The Sovereign Acts Doctrine Strikes Back: COVID Costs Are Its Latest Victim

Cohen Seglias Pallas Greenhall & Furman PC
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Oftentimes, contractors find it difficult to differentiate between the government’s acts taken in its sovereign capacity as opposed to those taken in its contractual capacity. The government acts in its sovereign capacity when it takes actions that are general and public in nature and do not target any particular contractor; rather the impact of the government’s action on its contracts is merely incidental to the purpose of a broader governmental objective. As two recent Armed Services Board of Contract Appeals (the Board) decisions involving contractor claims for COVID-19-related costs illustrate, the distinction between these two roles can make or break a contractor’s claim.

An initial note: the Sovereign Acts Doctrine is based on the government’s dual role as contractor and sovereign, in which a balance is stricken between its ability to legislate freely and the obligation to honor the contracts it enters into with private persons. As the Court of Claims in Jones v. United States explained back in 1865:

The two characters which the government possesses as a contractor and as a sovereign cannot be thus fused; nor can the United States while sued in the one character be made liable in damages for their acts done in the other. Whatever acts the government may do, be they legislative or executive, so long as they be public and general, cannot be deemed specially to alter, modify, obstruct or violate the particular contracts into which it enters with private persons.

When asserting the Sovereign Acts defense, the government must prove that the governmental action was public and general and the act must render the performance of the contract impossible. With the impact of COVID-19 costs starting to come into full focus for many contractors, the Board has made it clear that the government’s invocation of the Sovereign Acts defense is alive and well.

In APTIM Federal Services, LLC, the contractor sought to recover administrative costs incurred during a nearly two-month period in which the contractor was unable to access the base to perform its work. The base commander issued an order closing Arnold Air Force base to all non-operationally urgent personnel as a proactive measure to curtail the spread of COVID-19. Under the order’s parameters, the contractor did not qualify as urgent personnel and, thus, it was prevented from entering the base. Following the lifting of the commander’s order, the contractor submitted a claim seeking the costs that it incurred during the time it could not access the project site as well as a day-for-day time extension. The Air Force agreed to extend the period of performance but denied the contractor’s monetary claim. The contractor appealed that decision.

On appeal, the Air Force asserted the Sovereign Acts defense. In short, the Air Force maintained that the decision to shut down the base was an act that the government carried out in its sovereign capacity, not its contractual one. In support of its position, the government argued that the decision to restrict access to the base was an act genuinely public and general, with only an incidental impact to the contract, and that the act rendered the government’s performance of its contractual obligation impossible. The contractor countered, asserting that the government had not shown that its performance was impossible. The Board disagreed.

The Board held that the base commander’s decision to close the base to all non-essential personnel for purposes of mitigating the impact of the COVID-19 pandemic did not aim to relieve the government of its contractual obligations nor did the restriction apply exclusively to this one contractor. With respect to the impossibility test, the Board held that because the base commander’s directive had closed off access to non-essential personnel the government’s contractual performance was impracticable as it could not make the site freely available to the contractor without violating the base commander’s executive directive. Thus, the government’s Sovereign Acts defense prevailed and the contractor’s appeal was denied.

In JE Dunn Construction Co., the contractor alleged that the government had changed the contract by implementing COVID-19 restrictions that required all personnel coming to the base from outside a 350-mile radius to quarantine for 14-days before being permitted to enter the base. At issue were four individuals from states outside of the established radius who had come to perform work for the contractor. Per the base’s quarantine requirements, these employees had to quarantine for 14-days before they could access the work site. The contractor submitted an REA to recover its additional hotel, food, rental car, labor, profit, and overhead expenses as a result of the quarantine order. The contracting officer (CO) denied the REA and the contractor perfected a claim. The CO denied the claim and the contractor appealed.

Before the Board, USACE asserted that the Sovereign Acts defense prohibited the contractor’s recovery of these “quarantine costs.” In denying the appeal, the Board first found that the 14-day quarantine requirement at the base applied to all visitors and was not specifically directed at any one particular contractor (i.e., the requirement was general and public). Instead, the Board found the restriction was implemented to help control the spread of COVID-19 on the base. The Board also considered whether the quarantine requirement rendered the government’s contract performance impossible. On this point, the contractor argued that the government’s performance was not rendered impossible because USACE could have adopted New York State’s less stringent three-day quarantine protocols and achieved the same public objective at less cost to the contractor. While the base’s quarantine requirement was pending, New York modified its own quarantine requirements so that an individual could test out of the state’s 14-day quarantine requirement by testing negative for the virus both upon entering the state and after three days of quarantining within the state. Responding to the contractor’s argument, the Board observed that the contractor failed to demonstrate that any of the employees whose costs the contractor was seeking to recover would have tested negative following their three-day quarantines and, thus, avoided the same cost impacts it incurred under the base’s requirements. Accordingly, the contractor could not “demonstrate that it would not have suffered the same damages even if Fort Drum’s more stringent 14-day quarantine requirement had not been in effect during the relevant timeframes.”

These cases are among the first we have seen in which the government has invoked the Sovereign Acts defense to push back on contractors seeking relief from the costs incurred to comply with COVID-19 quarantine restrictions. It is important for contractors to scrutinize carefully any quarantine restrictions that had been, or have been, instituted directly by their contracting officers. Moreover, contractors should also examine their contracts for any provisions that demonstrate the government assumed the risk that a particular event might occur. If you have any questions on this topic or would like to discuss issues related to COVID-related costs, our Government Contracting Group is available to assist you on this or any other government contracting matters.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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