The ‘nudum pactum’ mistake

One of the three basic requirements for a contract to be enforceable is consideration, which usually means a promise to pay money, but could mean that another valuable item would be provided instead (as in a trade, for example, of one valuable car for another valuable car).

In federal procurement contracts, the courts have said that to be a valid contract, the transaction “must show a mutual intent to contract including an offer, an acceptance and consideration.” If there’s no consideration, is it a contract? The answer is simple: it’s a “nudum pactum” and there is no valid contract.

A “nudum pactum” is defined as a “bare agreement,” a promise or undertaking without any consideration for it. Where there is a “nudum pactum,” the contract is neither valid nor enforceable.

Richard Lieberman, a consultant and retired attorney.
Richard Lieberman, consultant and retired attorney.

Government contractors must be wary of performing under a “nudum pactum.” They likely will not be paid for their goods or work, and unlike a valid contract, the contractor will have no recourse to courts. The issue primarily arises where the contract contains one or more “availability of funds” clauses.

An example: The New Iraq Ahd Company signed an agreement with the Army to construct a fence for the 25th Infantry division, but the contract stated that there was “no legal liability on the part of the government for any payment … until funds are made available to the contracting officer for this contract and the contractor receives notice of such availability, to be confirmed in writing by the contracting officer.”

Although the company spent $175,440 to buy materials, the funding never became available, and the contracting officer never provided notice of funds availability to the contractor. New Iraq recovered nothing in litigation because there was no contract to enforce — it lacked consideration and was purely a “nudum pactum.”

This same situation can arise for other contractors whenever the government includes “availability of funds” clauses. These clauses are included in most contracts for services, usually buried in the clauses around page 30, and state that “no legal liability on the part of the government for any payment may arise until funds are made available to the contracting officer for this contract and until the contractor receives notice of such availability, to be confirmed in writing by the contracting officer.”

Agencies frequently use these clauses when awarding a contract at the end of one fiscal year, when the contract begins in the next fiscal year. However, the agency has not received its funds and the Anti-Deficiency Act prohibits the government from spending money that has not yet been appropriated. It’s a typical problem where the government wants to continue a contract for services on Oct. 1, but doesn’t yet have its funding.

If this clause is in a contract, it is a “nudum pactum” until the contracting officer receives funds, and the same contracting officer provides the contractor with notice of the availability of funds.

Meaning:  Do not deliver any goods or perform any services until you receive that written notice of availability of funds. You are likely never to receive payment.

 Contractors need to make sure that there is consideration (money) placed on their contract. The “availability of funds” clauses protect the government from overspending. But if no funds are available on the contract, there’s no money, and the contractor shouldn’t do any work until the contracting officer notifies it in writing that there are funds on the contract.

For example, if you are performing a services contract and there’s no money on the contract as of Oct. 1, you should stop work until the funds become available. Your contracting officer may ask you to continue without funds, but you could be making a big mistake.

Richard Lieberman is a consultant and retired attorney. This article does not provide legal advice as to any particular transaction

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