Bow to Your King: Government’s Sovereign Immunity Bars Recovery of Interest Contractor Paid on Funds Borrowed to Finance Performance; Doyon Utilities v. United States, COFC No. 19-199C

Valery Sidelnykov | Shutterstock

Claim for interest on funds contractor borrowed to continue performance is denied. The government delayed payment under the contract, so the contractor borrowed money to make ends meet. The contractor sought to recover interest it paid on the loan from the government. The court noted that a line of cases permit a contractor to recover interest as an equitable adjustment for contract changes, and this matter involved a change to the contract. But in this case, the contract’s changes clause incorporated a FAR provision that precluded recovery of interest. Because the changes clause excluded recovery of interest, the government had not waived its sovereign immunity against claims seeking interest.

Doyon Utilities, a regulated utility in Alaska, had a contract with the Defense Logistics Agency (DLA) to provide electric, natural gas, water, and wastewater services to a military base in Anchorage. Doyon also had a contract with the city of Anchorage to construct and operate a landfill gas (LFG) processing facility—basically a facility that captures and repurposes natural gas that emanates from landfills.

Doyon began discussing the possibility of operating an LFG facility for DLA at the Anchorage landfill.  Doyon submitted a proposal to DLA for development of a processing center. The proposal provided that Doyon would purchase LFG from Anchorage and then provide it to the military base. The government would be ultimately responsible for funding the project through a pass-through agreement in which it would reimburse Doyon for the LFG it purchased from Anchorage. The government accepted the proposal and authorized Doyon to proceed with development of the LFG processing facility.

Doyon commissioned a new processing facility and entered a contract with Anchorage to purchase LFG for the government. In accordance with this agreement, Doyon began purchasing LFG from Anchorage. At the same time, however, Doyon was still attempting to finalize pass-through arrangements with DLA that would reimburse Doyon for the LFG it purchased from Anchorage. To make ends meet while it was finalizing the pass-through arrangement, Doyon took out a loan.

It ended up taking over a year to finalize pass-through. Doyon submitted an invoice to the government for over $3.7 million for the gas it purchased from Anchorage during that time. DLA paid that invoice. Doyon then submitted a request for an equitable adjustment to the agency for $178,000 in interest that it paid on the loan it had obtained to finance operations. DLA denied the request for an equitable adjustment. Doyon submitted a claim for the interest, which as also denied. Thereafter, Doyon filed suit with the COFC to recover the interest.

The government moved to dismiss for failure to state a claim and for lack of subject matter jurisdiction.

The government argued that Doyon’s complaint failed to state a claim because interest on borrowings is an unallowable cost under the FAR and DFARS. The court noted that generally, the FAR provides that interest on borrowings are unallowable costs. Moreover, 28 U.S.C. § 2516(a) provides that federal contractors cannot recover interest from the government unless it is explicitly allowed by the contract.

Nevertheless, the court noted a line of cases that articulate an exception to this “no-interest” rule. These cases hold that interest paid to third parties to finance changed work is a proper component of an equitable adjustment. In these cases, the contract had a changes clause that allowed the contractor to recover for changes made by the government. These cases held that interest incurred as a result of a change to the contract is recoverable to compensate the contractor for the change. In this sense, the changes clause is effectively the government’s consent to the award of interest. These cases further reasoned that their holdings did not conflict with the prohibition of interest prescribed by 28 U.S.C. § 2516(a). That statute only applies when a contractor claims the government has breached the contract. It does not apply when the contractor requests an equitable adjustment based on a change made under the changes clause.

Here, Doyon’s contract incorporated the changes clause from the FAR. What’s more, Doyon sought an equitable adjustment to recover interest. This interest was predicated on a change because DLA’s approval of Doyon’s proposal to build a processing facility was a change to the company’s utility contract that increased in the cost of performance. Thus, Doyon had sufficiently stated a claim. The no-interest rule did not, by itself, bar Doyon’s claim for interest.

But the court found the government’s jurisdictional argument more persuasive. The government argued that even though Doyon’s contract had a changes clause, the contract still excluded recovery of interest from the government. Accordingly, the government had not waived its sovereign immunity against claims for interest as part of the changes clause. Because the government was immune, the government contended, the court lacked jurisdiction to hear Doyon’s claim.

The court noted that the changes clause in Doyon’s contract was similar to the changes clause in the cases that allowed contractors to recover intertest incurred as a result of government delay. Unlike those other contracts, however, Doyon’s contract incorporated the DFARS pricing modification clause. That clause, in turn, stated that the cost principals and procedures of FAR part 31 applied to the contract. FAR part 31 includes FAR 31.205-20, which specifically states that interest on borrowings are unallowable costs. Because Doyon’s contract contained a specific provision that excepted interest from the changes clause, the government had not waived its sovereign immunity with respect to interest. Consequently, Doyon could not seek an equitable adjustment for this interest.

Doyon is represented by Adam Whitfield Cook of Birch, Horton, Bittner & Cherot, P.C. The government is represented by Steven Charles Hough, Steven J. Gillingham, and Robert E. Kirschman, Jr. of the Department of Justice as well as Brandon Cogswell of the Defense Logistics Agency Energy.

COFC - Doyon Utilities