Outside of the world of government contracts it’s a self-evident truth: if someone hires you to provide goods or services but then fails to pay, you are not obligated to continue providing those goods or services. From multi-billion dollar corporations to mom-and-pop shops, no business would expect a contractor to continue performance without timely payment. But that is exactly what the federal government expects, and, in most cases, is entitled to receive. On January 14, 2020, in the Appeal of Puma Energy Honduras, S.A. de C.V., the Armed Services Board of Contract Appeals confirmed that the government’s failure to timely pay valid and undisputed invoices does not entitle the contractor to cease performance of the contract work. 

In Puma Energy, the contractor was hired to provide fuel to the government. When the government failed to pay the contractor’s invoices, the contractor’s internal fuel dispatch system automatically blocked future fuel deliveries pending payment of the outstanding invoices. The government then terminated the contract for default for failure to perform. 

The contractor argued that it was the government’s failure to pay that triggered the automatic stoppage of the fuel deliveries. The Board acknowledged that if the government’s failure to pay causes the contractor to become financially incapable of performing, then performance is excused. But the Board ruled that it was the contractor’s own business practices (i.e. the automatic stoppage on future deliveries) that caused the contractor’s failure to perform. Nevermind the fact that the contractor’s system stopped delivery because the government failed to pay for the fuel it had already received. Accordingly, the Board sustained the government’s termination of the contract for default.

Before the passage of the Prompt Payment Act, the government’s failure to timely pay a contractor’s invoices was a valid basis for the contractor to cease performance. Now, outside of certain special circumstances such as financial incapacity to perform due to the government’s non-payment, contractors are generally barred from ceasing performance due to non-payment. Most of the time, when the government fails to timely pay its invoices the contractor’s sole remedy is interest under the Prompt Payment Act.

The takeaway for contractors is simple: the government’s failure to timely pay your invoices does not excuse your performance of your contractual obligations. That said, there are a variety of ways to encourage the government to pay valid unpaid invoices that are not likely to result in contract termination.