COVID-19: Meeting Critical Business Operational Needs During Shelter-In-Place Shutdowns
March 23, 2020
By Brett W. Johnson and Ian Joyce
In response to the COVID-19 pandemic, government authorities at every level are issuing declarations limiting daily activities. The orders – ranging from specific industry shutdowns to shelter-in-place executive orders – are directly responsive to the needs of each governmental entity. Unfortunately, press releases and public commentary discussing the declarations preceded the actual promulgation of such declarations, causing companies to face significant confusion from employees, vendors and higher tier contractors in understanding what activity is actually restricted.
In addition, contractors holding Defense Property Accountability System (“DPAS”) Rated Orders may soon find themselves in an untenable situation. As way of background, a Rated Order is a purchase order or contract that a contractor must prioritize over all other orders. They are issued by the government, and the priority given to any individual Rated Order is determined by importance of the item purchased. There are other requirements, for example, a company must accept a Rated Order except under certain circumstances.1 In addition, companies should ensure that appropriate pricing occurs and that commercial and Rated Orders are treated equally. The only difference being that the Rated Order must be performed prior to commercial orders to ensure the delivery deadline.
So, on one hand, “shelter-in-place” orders by local government prohibit employees from continuing work; on the other, the President recently invoked the Defense Production Act, which will allow the Federal Government to accelerate performance of Rated Orders.2 Although it would be preferable if local government declarations recognize that declarations by State and Federal governments should take precedence, the various rush to issue declarations will cause confusion. The following guidance may help companies navigating these murky waters.
First, contractors should be aware that “shelter-in-place” rules may not prevent performance of a Rated Order.
For example, both California’s and Illinois’ shelter-in-place rules exempt workers in “essential businesses.” Unfortunately, what constitutes an “essential business” is vague, and there do not appear to be due process protections in place to make definite determinations.3 This in-itself causes confusion, any standard line worker may not appreciate whether they work in an “essential business” and may decline to work in the face of a shelter-in-place law, even if their employer specifically directs them to do so.
Regardless, both orders define “essential business” by reference to the Cybersecurity and Infrastructure Security Agency’s “16 critical infrastructure sectors.”4 One such “critical sector” is the “industrial defense sector,”5 which includes “personnel working for companies, and their subcontractors, who perform under contract to the Department of Defense providing materials and services to the Department of Defense.”6 Thus, while these shelter-in-place rules do not explicitly exempt Rated Orders, it can be inferred that they do not, in fact, prevent performance (at least for Rated Orders issued by the Department of Defense). The problem, of course, is that defense obligations are not regulated to just the Department of Defense. The obligations are spread throughout different government agencies, including the Departments of Energy, Homeland Security, Veterans Administration, and Health and Human Services. Each of these agencies may also use Rated Orders to meet the government’s needs.
Moreover, even if Rated Orders are not specifically exempt from shelter-in-place requirements or other State declarations, the Federal Government’s invocation of the Defense Production Act may overrule the local requirements. It is well established that where compliance with both Federal and State regulations is a “physical impossibility” the Federal Government takes superiority.7 Similarly, Federal law takes superiority over State law that “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.”8 Here, willful failure to comply with a Rated Order is a criminal penalty,9 while shelter-in-place rules may affirmatively prohibit (or significantly delay) completion of a Rated Order. Thus, in the event shelter-in-place rules apply to Rated Orders, compliance with both the Rated Order and the shelter-in-place rule will be impossible, and the Rated Order would likely take precedence.
All that said, it is advisable for contractors to stay in contact with State, local, and Federal officials to address any conflicts that may arise. This is a preferable approach over openly violating any government orders.
Second, regardless of the discussion above, performance of a Rated Order may be significantly delayed by shelter-in-place rules. Federal Regulation requires a contractor to notify the government immediately if it becomes clear that a Rated Order will be delayed.10 The contractor must give the reasons for the delay and advise of a new shipment or performance date.11
In certain circumstances, the government may help facilitate Rated Order performance through “Special Priorities Assistance” (SPA).12 SPA may be provided for any reason, however, it is normally provided when a contractor has difficulty obtaining delivery or cannot locate a suitable supplier—scenarios that seem likely to occur during a government quarantine.13 In order to receive SPA, a contractor must show that there is an urgent need for the item requested in the Rated Order, and that the contractor has made “reasonable efforts” to resolve the problem.14 Contractors considering SPA should document any efforts to mitigate or resolve their problems. These efforts could include contacting local officials (if the inability to perform is caused by local government action) or seeking alternative suppliers not impacted by a shutdown.
In addition, contractors should be aware that Federal Regulations require them to use Rated Orders to purchase parts necessary to fulfill Rated Orders.15 For example, if a contractor has a DO-A3 Rated Order and needs to purchase parts to manufacture the item, the contractor must use a DO-A3 Rated Order in the applicable subcontract or lower tier purchase order to obtain the necessary parts.16 Unfortunately, many government contractors buy parts in bulk for their own inventory and fail to flow-down the Rated Order category or even make reference that the subcontract is in support of a government contract. If a contractor has failed to flow-down the Rated Order category, it may be required to issue new purchase orders or subcontract amendments to ensure that the products sought (or services rendered) are properly Rated (and given proper priority by the subcontractor). Taking these precautions will help ensure performance of a Rated Order in the event subcontractors are impacted by shelter-in-place rules, and as mentioned above, is affirmatively required by law.
Third, contractors at each tier should promptly evaluate newly issued Rated Orders before accepting them. Pursuant to Federal Regulations, a contractor must reject a Rated Order if it is “unable to fill the order” by the required date.17 If a government quarantine or shelter-in-place action will likely prevent timely performance, the contractor should reject the Rated Order. When making this determination, contractors should consider the capacity of anticipated subcontractors as well as the availability of raw products.
On this point, contractors should strongly consider suspending programs that automatically accept purchase orders. These systems may unwittingly accept Rated Orders that the contractor cannot perform.
Fourth, contractors should be aware of the contractual defenses available in the event of nonperformance. Most federal contracts should contain an “excusable delay” clause, which provide that the contractor will not be in default for failure to perform caused by “acts of the Government,” “epidemics,” and/or “quarantine restrictions.”18 A full government shelter-in-place rule seems to fall under this clause, and as such, the clause may provide nonperforming contractors some quantum of relief. All contractors should evaluate their Rated Orders to determine if they contain an excusable delay clause. (But they should also be cognizant of the requirement to notify the government in the event of delay, as described above).
Even without an excusable delay clause, however, the contractual doctrine of “commercial impracticability” may protect nonperformance. That doctrine provides that a contractor does not have to perform a contract if: 1) an event occurs that makes performance impracticable; 2) the non-occurrence of the event was a basic assumption of the parties; 3) the event was not caused by the contractor; and 4) the contract does not shift the risk of the event to the contractor.19 Similar to SPA relief, this doctrine only applies where the contractor has evaluated all possible alternatives and determined they are inadequate, mere increased costs are not sufficient to invoke the doctrine.20 Here, a court may view a “shelter-in-place” rule as a supervening event, not contemplated by the parties, that makes performance of a Rated Order impossible. That said, every case is unique, and the extent to which commercial impracticality will apply to a Rated Order is fact dependent.
Fifth, companies must ensure they are complying with the government declarations at all levels. Companies that believe they are “essential” should consider providing letters authorizing specific employees to continue to work notwithstanding prohibitions placed on workers by government declarations. These letters would ensure the employee’s transit is not prevented by government officials. Any company that issues letters like these should keep the following in mind. First, these letters should be specific, (i.e., not blanket letters) and should clearly delineate the employee’s authority to continue the activity notwithstanding the local declaration, for example, through reference to DPAS or the applicable government declarations in force in that jurisdiction. Second, the letters should include a specific point of contact who has the authority to actually bind the company. Finally, companies should consider putting in place policies that govern the use of such letters and ensure that they are not abused. For example, a policy could provide that if an employee uses a letter for non-official activity, the employee could face discipline or even be required to report the misuse to appropriate government agencies. Please note that it is likely that the use of such letters could be challenged by government officials, not only under the applicable declarations, but also the False Claims Act and laws concerning false certification. As such, the company must have appropriate legal justification for exempting itself from the declaration and in utilizing this justification to authorize employee activities during the declaration.
In conclusion, shelter-in-place rules and other government declarations during this crisis make performing DPAS Rated Orders or other identified critical essential contracts difficult. However, there is reason to believe that contractors may be able to continue production or provide services, notwithstanding these rules. To ensure compliance with all applicable law, contractors with Rated Orders should stay in contact with their procurement officers and local officials. They should also understand their legal duties and contractual options in the event nonperformance becomes a reality. They should ensure proper documentation related to the justification and authorizations provided to employees to engage in transit or other activities that are otherwise prohibited by the governmental declarations.
- 15 CFR 700.13(a)(1).
- Nathaniel Weixel, Trump Triggers Defense Production Act in Coronavirus Fight, The Hill (March 20, 2020), available at https://thehill.com/policy/healthcare/488632-trump-to-trigger-defense-production-act-in-coronavirus-fight-says-schumer.
- See Russ Mitchell, Unsure if California Coronavirus Rules Hit Your Business? Good Luck Finding Out, L.A. Times (March 20, 2020), available at https://www.latimes.com/business/story/2020-03-20/coronavirus-california-business-closure; Alan Ohnsman, Coronavirus Likely to Halt Tesla’s California Assembly Lines as Officials Say It’s Not An ‘Essential’ Business, Forbes, available at https://www.forbes.com/sites/alanohnsman/2020/03/17/coronavirus-likely-to-halt-teslas-california-assembly-lines-as-officials-say-its-not-an-essential-business/#7d36580b2d37
- Ex. Ord. N-33-20, available at https://covid19.ca.gov/img/Executive-Order-N-33-20.pdf (“I as State Public Health Officer and Director of the California Department of Public Health order all individuals living in the State of California to stay home or at their place of residence except as needed to maintain continuity of operations of the federal critical infrastructure sectors, as outlined [by CISA]”); COVID-19 Ex. Ord. No. 8, available at https://www2.illinois.gov/IISNews/21288-Gov._Pritzker_Stay_at_Home_Order.pdf (“On March 19, 2020, the U.S. Department of Homeland Security, Cybersecurity & Infrastructure Security Agency, issued a Memorandum on Identification of Essential Critical Infrastructure Workers During COVID-19 Response. The definition of Essential Businesses and Operations in this Order is meant to encompass the workers identified in that Memorandum”_.
- Critical Infrastructure Sectors, Cybersecurity and Infrastructure Security Agency, available at https://www.cisa.gov/critical-infrastructure-sectors
- Memorandum for Defense Industrial Base, The Under Secretary of Defense, available at http://thecgp.org/images/Defense-Industrial-Base-Essential-Critical-Infrastructure-Workforce.pdf.
- See Wyeth v. Levine, 555 U.S. 555, 589 (2009); Florida Lime and Avocado Growers, Inc. v. Paul, 373 U.S. 132, 142-43 (1963).
- Wyeth, 555 U.S., at 589.
- 15 CFR 700.74.
- 15 CFR 700.13(d)(3).
- 15 CFR 700.50
- 15 CFR 700.52(a)(1)–(a)(2).
- 15 CFR 700.53(a)–(b).
- 15 CFR 700.15.
- 15 CFR 700.15.
- 15 CFR 700.13(b)(1).
- 48 CFR 52.249-14.
- United States v. Winstar Corp., 518 U.S. 839, 904 (1996); Rest. 2d Contracts § 261.
- Jennie-O Foods, Inc. v. United States, 580 F.2d 400, 408-409 (Ct. Cl. 1978).
©2020 Snell & Wilmer L.L.P. All rights reserved. The purpose of this publication is to provide readers with information on current topics of general interest and nothing herein shall be construed to create, offer, or memorialize the existence of an attorney-client relationship. The content should not be considered legal advice or opinion, because it may not apply to the specific facts of a particular matter. As guidance in areas is constantly changing and evolving, you should consider checking for updated guidance, or consult with legal counsel, before making any decisions.