On January 20, 2021, President Joseph R. Biden, Jr. signed a Proclamation suspending former President Donald J. Trump’s Proclamation of February 15, 2019, declaring a national emergency to secure the southern border of the United States.[1]

President Biden’s Proclamation established that “[i]t shall be the policy of my Administration that no more American taxpayer dollars be diverted to construct a border wall.” The Proclamation directed the Secretary of Defense and the Secretary of Homeland Security, in consultation with the Director of the Office of Management and Budget, to:

(i) pause work on each construction project on the southern border wall, to the extent permitted by law [regardless of whether funding is by diverted funds or Congressional appropriations] . . . to permit: (A) assessment of the legality of the funding and contracting methods used to construct the wall; (B) assessment of the administrative and contractual consequences of ceasing each wall construction project; and (C) completion and implementation of the plan developed in accordance with section 2 of this proclamation;
(ii) pause immediately the obligation of funds related to construction of the southern border wall, to the extent permitted by law;
(iii) compile detailed information on all southern border wall construction contracts, the completion status of each wall construction project, and the funds used for wall construction since February 15, 2019.[2]

President Biden’s Proclamation constituted an Act of Government – i.e., an action taken by a federal, state, or local government in furtherance of its powers – and its impact is sure to be felt on the public contracts it impacts. However, in light of ever-increasing regulation, particularly government mandates related to the ongoing COVID-19 pandemic, even private contractors have to consider the implications of an Act of Government on their contracts.

Acts of Government and Public Contracts

President Biden’s Proclamation resulted in thousands of stop-work orders being issued pursuant to Federal Acquisition Regulation (“FAR”) 52.242-15(a), which requires that the contractor on a public works project immediately stop work for a period of up to 90 days after a written order from the government’s contracting officer. The length of the stop-work order can be extended only with the consent of the parties. The contractor must resume work thereafter if the government cancels the stop-work order or if the 90-day period expires without the government terminating the work for default or the convenience of the government.

If the work resumes, the contractor is entitled to “an equitable adjustment [to the completion date] or contract price, or both … if (1) [t]he stop-work order results in an increase in the time required for, or in the Contractor’s cost properly allocable to, the performance of any part of this contract; and (2) [t]he Contractor asserts its right to the adjustment within 30 days after the end of the period of work stoppage[.]”[3]

If the work covered by the stop-work order is terminated for cause or the convenience of the government, the contractor is entitled to all reasonable costs resulting from the stop-work order, plus any recovery allowed under either the default provision or the termination for convenience provision of the applicable contract.[4]

Acts of Government and Private Contracts

While a contractor’s right to recover for an Act of Government on a federal public works contract is covered under the FAR provisions, many private construction contracts do not address recovery in the event of an Act of Government that adversely affects the performance of the contract. In such a case, the doctrine of sanctity of contract provides that each party is obligated to do what it promised to do, so long as performance is possible. In other words, each party assumes the risk that its performance will be costlier, more extended or more difficult than originally anticipated. As the United States Supreme Court explained in United States v. Spearin, “[w]here one agrees to do, for a fixed sum, a thing possible to be performed, he will not be excused, or become entitled to additional compensation, because unforeseen difficulties are encountered.”[5]

As a result, a contractor is obligated to continue performing its construction work and an owner is obligated to continue paying the contractor, without an adjustment in the contract price or contract time, in the event an Act of Government makes either of their performances more difficult or unprofitable but not impossible.

Many private contracts contain force majeure clauses that excuse performance under certain circumstances, an Act of Government being one, but what constitutes an Act of Government that excuses performance is often unclear. For example, two lumber companies argued in Seaboard Lumber Co. v. United States[6] that their obligation to perform lumber supply contracts was excused because the United States Forest Service refused to agree to an adjustment to the terms of their contracts as a result of the government’s new monetary control procedures, deregulation of savings institutions and other acts of government that led to an increase in interest rates and a slump in the lumber market. The Federal Circuit Court of Appeals affirmed judgment in favor of the United States Forest Service because while the acts of government affected profitability, they did not prevent performance.

Likewise, courts have found that acts of government that result in market fluctuations in the price of commodities;[7] acts of a foreign government that cause a collapse in global oil prices;[8] a trade war;[9] economic hardship due to a government’s refusal to allow a rate increase to offset an increase in the cost of coal;[10] and an increase in the cost of polysilicon as a result of escalating tariffs imposed by the United States and China[11] did not excuse performance, so long as performance remains possible even if performance is at a loss. Indeed, “[a] force majeure clause is not intended to buffer a party against the normal risks of a contract. The normal risk of a fixed-price contract is that the market price will change.”[12]

On the other hand, a government prohibition on the sale of goods categorized as military equipment to Iran excused a seller from performing a contract for the sale of radio communications products because performance was deemed impossible due to an Act of Government.[13] Similarly, warships in the Mediterranean Sea excused a contract to deliver sage to Greece during World War II.[14] And delays in the delivery of aircraft as a result of government priority orders during the Vietnam War constituted acts of government that excused delayed performance under the contract’s force majeure provision.[15]

In sum, contractors generally bear the risk of performance if performance is adversely affected by acts of government. There is no reason, however, that the parties to a private contract cannot follow the lead of the Federal Acquisition Regulations and draft their contract to address the risk of an Act of Government.

 

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[1] Proclamation of Jan. 20, 2021 on the Termination of Emergency with Respect To The Southern Border Of The United States And Redirection Of Funds Diverted To Border Wall Construction (the “Proclamation of Jan. 20, 2021”) (suspending Proclamation 9844 of February 15, 2019).

[2] Proclamation of Jan. 20, 2021, §§ 1 & 2.

[3] FAR 52.242-15(b).

[4] FAR 52.242-15(c) & (d).

[5] 248 U.S. 132, 136 (1918).

[6] 308 F.3d 1283, 1293 (Fed. Cir. 2002).

[7] United Sugars Corp. v. U.S. Sugar Co., Inc., 2015 WL 1529861 (D. Minn. 2015); B.F. Goodrich Co. v. Vinyltech Corp., 711 F. Supp. 1513, 1519 (D. Ariz. 1989).

[8] Langham-Hill Petroleum, Inc. v. S. Fuels Co., 813 F.2d 1327, 1330 (4th Cir. 1987).

[9] Shelter Forest Int’l Acquisition, Inc. v. Cosco Shipping (USA) Inc., 475 F. Supp. 3d 1171 (D. Ore. 2020).

[10] N. Ind. Pub. Serv. Co. v. Carbon Cty. Coal Co., 799 F.2d 265, 274-76 (7th Cir. 1986).

[11] Kyocera Corp. v. Hemlock Semiconductor, 313 Mich. App. 437 (2015).

[12] Seaboard Lumber Co., 308 F.3d at 1293 (citing N. Ind. Pub. Serv. Co., 799 F.2d at 274-76).

[13] Harriscom Svenska, AB v. Harris Corp., 3 F.3d 576 (2d Cir. 1993).

[14] Carvel v. John Kellys (London), Ltd., 53 N.Y.S.2d 640 (Super. Ct. 1945).

[15] Eastern Air Lines, Inc. v. McDonnell Douglas Corp., 532 F.2d 957 (5th Cir. 1976).