens, the government may still invoke the Sovereign Act Doctrine to avoid liability.
The Sovereign Act Doctrine allows the government to escape liability for contractual breaches when the government’s action that hinders the contract’s performance is considered a “public and general act” attributable to the government as a sovereign. The United States Supreme Court has held that an act is “public and general” in nature when its impact on public contracts is incidental to accomplishing a broader government objective. Therefore, to invoke the Sovereign Act Doctrine, the government’s action must serve the general public welfare and not be targeted toward a particular contractor or contract. For example, when a contractor asserted delay damages after being denied access to a construction site on a military base following the September 11, 2001 terrorist attacks, the court found that the government was not liable since the order limiting access was intended to protect the secrecy of government information.
A natural tension in federal government contracts is the federal government’s dual role of contracting party and sovereign entity. A byproduct of that tension, the Sovereign Act Doctrine, is an affirmative defense inherent in every government contract. This defense is premised on the principle that the United States as a contractor cannot be held liable for the government’s public acts made as a sovereign or lawmaker. Drawing the distinction between these two roles is not always easy, especially when the government benefits from its actions. Consequently, the Sovereign Act Doctrine frequently collides with contract law when the government’s actions deprive a contractor of all or some of the benefits the contractor reasonably expected to receive under its contract with the government.
The Supreme Court has imposed a two-part test for determining the applicability of the Sovereign Act Doctrine: (1) whether the sovereign act is properly attributable to the government as contractor; and (2) whether the act would otherwise release the government from liability under ordinary principles of contract law. This test, however, is often difficult to apply in practice. The goal is to fairly balance the government’s freedom to legislate with its obligation to abide by its contracts. In the words of the Supreme Court, “The acts of the one are not to be ‘fused’ with the other—if an act of the Government as sovereign would justify non-performance by any other defendant being sued for contract breach, then the Government as contractor is equally free from liability for non-performance.”
Limitations Of The Sovereign Act Doctrine
The Sovereign Act Doctrine is not limitless. Even if a government act is deemed a “sovereign act,” the court must still determine whether the action would otherwise release the government from liability under ordinary principles of contract law (i.e. doctrine of impossibility). Moreover, courts have refused to apply the defense where the government’s breach is tainted by a governmental objective of self-relief. A government act cannot be “public and general” if it has the substantial effect of releasing the government from its contractual obligations. In other words, the government cannot rely upon the defense as a means to escape from contracts that it subsequently deems unwise or—as one court put it—when the government has a “change of heart.” For example, one court rejected the defense where the government unilaterally terminated a timber contract after deciding that continued performance was unwise and likely to cause environmental damage. The government is charged with an implied duty to act reasonably and in good faith when acting as a sovereign. Consequently, when the government alters or impairs the terms of a contract, there is a natural presumption that the government is not acting in its public or general capacity.
Courts will also reject the defense if the government’s directive is contractual in nature or narrowly targeted to relieve the government of its contractual obligations. Therefore, if at least part of the government’s action is premised on depriving a contractor from the benefits it reasonably expected from the contract, the government is unlikely to be protected by the Sovereign Act Doctrine. This includes government actions that impact a specific contractor or class of contractors without having a broader public objective. In one case, a court found that the government was not immune from liability where it delayed and denied permits for offshore drilling that the contractor was entitled to receive under the terms of an underlying lease agreement. The court held that the defense did not apply because the government’s action was specifically directed at the contractors’ contractual right to use the oil platform. Another court similarly refused to apply the government’s defense where Congress enacted a statute specifically impacting the duties and water rights of certain water districts holding contracts with the government.
Although the Sovereign Act Doctrine provides substantial protection to the government, it is not limitless. The applicability of the defense will often involve a fact-specific inquiry probing the motivations and scope of the government’s directive. As such, the prudent contractor faced with the contracting officer’s invocation of the Sovereign Act Doctrine in the hypothetical above should clearly document all circumstances leading up to the directive to support its entitlement to a constructive change, including demonstrating all cost impacts. In doing so, it will be necessary to analyze whether the federal government’s actions are contract-specific or related to its implementation of a broader national policy.