Can A Contractor Stop Working If Its Invoices Are Not Paid?

Richard D. Lieberman

 

 

The Prompt Payment Act, 31 U.S.C. Sec. 3903, 5 C.F.R. Sec. 1315, requires that the Government pay proper invoices within 30 days of receipt. Unfortunately, many contractors still encounter situations where the Government fails to make payment(s) on time. Of course, the first thing that must be done is to write a letter to the Contracting Officer ("CO") requesting payment. In addition to requesting payment, the letter should summarize the unpaid invoices, the respective dates they were submitted and the Government's acceptance documents. But when the letter fails, and the invoices remain unpaid, can a contractor cease performance, asserting that the Government has materially breached the contract? A fundamental legal principle is that if there is a material breach by the Government, then the contractor will be excused from its subsequent breach for refusing to perform, and any default termination by the government for nonperformance is improper. However, cases have not established a clear standard as to when and under what circumstances the Government's failure to pay proper invoices amounts to a material breach so as to justify a non-breaching contractor's subsequent refusal to perform.

Here are a few examples: In Northern Helex Co. v. United States, 197 Ct. Cl. 118 (1972), a contractor entered a 22-year contract with the Government to supply helium on a monthly basis. The contractor began making deliveries in December of 1961 and was paid in a timely fashion. However, in 1969, the Government was unable to pay and by December 1970, over twelve months had passed in which the contractor received no payment on the over $8.5 million of helium it had delivered over that time. The court found that the Government was in material breach, citing the failure to pay for such a long period of time.

In U.S. Service Corp., ASBCA Nos. 8291, 8433, 1963 BCA ¶ 3703, the Board held that the Government materially breached a contract by failing to pay a monthly invoice of approximately $1,000 on a $13,000 contract. The contractor submitted its invoice for the month's work on February 28th. When the Air Force failed to pay, the contractor wired the CO on March 26th, so advising, and requested payment by March 31st. On April 5th, the Contractor sent an overnight letter to the CO stating that, "[i]f satisfactory arrangements for payment are not made by April 7th, service will be terminated for breach of contract." The Air Force failed to acknowledge the wire or the subsequent letter. On April 7th, after the contractor still had not received payment or been advised as to when payment could be expected, the contractor ceased work. The Air Force ultimately paid the invoice on April 10th, but by then the contractor had left the job site. After an exchange of telegrams, the CO terminated the contract for default, effective April 13th. The Board held the default improper stating that "the Government, after receipt of due notice and, without justification, failed to meet its obligation to make payment for the month of February within the time required by the contract and that this failure was a breach of a material condition. This being true, the appellant had a right to refuse to perform further under the contract, and it exercised this right by withdrawing its equipment and declining to continue with the work."

In Valley Contractors, ASBCA No. 9397, 1964 BCA ¶ 4071, the Board found a termination for default unwarranted where the contractor discontinued performance one week after the Government failed to make part of a monthly payment when it was due. Both Johnson v. United States, 223 Ct. Cl. 210 (1980) and Nat'l Eastern Corp. v. United States, 201 Ct. Cl. 776 (1973) stand for the proposition that for a default (i.e. the contractor's refusal to continue the work) to be excused by the Government's failure to make payments, it must be the result of financial incapacity caused by the Government's wrongful failure to make payments.

In General Dynamics Corp., DOTCAB No. 1232, 83-1 BCA ¶ 16386, the Government refused to pay a contractor's last five invoices amounting to approximately $800,000 on the basis that the contractor was failing to make progress. The Government previously had agreed that the contractor would be paid all of its costs (up to a $12.8 million ceiling) and that the contractor's performance would not be considered in determining the payment of these costs. On at least two occasions, the contractor informed the Government that its failure to pay was a breach of contract. The Board held that the Government's refusal to pay, in violation of the express provisions of the contract, was a material breach of the contract, thereby excusing the contractor's subsequent nonperformance. Thus, the Board concluded that the Government's termination for default was improper.

Probably the most detailed analysis of the right to stop performance when the government fails to pay proper invoices is found in Consumers Oil Co., ASBCA No. 24172, 86-1 BCA ¶ 18647. In Consumers Oil, the Board analyzed a contract for the delivery of oil to several defense bases. The Board held that the contract was divisible, explaining that Consumers' total abandonment of the contract and cessation of service to all the bases was improper, yet the cessation of performance at some of the bases was justified by the Government's non-payment. The Board's words are instructive:

When the Government breaches its duty to pay moneys undisputably [sic] owing, the contractor's right to abandon performance does not depend on showing that the delayed payment rendered it unable to continue. To require such a showing would accord the Government a license to abdicate with impunity its obligation to make payments when due to those contractors having sufficient financial resources to continue performance despite nonpayment. To the contrary, for nearly a century the former Court of Claims had consistently held that construction contractors are justified in refusing to proceed with performance upon the Government's failure to pay a single monthly progress payment when due. Brooklyn & Queens Screen Manufacturing Co. v. United States, 97 Ct. Cl. 532 (1942); Suburban Contracting Co. v. United States, 76 Ct. Cl. 533 (1932); Overstreet v. United States, 55 Ct. Cl. 154 (1920); Pigeon v. United States, 27 Ct. Cl. 167 (1892). In none of these cases was the contractor's financial capability determinative of its right to abandon performance.

Similarly, the ability of a supply contractor to continue performing does not foreclose its right to stop deliveries and sue for damages when confronted with a "prolonged failure [by the Government] to pay large amounts" of money due it. Northern Helex Co. v. United States, 197 Ct.Cl. 118, 125 (1972); 207 Ct.Cl. 862, cert. den. 429 U.S. 866 (1976); 225 Ct.Cl. 194, (1980). Moreover, when the Government's failure to pay moneys admittedly owing justifies abandonment of performance by a service contractor, boards of contract appeals do not inquire into whether the nonpayment rendered the contractor unable to continue performance. Contract Maintenance, ASBCA Nos. 19409, 19509, 75-1 BCA ¶ 11207; Valley Contractors, ASBCA No. 9397, 1964 BCA ¶ 4071; U.S. Services Corp., ASBCA Nos. 8291, 8433, 1963 BCA ¶ 3703; Drain-A-Way Systems, GSBCA No. 6473, 83-1 BCA ¶ 16,202; Robert O. Redding, AGBCA No. 272, 69-2 BCA ¶ 7888.

[The Board concluded that only a material breach by the Government excuses the contractor's abandonment of performance, analyzing the breach at each ordering/delivery base].

Although there is no clear standard for determining that the government has materially breached a government contract so as to justify the contractor ending performance, the cases indicate that materiality will be determined by: (1) the amount of money involved; (2) the length of time of the non-payment; and (3) the payment procedures agreed to by the parties. Construction contracts will clearly be in material breach for nonpayment, because of the payment terms contained therein. But supply and service contractors should use caution before ending a contract and consider some of the tips below.

TIPS: (1) Request, in writing, payment from the CO after the invoice is due but unpaid (e.g. 45 days after submittal to the government) (2) If no payment is received, notify the CO that the government is in breach. Advise the CO if the breach has made or will make the contractor's performance financially impossible and why that is the case. If this will not make contractor's performance financially impossible, explain why the amount of money involved, the length of time of nonpayment, and the contract provisions make this a material breach. (3)Advise the CO, in writing, that because of the material breach the contractor intends to cease performance on a date certain. (4) Cease performance on that date, unless the invoice is paid or the Government furnishes adequate assurances of payment. (5) If the contract is defaulted for nonperformance, contact Dick Lieberman, 202-775-5560, and defend your non-performance in the Court of Federal Claims or an appropriate Board of Contract Appeals.

Reprinted with the permission of the author, Richard D. Lieberman, Esq., who has more than 35 years of experience as government contracts counsel and staff member of the Senate Appropriations Committee and the Pentagon Comptroller. This article originally appeared in the May 2007 McCarthy, Sweeney & Harkaway Government Contracts Newsletter. You may obtain a free subscription to that newsletter by going to http://www.mshpc.com.