Of Sovereignty and Contract: Damages for Breach of Contract by Government
Gillian K. Hadfield
USC Law School and Department of Economics
Southern California Interdisciplinary Law Journal, 1999
When governments enter into contracts, they put their role as sovereign and lawmaker in tension with their role as contractor. In recent years, with the rise in the use of contracting by governments, courts have grappled with how to resolve this tension. In particular, when government breaches a contract, what is the appropriate response of the courts? Government breach is often a result of a change in policy brought about by democratic processes; ordinary contract enforcement with expectation damages then limits the capacity of government to respond to political change and, furthermore, locks in policies of previous administrations at least in so far as the cost of expectation damages raises substantially the cost to taxpayers of policy. Non-enforcement of government contracts, on the other hand, shifts the cost of policy changes onto individual contractors to the extent of their reliance losses (including opportunity costs).
This paper returns to first principles in the theory of contract damages to assess both the economic and the philosophical justifications for expectation damages found in private contract law. I demonstrate that these justifications are inapplicable in the government context, taking us to square one in the determination of appropriate remedies for government breach. I argue in this paper, drawing on takings principles from both Canadian and American law and statutory regimes governing procurement, that the proper remedy for breach by government is reliance damages. The paper also gathers together the various strands in Canadian and American law governing government contracts. Both the doctrinal evidence and the theory lead to the conclusion that government contract law is and should be considered a distinct species of contract law. In this sense, courts (such as the Supreme Court in U.S. v. Winstar) have been led astray by the "government as contractor" image, treating government contracts as equivalent to private contracts and overwhelming the "government as sovereign" side of the issues.
Note: This is a description of the article and is not the actual abstract.
JEL Classification: K12, K23, H57
Date posted: March 19, 1999