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jsprandel

Can't process payments during Government shutdown

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My agency buys large volumes of commodities and during the Government shutdown we are anticipating deliveries that have already been funded with the previous years funds. In many cases, we have to pay contractors in 7 days instead of the normal 30 days required by the Prompt Pay Act. Unfortunately, due to the shutdown, the organization that issues the checks after we process the invoices is on furlough (we have the money, but we can't access it). Many of our contractors, including small businesses, are claiming they can't produce any more product until we start issuing the checks again. I don't think we have very many options since the problem is that all payments will be delayed until a continuing resolution is passed. I know we have several options, including termination and repurchase, extending delivery dates, canceling orders, etc. I was wondering if anyone else has a similar problem and how they are handling it.

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You're a government employee? It sounds like the payment office closure is your only problem?

Your contractors must perform their contracts and make their deliveries, regardless of the payment office closure. The Government's obligation to make payment is governed by the contract. Generally, a Government failure to make invoice payments is not a breach of the contract, and the parties have already agreed that the sole remedy for late payment is the payment of interest. Read the prompt payment clause of your contracts and see if this isn't so.

Don't terminate and re-purchase -- just require your contractors to perform their contracts -- and if Government will perform, too -- if the Government makes payments after the promised date, well, it promises to pay interest.

Does this sound harsh? It isn't intended to be. It's just a matter of reasonably enforcing your contracts. If any of your contractors is asserting that it will not perform until payment occurs, you might send it a show cause notice for anticipatory repudiation of its contract obligations and then terminate for default if it doesn't change their tune. If that makes a contractor call its congressman, good.

The Government meets its obligation under the contract when it pays or, if it pays late, pays with interest. That's the bargain the contractor agreed to. That's fair.

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Guest Vern Edwards

ji20874:

Generally, a Government failure to make invoice payments is not a breach of the contract, and the parties have already agreed that the sole remedy for late payment is the payment of interest.

Are you going to make an argument and cite something in support of that rather broad assertion, or is everyone supposed to take your word for it?

How long can the Government fail to pay before it would breach the contract, if ever? Does "failure to make invoice payments" include refusal to make such payments? What if the contractor cannot perform because the Government fails to pay? Could the Government terminate for default? What if the contractor suffers damages due to the Government's failure to pay?

Do you want to clarify your statement and be more precise? Maybe you should check Administration of Government Contracts 4th, by Cibinic, Nash, and Nagle.

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ji20874,

While you're at it, are you sure that the Government is liable for late payment interest if the lateness is caused by a soveriegn act of the Government (i.e., closure of the payment office)? Why wouldn't the sovereign acts doctrine apply?

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Vern,

A poster comes here, and he or she asks a general question. Other posters (like me) give general answers. My answer was a good answer, and I’m satisfied with it. All of your questions go beyond the original poster's situation and probably won't be helpful to him or her. But I will add one more thought for the original poster's benefit, from the Treasury's Prompt Payment FAQs website (http://fms.treas.gov/prompt/questions.html#noncomp):

Q34: What should a vendor do if an agency fails to pay interest required by the Prompt Payment Act?

A34: If an agency fails to pay interest required by the Prompt Payment Act, the vendor should consult with its legal counsel to determine its remedies under the Prompt Payment Act (31 U.S.C. § 3901 et seq.) and other applicable laws.

But if you can answer the original poster’s question, please do so. We will all benefit from the discussion.

Don,

I have to leave the sovereign acts doctrine to the lawyers – it isn’t incorporated into the text of our federal government contracts. But that question also goes beyond the original poster’s situation, which is focused on what he or she should do in this immediate circumstance when paying offices are closed. My answer is that contractors still have an obligation to perform notwithstanding the temporary closure of the payment offices. I tend to believe that contractors will receive interest payments -- I haven't heard any executive branch officials talking about the sovereign acts doctrine as an excuse to avoid interest payments.

A contractor who has not received a timely payment can file a claim under the Disputes clause for the payment. Likely, the claim will be denied because of the prompt payment clause promise of an interest penalty payment as the remedy for late payment, but if the contractor wants to make an argument about Government breach like Vern is suggesting, it seems it must first at least file a claim for payment and have it denied. I suppose that the partial Government shutdown will be resolved before the sixty day period for answering a claim arrives. Even so, the Disputes clause says the contractor “shall proceed diligently with performance of this contract, pending final resolution of any . . . .”

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Guest Vern Edwards

ji20874:

You made an assertion:

Generally, a Government failure to make invoice payments is not a breach of the contract, and the parties have already agreed that the sole remedy for late payment is the payment of interest.

In fact, generally, "failure to make invoice payments" as required by the contract is the ultimate breach of contract. See, e.g., In re: John M. Cochran & Assocs., EBCA No. 9701232, 02-2 BCA para. 32008:

When the Government fails to make payments required under the contract, without justification, this failure is a breach of contract and the contractor has the right to refuse performance.

Is the lack of personnel to process a payment justification for not making payment? I have no idea. As far as I know the issue has not come up before. This shutdown confronts us with a new problem. We have to proceed carefully.

That's why I asked you if you wanted to clarify your answer. You probably meant a Government delay instead of "failure". Interest might be the sole remedy for late payment, but it does not follow that continued performance is the only course of action available to a contractor when the customer says, "I can't pay you now, and I don't know the date on which I will be able to pay you." We're not talking about a situation in which payment has been made, but late. We're talking about a situation in which no payment has been made and no one can state the date on which the payment will be made. Is the contractor required to keep working in such a case?

As I understand it, the Sovereign Acts doctrine says that the Government might not be liable for breach damages, but it does not say that the Government's failure to comply with the contract is not a breach and that a contractor must continue to work without any idea of when it will get paid. In any case, a sovereign act may give rise to a "supervening impracticability". See the Restatement (Second) of Contracts, Section 261:

Where, after a contract is made, a party's performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary.
See also U.S. v. Winstar Corp., 518 U.S. 839 (1996).

Based on your answer, you gave the following advice:

Don't terminate and re-purchase -- just require your contractors to perform their contracts....

Emphasis added. In the absence of more information about the contracts in question, telling someone to require the contractors to continue performance is singularly bad advice. And then, you said this:

If any of your contractors is asserting that it will not perform until payment occurs, you might send it a show cause notice for anticipatory repudiation of its contract obligations and then terminate for default if it doesn't change their tune.

Emphasis added. Wow! Hopefully, jsprandel would consult with counsel before doing any such thing. It might be that the Government's inability to pay for deliveries or say when it could pay is the basis for an excusable delay. We were in uncharted territory with this shutdown. Show cause would have been hasty. Anything more could have been much worse.

As for the original question, there wasn't one. Just this:

I was wondering if anyone else has a similar problem and how they are handling it.

I suppose that's irrelevant now.

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Problem solved until January when we may be doing it all over again. Isn't this a lot of fun.

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Vern, you're right! I erred by leading you (and maybe other WIFCON readers?) to believe I was asserting that an absolute and final Government failure to pay could not be a breach of contract. I had some expectation that WIFCON readers would read what I wrote within the context of the original posting, meaning a circumstance of the Government not making an invoice payment to a contractor during the period of the temporary partial Government shutdown.

You wrote, "It might be that the Government's inability to pay for deliveries or say when it could pay is the basis for an excusable delay. We were in uncharted territory with this shutdown. Show cause would have been hasty." I agree that we're in uncharted waters here, but I disagree a show cause would have been hasty if a contractor had declared its intention to stop delivering commodities because of a missed payment during the temporary partial Government shutdown. In such a case, a show cause notice would have been an invitation for the contractor to make its excusable delay argument -- that's the purpose of a show cause notice, to invite the contractor to make its case or allow the contractor to correct the Government's mis-understanding of its intentions. A well-timed and well-written show cause notice (not a cure notice) could be a very prudent step for a contracting officer to take during a period of some uncertainty where a contractor had declared its intention to stop delivering commodities because of a missed payment during the temporary partial Government shutdown, as suggested in the original posting. But that's my opinion, offered to the original poster in a spirit of helpfulness among contracting professionals that I like to see on WIFCON.

I'm glad it's over, too.

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Guest Vern Edwards

I understand your point about a show cause notice, but remember that the show cause notice in FAR 49.607(B) says that the government is considering T for D and is giving the contractor a chance to show why it shouldn't. I would not want to say at that point that the Government is considering T for D unless I had a supporting legal opinion. I think a preliminary phone call would be better.

COs should raise the issue of failure to pay due to shutdown with their legal offices now, before the issue comes up again, and ask for opinions about contractors legal rights. It would not be appropriate to send a show cause notice if you know that the contractor is acting within its rights. Also, COs should ask for opinions about the impact of shutdowns, if any, on the exercise of options.

Agencies should think these problems through and come up with legal analyses and appropriate policies to deal with these matters, instead of leaving COs hanging.

Let's hope the problem isn't resurrected.

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