Can Congress change a contract's provisions?

This topic was raised by a reader: Recently, Congress has been getting much more involved in the management of agency contracts. Some of the congressional directives may have a substantial impact on existing contracts. How far can Congress go in changing the terms of a government contract? Can acts by Congress result in government liability to a contractor?

This question raises an interesting problem. Historically, the U.S. government has assumed two completely different personas in its dealings with its citizens. On the one hand, the government may act in a sovereign capacity, providing for the health and welfare of the general population as a whole. With certain exceptions, the government is shielded from liability to its citizens for actions performed in its sovereign capacity, including most acts by Congress. This "sovereign-acts doctrine" was described most notably by the Supreme Court in Horowitz v. United States, 267 U.S. 458 (1925).

On the other hand, the government also may act in a private capacity. In this second role, the government may enter contracts and otherwise act in the same way as a private entity. When acting in its private capacity, the government subjects itself to the same types of liability as a private party to a contract.

Recently, a number of decisions have discussed the limitations on the sovereign-acts doctrine. The most important new decision is Winstar Corp. v. United States, 64 F.3d 1531 (Fed. Cir. 1995). The Winstar decision is especially important because the Supreme Court just agreed to review the case during the coming year. In Winstar, the U.S. Court of Appeals for the Federal Circuit affirmed a lower-court decision finding the government liable for breach of contracts between it and numerous financial institutions that had agreed to assist failing banks. Under the contracts, the financial institutions were authorized to employ various beneficial accounting methods when they agreed to acquire the risky banks. However, before they had received the full benefit of these accounting methods, Congress legislatively curtailed their use.

The Court of Appeals agreed that the government is immune from liability for its "public and general acts as a sovereign." However, according to the court, not every governmental action qualifies as a sovereign act within the meaning of the doctrine. Government action whose principal effect is to abrogate specific contractual rights does not immunize the government from contractual liability under the doctrine. Id. at 1548-49.

Because the court found that the legislative action was aimed specifically at the contractual rights granted the financial institutions, it concluded that the sovereign-acts doctrine did not shield the government from liability for those actions.

Similarly, in Yankee Atomic Electric Co. v. United States, 33 Fed. Cl. 580, 583-84 (1995), the Court of Federal Claims held that a congressionally mandated "special assessment," applied retroactively to uranium-enrichment contracts, improperly violated the pricing terms of those contracts. Although the government argued that the special assessments were in the nature of a tax, the court ruled that the assessments were "tantamount to an abrogation of contract rights."

The price of the uranium-enrichment services was contractually fixed at the time of performance.

According to the court, the contractual authority to price the services was extinguished when the government rendered performance, and, "simply put, the government bargained away the right to demand additional compensation from plaintiff (for the same services) to meet risks not foreseen at the time the contracts were made." Furthermore, "even where a contract does not contain language securing protection from the potentially disruptive effects of subsequent legislation, exercise of the sovereign power does not proceed unchecked." Id. at 584.

Generally, contractually based limitations on the sovereign-acts doctrine provide the safest protection for the contractor. However, one consequence of reliance on a contractually based theory is the need to follow any contractually specified procedures for dispute resolution in pursuing compensation.

The law in this area is still unsettled. Hopefully, the Supreme Court's review of the Winstar case will resolve some of the remaining uncertainties.

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Peckinpaugh is a member of the government contracts section of the law firm of Winston & Strawn, Washington, D.C. Readers are encouraged to submit topics by e-mail to carl@carl.com, or by voice-mail to (703) 876-5151, extension 2965. You can also read his column on FCW's home page located at http://www.fcw.com.