So-called “sovereign acts” may soon affect the performance of a wide swath of government contracts by shielding the federal government from the fallout of President Trump’s newest tariffs. The sovereign acts doctrine is rarely discussed, but it can have a profound impact on contract profitability.
While a contractor might normally be granted additional compensation when its performance is hindered by government action, the sovereign acts doctrine protects the government from liability where the impact on a particular contract results from the government’s “public and general acts as a sovereign.” In other words, because the federal government’s legislative and regulatory powers take precedence over fidelity to any particular private contract, the government is not responsible when its higher-order actions happen to disrupt contract performance.
In March 2018, the Trump administration began imposing tariffs on steel (25%) and aluminum (10%) imports. These tariffs have since been expanded to a number of close U.S. trading partners, including the European Union, Canada, and Mexico. On July 6, the Trump administration also set a tariff of 25% on approximately $50 billion in Chinese imports, and has announced an additional 25% tariff on approximately $200 billion in Chinese consumer goods.
The question of whether a particular federal action is “public and general” enough to trigger the doctrine varies from case to case, but there is a substantial possibility that tariffs on imported steel and other building supplies may qualify. This would leave contractors to cover recent increases in materials costs that flow directly from these trade policies.
While these national-scale government actions are certainly the most visible examples of the sovereign acts doctrine, contractors should also be prepared to confront more localized government actions that benefit from the same defense.
Work site access restrictions are a common example of such “local” sovereign acts. For example, in Conner Bros. Const. Co., Inc. v. Geren, the Army and one of its commanders made the operational security decision to exclude construction personnel from a worksite within an Army base in the days following the September 11, 2001 terrorist attacks. This was deemed a sovereign act that precluding recovery for the contractor’s delay damages, though the contractor was allowed additional time to perform.
Similarly, in Garco Const., Inc. v. Secretary of the Army, (which also involved administrative deference issues that we have covered in previous posts), the sovereign acts doctrine protected the Army from liability after the more stringent enforcement of its existing base access policy barred entry for a large number of subcontractor workers.
While it can be difficult to plan for circumstances like these, contractors should keep a close eye on the price risks that they and their subcontractors accept when bidding on federal contracts. If there is a substantial chance that an imminent sovereign act could interfere with performance, contractors would be well-advised to ensure that their bids reflect contingencies that account for this possibility.
To learn more about how the sovereign acts doctrine could intersect with these new tariffs, or for information about the potential impact of other governmentwide disruptions, consider attending our upcoming seminar, “Navigating Federal Government Contracts Northwest 2018.” The seminar/webinar will include a keynote speech by James Nagle specifically addressing the application of the sovereign acts doctrine to government shutdowns and other current or looming political disputes.