Infotech and the Law: When it comes to paying interest, govt. fails fairness test

Richard Rector

Now and then, long-standing legal principles are overtaken ? for good reason ? by competing principles that better match our evolving standards of justice. In contract law, for example, no one today would seriously dispute the idea that a duty of good faith and fair dealing is implicit in all contracts. Yet the concept was foreign to many contracting parties just 40 years ago.

In the area of government contracts, an emerging principle over the years has been that the government is bound by its contract just as a private person is. In other words, when the government enters the marketplace and seeks to enforce its contractual rights, it is subject to the same rules that apply to individuals in commercial transactions.

Recognizing this principle has made government contracting more predictable and fair. It also has further eroded the competing principle of sovereign immunity, which is the archaic concept, adopted from English common law, that the king can do no wrong.

In the United States, the doctrine of sovereign immunity means the government cannot be sued without its consent. Wisely, Congress has provided such consent in numerous circumstances over the years, progressively relaxing the doctrine in recognition of the government's expanding role in modern commerce.

Yet there are hardened vestiges of sovereign immunity remaining within our legal system. For instance, it is a long-standing rule of government contracts that interest does not run on a claim against the government without specific contractual or statutory consent.

Fortunately, Congress has consented to the payment of interest in certain situations. For example, through the Contract Disputes Act of 1978, interest on contract claims is authorized from the date of a claim's submission. Similarly, through the Prompt Payment Act of 1983, Congress authorized interest on the government's late payment of contract invoices.

Nonetheless, there remain situations in which the interest prohibition deprives contractors of a fair recovery for breach of contract. For instance, if the government improperly, or even willfully, withholds progress payments, such breach typically is not compensable by the payment of money damages ? that is, interest on the withheld amounts.

The courts and boards of contract appeals have often recognized the inequity of this prohibition, but they are required to follow it. This was illustrated recently in one of the Winstar-related cases at the Court of Federal Claims, Suess v. United States (Fed. Cl. No. 90-981C, April 1, 2002).

In that case, the court held that a former Oregon thrift was entitled to damages of approximately $35 million for the government's breach of contract in 1990. Nonetheless, because the court could not award interest on that amount, it concluded that the award was grossly inadequate.

The court candidly remarked: "This represents one of those gaps in our nation's system of the rule of law. Our great Constitution's framers were men of extraordinary vision. They understood that while a framework for the protection of rights under law had been established in 1789, its complete fulfillment was an ongoing project for the ages. Through statute and executive action, our nation has moved toward that goal. This is a case where the movement should continue through the legislative process."

It's time to overhaul the outdated rules on recovery of interest in government contracts. When the government breaches a contract, it should foot the entire bill just like any commercial entity, and the contractor should be made whole. Justice, and our system of law, deserve no less.

Richard Rector is a partner in the Government Contracts practice of Piper Rudnick LLP in Washington. His e-mail address is richard.rector@piperrudnick.com.

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