Government Right of Setoff When Debts Owned to Contractors May Be AdjustedThe government has a federal common law right of set off costs, also referred to as offset, to balance mutual debts and it can be used as a defense against a contractor to better reconcile competing claims. 

It is important to understand, as a contractor, when the government may be able to set-off some of the costs that you incurred and that you will not be able to get back.

General Rule on Contract Right of Set off:

The right of setoff allows parties that owe each other money to apply their mutual debts against each other.  This right, which applies to every creditor, also applies to the government.  United States v. Munsey Trust Co., 332 U.S. 234 (1947).

The right can even be used against settlement proceeds and it applies to government claims under both other contracts and the same contract with the debtor.  This means that if you have incurred costs that the government can offset from another contract, then the full amount can be offset in the present claim; the goal is to be efficient and settle claims as quickly as possible.

Overcome Set off only through Explicit Language

 The government’s common law right to setoff can only be defeated or constricted by explicit contractual, statutory, or regulatory language.  Courts have been very strict in this regard; without an express limit on setoff rights, the court will likely find that a right of offset is warranted. 

In one recent case, the contractor was in a lease, and the lease stated that if the property becomes unfit, the lessor either needs to repair the building or the government agency may cancel the lease.  Ensley, Inc. v. United States (2014). 

The government contracting agency took it upon itself to create a third option: repair the building and deduct the amounts from the rent.  Because the contract did not expressly disallow this, the government was able to offset the repair costs.

Any right to setoff is limited to the actual costs incurred; no future costs will be considered in determining the offset amount.  When costs have been deferred, not avoided, the right of offset is not available for the deferred costs.

CDA Application & No Independent  Common Law Right to Set off:

Like any other claim governed by the Contracts Disputes Act of 1978 (“CDA”), to be heard by a court, the government must first submit their claim to the contracting officer (“CO”) and either a contracting officer’s final decision must be rendered or the government could show it was exempt from a CO decision.

In Raytheon v. United States, the Court of Federal Claims held that the government did not have a separate common law right of setoff because the government had to first comply with the CDA, and they failed to do so.  Even if the setoff claim is raised as a defense, Contract Disputes Act jurisdictional requirements still apply and there is no independent right to set off. See also information about equitable subrogation and Miller Act Claims.

The Government cannot offset using debt owed by a different entity

In J.G.B. Enterprises v. United States, the government sought to offset a payment owed by a debt owed by a different entity.  Because the contractor who was owed money was actually a subcontractor and third-party beneficiary to the contract, it could bring claims under its own direct right to setoff. 

The government tried to argue that the distinction between direct and derivative  common law right to set off was immaterial, but the Court of Appeals for the Federal Circuit did not agree.  The government must itself have a valid claim against the party subject to a right to setoff before the right can be applied. 

To Avoid Costly Mistakes, Get a Free Government Claims Checklist

If you have any questions about the government’s right of setoff, please call the contract claims attorneys at Watson & Associates, LLC to speak with any of our Federal Government Contract Attorneys at 1-866-601-5518 for a free consultation.

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