The Ailowability of Intereat in Government Contracts: The Continuing Controversy

• Author: by Major Theodore F. M. Cathey and Major Glenn E. Monroe
• Pages: 01

*This mi& is based upon a thesis with a slightly different title written by Mpjor Cathey when he was a student in the 2Sd Judge Advocate Oftleer Advanced (Graduate) Come, at The Judge Adweate General's School, Chariottesviiie, Virginia, 19TG75. The thesis was extensively revised and updated by Major Monroe dunng the winter and wring of 1979.

The opinions and condusion8 piesented m this article are those of the authors and do not neeessdy represent the views of The Judge Advocate &nerds School, the Department of the Army, or any other governmentPl agency.

**JAGC, U.S.

Army. Chief Attorney. Defense Suppiy Service-Waahington, The

Pentagon, 1979 to present. Fomer staff judge advocate, United States Support Activity-I-, Teheran, Iran, 197&79. Former inatmctor, Contraet Law Divi-sion, J.A.G. School, Chariattesviiie, Virginia, 197678. B.A.. 1960, University Of Hawaii J.D., 1970. University of Tennessee. Graduated with 1Sd Advanced (Graduate) Class, J.A.G. School, 1976. Member af the Bare ofthe Supreme Court of Tenneasee, the Umted States Coun of Militan. Appeaia, the United States Tar Court. the United States Court of Claims, and the United States Supreme court.

***JAGC, U.S. Army. Government tnai attorney before the Armed Selvieea

Board of Contract Appeals, assigned to U.S. Army Legai Services Agency, Fdk

Church. Vrgmia. 1979 to present. Former instmetor, Contract Lmu Division, J.A.G. School, 197679. Former ieetuer in busmeas law, School of Continuing Education, University of Virgmia, 1977.1978, Former chief, Cwer Management, Reserve A f f h Department. J.A.G. Sehooi, 197E-76. B.A.. 1965, Mua-hngum College; 1-7, La Sorbonne, and 1w9,

Alliance Fmnenise, P e e ,

J.D., 1974, Ohio State University School of Law: LL.M.. 1979. University of Virginia School of Law; candidate for S.J.D., 197940, University of Virginis School of Law. Member of the Bars of Ohio, the United States uounof Military Apped~, the United States Tax Court, the United Statea Coun of Claims, and the United States Supreme Court.

Major Monroe ia the author of An Analyaia 01 ASPR Ssctm XV h Coal Primple, 80 Mil. L. Rev. 147 (1978). Ke h a also publibhad artides on eontraet costs and funding in The Army Lawyer, Feb. 1977, at 4; id., July 1977, at 1; id..Mw. 1978, at S5; and id., July 1978, at 7. Majm Monroe haa dso written B

textbook comparing Provision6 of the Defense Aequiiitim RegulPUm and the state-ievei Model PlDeYTement Code. This work is to be publlahed by Miehiei Bobbs-Merrill Law Riblishera. Charlottesviile. Virginin, within P year

France;

In this adiele on eantmetar.ineurred interest espense, Major Cathey and Major Monroe discuss one of the cost princtples of section XV ai the Defense Acauisition Reaulation IDARI. for-

, .

merly called the A m e d Senices Procurement Regulatton fASPRJ

The sewmi dozen DAR cost principles state Lchether and to what ertent contractors wrking under government contracts can be retmbumed by the goeernmentfor specflied costs or ez-penses incurred by them. The principles are mast commonly applied to cost-type contracts, but are applrcable when necessav la other contracts as well. The principles are supplemented and in some cases modified by deciszons of admzntstiatzw boards of contract appeals and the United States Cou71 of Claims.

Under DAR Section 15-205.17. interest an money borrowed by a contraeta? to pay for erpenses of pefloonlng his contract is normally not compensable. But ifthe gozernmeni delays un-reasonably m payzng contractor znvoices and other legitzmate contractor claims, the contractor may clam interest zncorne from the government. Such an interest clam 1s generally eompensable. The authors dtseuss the histow of the cost pnneiple on interest erpense, the Lanations of and exceptions thereto which havefrom time to time been recognized, and thepnnetple's present application to goasrnmeni contracts.

I. INTRODUCTION

For aver a decade the Court of Claims and administrative boards of contract appeals (principally the Armed Services Board1 have struggled with contractors' requests for interest compensation as a cost, or interest an claims against the government. The former mvolves additional ex-penses in connection nith contract performance (e.g., interest paid on money borrowed to finance the costs of performing government-ordered contract changes). Interest on a claim deals with delays in making payment.

Bath situations will be discussed, sections I1 through VI11 addressing the cast-of-performance issue, and section IX reviewing the delay-in-payment aspect.

The reeaveq of interest saga is confusing and ultimately quite frustrating. At first, interest on a claim was unallowable, whereas as a cast of performance, recovery of interest \vas possible, indeed, for a fer years, even likely at the Armed Services Board of Contract Appeals. Today, interest associated with payment delays clearly is compensable, whereas,

a8 a cast of performance, recovery of interest is unlikely, although Still possible. Recent Caun of Claims decisions have almost eliminated any chance of compensation except for preJuly 1970 fixed-price contracts where the emtractor 1s able to demonstrate the need to barrow in order to finance government-caused additional work. The b e d

Services

Board, while reluctantly following the court's lead, continues to argue, albeit as dictum, that recovery under other circumstance8 is appropriate.

Thus, while the mles regarding interest compensation for delays in payment have completely changed, we have come full circle with respect to the cast-of-performance issue; essentially we have taken a longjourney only to find ourselves back at the starting point

11. THE GENESIS OF THE "NO-IXTEREST' POLICY

1. SOVEREIGS IMiMiXITY

   The principle that the sovereign could do na wrong, or in a more practical view, could not be sued in its own corns or any other courts without its consent and permission,' had its origin in the common law. Until 18.55, this principle was adopted in toto and without exception by the United States in dealings Rjth its citizens. There was no judicial tribunal in which the citizen could litigate a private claim against the gavernment.'Inrecognition ofthis injustice, and the abuses oftheprivate bill system, the Court of Claims was created by the .4ct of February 24, 186L3 In the fimt year of existence, the c o w indicated by its decisions an attitude of judicial conservatism, based in all probability on its belief that sovere~gn immunit? vas still a viable concept.' Its attitude on in- , Sea. e # , discussion at Lynch V. United Stares. 282 U.S.

   611, 5 8 M Z (1834). a Shelry, The .Myth that the Kzng can do no W~ong,

   22 Admm. L. Rev. 587. 689

   (1810).

   * Shemy aupm note 2. af 60a

   Act of Feb 24, 1865. ch. 122. 10 Stat. 612

   MILITARY L4W REVIEW [VOL. 86

   teres can best be summed up in Pacific Coast S.S Co L. Cnited States,j where it stated:

   As a nght in the nature of property. or as a premium or profit for the use of money, interest was not allowed at common law Contracts for the pakment of interest as an accessory or incident to pnncipal were treated as usunous and punishable as u s q . In this country the payment of interest became sanctioned by statute for contracts, express or implied, or by imy of damages. either for a default in the payment of a debt or for a use or benefit denved from the money of another.'

   Here, the court is reiterating the traditional fiat that interest will be paid only on the permission of the sovereign through its legldlatire offices.

   This lule has a continuing vitality. In a more recent deemon b> an adminstrative board of contract appeals. the follau-ing was enunciated:

   [Tlhe common Ian mle that delay or default in payment of money gi\er nse to a right to recover interest has been held not to be applicable ta the sovereign government on grounds of public convenience. unless the rovereign's consent to pay interest has been exhibited by an Act of Congress, or by a lairful contract by its executire officers.'

   The doctrine of sovereign immunity was codified by an act of Congresswhich stated that interest cannot be allowed on any elaim except "upon a contract expressly stipulating for the payment of In its present form, the statute reads.

   Interest on a claim against the United States shall be allaued in a judgment of the Court of Claims only under a contract or Act of Congress expressly providing for payment thereof.e

   Exceptions to the doetnne of sovereign immunity appear to be ngidly circumsenbed. Interest on a claim IS allowed only u-hen some provision

   E Padc Coaaf S.S. Co e Id at 49e Tillou I

   United States. 33 Cf GI. 36 (1897)

   Gifford Wood Co.. ASBCA Xa. 3816, 67-1 B.C A para. 1192. at 3327 (1967)

   United St~res.

   1 Ct C1 220 (1865). Aef of March 3, 1863. eh 92.

   S 7. 12 Star. 766

   0 26 U.S c 5 2616(~) (m61 6

   19801 ALLOWABILITY OF INTEREST

   in the contract or an act of Congress expressly provides for such payment.l0 Additionally, it has been interpreted that the prohibition on the payment of interest, with two exceptions noted in the statute, was applicable not only to the Court of Claims, but to all federal courts." In a similar vein, the Armed Senices Board of Contract Appeals (hereinafter referred to as ASBCA) and the Comptroller General have held that, in the absence of a statutory or contraetural provision allowing for the payment of interest, it will be disallowed."

2. DEFENSE ACQUISITION REGULATION (DAR) SECTION XV

   Following in the shadow of the doctrine of sovereign immunity and its statutory stepchild, 28 U.S.C. 5 2516(a) (1976), the Defense Acquisition Regulation (formerly Armed Senices Procurement Regulation) has long and consistently maintained that interest is an unallowable cost.18 In its current form, DAR approaches interest at 5 1M05.17, entitled"1nterest and Other Financial Costs," as follows:

   Interest on borrowings (however represented), bond discounts, costs of financing and refinancing operations, , , . are unallowable except for interest assessed by...