LegiStorm

Summary:

Laws enacted by Congress on occasion interfere with contracts entered into before enactment, prompting suits against the United States by disappointed contract parties. In a few of them, courts have awarded billions of dollars to the United States' contracting partners. This report surveys the legal theories invoked in such suits. Note that litigation on the grounds covered herein can be avoided entirely if the congressional enactment is construed to apply only to future contracts. Two competing interests underlie this report's topic. On the one hand, protection of settled expectations, at least to some degree, is essential to ordered society. Contract law has this goal for expectations embodied in contracts. On the other hand, government needs latitude to address new problems, so contracts generally are said to confer no immunity against future legislation. The balance struck by the case law is that while Congress legitimately can thwart performance under existing contracts, the United States may in some instances have to pay compensation. The United States cannot be sued unless it waives sovereign immunity and vests jurisdiction to hear claims against it in a court. This the United States has done with regard to the legal theories at issue here. Once past these procedural thresholds, courts accord different treatment to legislative interference with existing contracts depending on whether the interference is with a "public contract," defined as one where the United States is a party, or with a private contract, defined as one between two non-federal parties. Broadly speaking, challenges to the former are more likely to win. For public contracts, breach of contract is the main theory on which challenges to congressional interference with existing contracts are litigated. The United States is as bound by its contracts as are individuals, so the same breach rules apply. Some special situations that have occupied the courts in recent years have been (1) breaches of the implied covenant of good faith and fair dealing; (2) the addition by Congress of new hurdles for the private party to a contract with the United States; and (3) breach by congressional inaction. In addition to sovereign immunity, which as noted has been waived, there are other "sovereign defenses" that the United States can invoke when sued for breach. One is the sovereign acts doctrine, which holds that the United States is not liable for its "public and general" acts as sovereign. This defense seeks to ensure that the United States is no worse off than a private contracting party when acts of the United States as sovereign impede contract performance. Another sovereign defense flows from the unmistakability doctrine, which states that a federal agency may not contract away Congress's sovereign power to regulate unless Congress has unmistakably empowered the agency to do so. For private contracts, the main legal theory is the Fifth Amendment Takings Clause. Plaintiffs argue that since contract rights generally are deemed "property" under the Takings Clause, a congressional enactment that thwarts performance under a contract in essence takes property, requiring compensation. The government's defense is often the Omnia rule, a Supreme Court holding under which government actions that only incidentally interfere with performance of private contracts are deemed to constitute but a frustration, not a taking, of contract rights. Per this definition, the Omnia rule does not apply when the congressional action expressly "targets" an existing contract right, though even here the taking claim usually is rejected.