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Supreme Court Rules Agencies Must Honor Contract Obligations Even if “Subject to the Availability of Appropriations"

Joanne Rotondi

Joanne Rotondi,

Washington, D.C.

Douglas P. Wheeler

Douglas P. Wheeler,

Washington, D.C.

Pete Dungan

21 June 2012
Co-Authored by Agnes P. Dover, Partner and Director of Hogan Lovells' Government Contracts Practice

Supreme Court Rules Agencies Must Honor Contract Obligations Even if Subject to the Availability of Appropriations In the only government contract case it considered this term, Salazar, Secretary of the Interior, et al. v. Ramah Navajo Chapter et al., the Supreme Court of the United States addressed the question of whether a federal agency is excused from paying a contractor when it has exhausted the appropriation account for the program and the contract specified that payment would be “subject to the availability of appropriated funds”.  The Court responded with a clear “no”, relying on its earlier decision in 2005, Cherokee Nation of Okla. v. Leavitt,543 U.S. 631.

The case involved the Indian Self-Determination and Education Assistance Act, 25 U.S.C. §§ 450-458ddd2, which required the Secretary of Interior to enter into contracts with various Indian tribes to provide services, such as education and law enforcement.  Congress appropriated sufficient funds to pay all of any individual tribal contractor’s costs, but it did not appropriate sufficient funds to cover all costs of all tribal contractors.  As a result, Interior made partial payments to the contractors and they in turn sued for breach under the Contract Disputes Act.

In addition to its general applicability, the Salazar decision is of special importance to Indian tribes, who have been long advised by the Bureau of Indian Affairs that the “subject to the availability of appropriations” rubric is an effective bar to its payment of claims under the Indian Self-Determination and Education Assistance Act (ISDA). The majority relied here on two earlier precedents, Cherokee Nation of Okla. v. Leavitt  , 543 U.S. 631, and Ferris v. United States 27 Ct. Cl. 542 (1892), both of which held that—absent special circumstances—the government cannot escape its contractual obligations because of insufficient appropriations.

Despite a strong dissenting opinion by Chief Justice Roberts, the Court in Salazar firmly concluded that “the Government is responsible to the contractor for the full amount due under the contract, even if the agency exhausts the appropriation in service of other permissible ends.”  [at 6] Importantly for contractors, the Court explained that “so long as Congress appropriates adequate funds to cover a prospective contract, contractors need not keep track of agencies’ shifting priorities and competing obligations; rather, they may trust that the Government will honor its contractual promises.”  [at 7]

The Court’s clear holding that Government agencies must hold up their end of the contractual bargain should be music to contractor’s ears. How long the music lasts will depend on the Congress.  As Justice Sotomayor observed, “the dilemma’s resolution is the responsibility of Congress”.  She identified legislative solutions which range from the elimination of self-determination contracts for Indian tribes to removal of the mandate which compels full payment of such claims. Or, most obvious of all, the Congress could appropriate sufficient funds to meet commitments made to Native Americans by the Bureau of Indian Affairs.

Joanne Rotondi

Joanne Rotondi,

Washington, D.C.

Douglas P. Wheeler

Douglas P. Wheeler,

Washington, D.C.

Pete Dungan

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