March 22, 2005

The Supreme Court Affirms Duty of Government to Pay Amounts Promised Notwithstanding Absence of Funds

The Supreme Court has just issued its long awaited decision in Cherokee Nation v. Leavitt finding that the government's promise to pay certain contract costs is binding.  Advocating the position of its government contractor members, the National Chamber Litigation Center ("NCLC") filed an amicus brief on June 18, 2004 urging the Court to affirm a decision of the Court of Appeals for the Federal Circuit and reverse a decision of the Tenth Circuit.  As noted in NCLC's brief, at risk was 120 years of case law and protected settled expectations regarding the government's responsibilities as a reliable contracting partner.

The decision reaffirms the principle that when the government enters into a contract funded with general appropriations, the contract obligations are binding and do not depend on whether the government continues to have funds actually available or on the future availability of funds. While not resolving all contract funding issues, this decision deals a blow to what has become the government's routine practice of seeking to avoid contract obligations based on a lack of funding to make payment.

Under the contracts at issue, the Indian tribes promised to supply tribal health services and the government promised to pay the prescribed costs for those services. Those costs included contract "support costs" (generally indirect costs for auditing, administration, workmen's compensation, etc.) Some time after the award of the contracts, the government determined that it no longer had funds remaining. The agency then refused to pay certain of the contract support costs and the resulting appeals went ultimately to the Tenth and Federal Circuits which reached opposite results. While one focus of the decision was on obligations under contracts with tribes, the decision is most valuable for its discussion of rights under what the court called "ordinary procurement contracts."

The importance of this decision for procurement contract law is the reaffirmation of certain basic principles. First, where Congress has appropriated sufficient legally unrestricted funds to pay the obligations under the contracts, an agency cannot avoid the obligation to make payments simply because it has expended those funds for other uses. (The contractor is not charged with knowledge of the administration of the fund and it is not at risk due to the maladministration or diversion of the funds. Citing Ferris v. United States, 27 Ct. Cl. 542, 546 (1892) and Blackhawk Heating & Plumbing Co. v. United States, 224 Ct. Cl. 111, 135 (1980)).  Second, this is true even if the agency's total lump sum appropriation is insufficient to pay all the costs under all the contracts the agency has made. See Ferris, supra. Third, where there are no restrictions in the appropriations statute itself, indicia in committee reports and other legislative history about how the money should be spent do not establish any legal requirements, i.e., are not legal restrictions (citing Lincoln v. Vigil, 508 U.S. 182, 192 (1993)). Fourth, language such as "subject to the availability of appropriations" does not defeat the government's obligations once Congress has appropriated sufficient legally unrestricted funds and a contract has actually been awarded.

The Court notes that agencies may sometimes choose to spend unrestricted appropriated funds to satisfy needs they deem more important than fulfilling a contractual obligation. However, according to the Court, the law expects the government to avoid such situations (e.g., cut back on other expenditures) or ask Congress to protect certain funds with statutory earmarks or to seek additional funding from the Congress. Alternatively, the contractor is left "free to pursue appropriate legal remedies arising because the Government broke its contractual promise."

In summary, in this unanimous decision the Court clearly articulates the basic principles governing the intersection of appropriations and contract rights. Moreover, it should serve as some restraint on the government's attempts to avoid obligations by citing the Anti-Deficiency Act and an earlier decision by the Court in Hercules, Inc. v. United States, 516 U.S. 417 (1996) (discussing a claim of implied indemnity).

McKenna Long & Aldridge LLP served as counsel to NCLC in Cherokee Nation v. Leavitt.   For further information about the case, please contact Herbert L. Fenster (202.496.7500) or Stanley Dees (202.496.7628) at the firm or Robin Conrad (202.463.5337) at the National Chamber Litigation Center.  Copies of the brief are available upon request or at www.uschamber.com/nclc.