When Congressional Legislation Interferes with Existing Contracts: Legal Issues [May 31, 2012]   [open pdf - 283KB]

"Laws enacted by Congress on occasion interfere with contracts entered into before enactment, prompting suits against the United States by disappointed contract parties. In a few of them, courts have awarded billions of dollars to the United States' contracting partners. This report surveys the legal theories invoked in such suits. Note that litigation on the grounds covered herein can be avoided entirely if the congressional enactment is construed to apply only to 'future' contracts. Two competing interests underlie this report's topic. On the one hand, protection of settled expectations, at least to some degree, is essential to ordered society. Contract law has this goal for expectations embodied in contracts. On the other hand, government needs latitude to address new problems, so contracts generally are said to confer no immunity against future legislation. The balance struck by the case law is that while Congress legitimately can thwart performance under existing contracts, the United States may in some instances have to pay compensation. […] For private contracts, the main legal theory is the Fifth Amendment Takings Clause. Plaintiffs argue that since contract rights generally are deemed 'property' under the Takings Clause, a congressional enactment that thwarts performance under a contract in essence takes property, requiring compensation. The government's defense is often the 'Omnia' rule, a Supreme Court holding under which government actions that only incidentally interfere with performance of private contracts are deemed to constitute but a frustration, not a taking, of contract rights. Per this definition, the 'Omnia' rule does not apply when the congressional action expressly 'targets' an existing contract right, though even here the taking claim usually is rejected."

Report Number:
CRS Report for Congress, R42635
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