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Vol 7 January 23, 1996

**[A GRANT IS A CONTRACT]{.underline}**

by Joe Levine

Is a grant a contract? This, no doubt, is an issue on which Federal
assistance practitioners have heard entirely enough. However, a recent
decision of the United States Court of Federal Claims adds another
chapter to the analysis of this issue.

In the case of [Thermalon Industries, Ltd. v. U. S.]{.underline}, 34
Fed. Cl. 411 (1995), the National Science Foundation (NSF) argued that
grants were not contracts under the Tucker Act (28 U.S.C. \'1491), which
provides the jurisdictional basis for the Court of Federal Claims (the
ACourt@) to try breach of contract suits against the United States. Many
of us thought that this issue was already settled (see, *e.g.*, 2
U[nited]{.smallcaps} S[tates]{.smallcaps} G[eneral]{.smallcaps}
A[ccounting]{.smallcaps} O[ffice]{.smallcaps}, P[rinciples]{.smallcaps}
[of]{.smallcaps} F[ederal]{.smallcaps} A[ppropriations]{.smallcaps}
L[aw]{.smallcaps} 10-5 (2d ed. 1992) and the cases cited in the
footnotes therein). However, NSF=s unsuccessful effort to relitigate
this question resulted in an opinion that provides a clear explanation
of what is required for a grant to be considered a contract, breach of
which is recoverable in that Court. In the process, the court sets forth
a useful summary of the differences between

Aagreements", Acontracts@ Aprocurement contracts@ and Agrants@.

FACTS:

The facts of the case are straightforward. Thermalon, in response to an
NSF solicitation, submitted a proposal and received a grant to conduct
research under NSF=s authority to promote scientific activities (42
U.S.C. \' 1861 *et seq.*). The award contained the usual terms and
conditions. Thermalon commenced performance and submitted invoices for
payment. NSF Office of Inspector General audited the invoices and
questioned the allowability of a substantial portion of the claimed
costs. Thermalon suspended work pending the final results of the audit
and NSF terminated the grant. After unsuccessfully seeking relief within
NSF, Thermalon filed suit. The government filed a motion to dismiss,
contending that the grant was Aan agreement intended to effectuate the
sovereign obligations of the United States@, and thus fell outside the
scope of the court=s jurisdiction under the Tucker Act. The court=s
opinion was issued in support of its decision to deny this motion and
order the case to proceed.

COURT=S ANALYSIS:

The Tucker Act provides that the court Ashall have jurisdiction to
render judgment upon any claim against the United States, founded  upon
any express or implied contract with the United States,@ 28 U.S.C. \'
1491 (a)(1). The court began its analysis by finding that plaintiff had
demonstrated the elements of a binding contract, namely, a mutual intent
to contract, including an offer, acceptance and consideration passing
between the parties, and that the government representative had
authority to bind the United States in contract. It found that issuance
of the award was either acceptance of the plaintiff=s offer or a counter
offer which plaintiff accepted when it commenced work on the grant.
(While it was not relevant to the courts analysis, the question of
whether the government accepted the grantee=s offer or issued a counter
offer can be important in deciding when funds are actually obligated -
see Vol. 3 of [It=s The Law AO]{.smallcaps}bligation of Federal
Assistance Funds@.)

Traditionally, grants were not considered to meet the requirement of
consideration because the benefit from the agreement flows to a third
party rather than to the government. However, consistent with a number
of previous cases, the court found mutual consideration in NSF=s
obligation to pay and Thermalon=s commitment to publish research
results, transfer title to government funded equipment, and provide
royalty-free license to resulting intellectual property. Finally, there
was no issue raised regarding authority to contract.

The Asovereign@ (ignoring constitutional issues) is immune, unless it
has specifically consented, from law suits challenging its actions or
seeking damages which resulted from its actions. The Tucker Act is a
specific waiver of immunity which provides the court with jurisdiction
to decide cases covered by its terms. The principal thrust of NSF=s
arguments in this case was that the Tucker Act was intended solely to
cover procurement contracts, *i.e.* situations where the sovereign steps
off the throne and engages in transactions such as private parties
engage in among themselves, while the grant in question involved an
agreement pertaining to sovereign obligations, *i.e.* accomplishment of
a general public welfare objective.

The court, while conceding that not all Aagreements@ were Acontracts@
under the Act, rejected this argument and concluded that the Act covered
more than just procurement contracts. The opinion points out that the
purchase and sale of goods and sovereign actions are not mutually
inconsistent categories, and that all actions of the United States are
sovereign actions, some narrowly focused and others broadly aimed at the
public welfare in general. With either, however, the government may
exercise its authority either unilaterally or bilaterally, such as
through a contract. Following a useful analysis of the Federal Grant and
Cooperative Agreement Act of 1977, 31 U.S.C. \' 6301 *et seq.*, and its
legislative history, the court found that classification of an agreement
as a grant (or a cooperative agreement) does not resolve whether the
arrangement is a contract enforceable under the Tucker Act. Rather, the
traditional standards for finding mutual intent to contract (including
offer, acceptance and consideration) are determinative.

CONCLUSION:

The final section of the court=s analysis brings the grant/contract
issue into sharp focus. The penultimate paragraph of the final section
states:

A*As described above, contracts enforceable under the Tucker Act result
only if there is a mutual intent to contract, including an offer,
acceptance, and consideration. Therefore, the government always has the
choice when designing a grant scheme to select a scheme that does or
does not involve contracts. Moreover, the choice of a contract scheme
ordinarily should limit an agency=s exercise of discretion in only minor
ways because the government can insist on whatever contract terms it
chooses including, for example, a restrictive standard for court review
(e.g., findings will be reviewed in court under an arbitrary and
capricious standard) and even a limitation of the issues that may be
contested in court. In addition, the choice of a contract scheme
potentially brings important benefits to the government. A contract
scheme not only enables the government to secure an independent forum in
which to enforce the terms of an agreement, but also encourages
participation in grant programs by ensuring that grantees may secure
review by an independent decision maker in the event the government
fails to fulfill its obligations under the agreement*.@

Thus, a grant can be a contract, if the government so chooses. By
following the applicable OMB Circulars and established procedures it
seems clear that Department of Commerce grants and cooperative
agreements are contracts since there is: an offer of grant; acceptance
by the recipient; consideration, in the recipient=s performance, the
government=s commitment to pay allowable costs, and the mutual
obligation to conform to the terms and conditions of the award.

However, as the above quoted language makes clear, a few simple changes
and they are contracts no longer. Before anyone begins a push to change
the language in our awards to eliminate Tucker Act coverage, consider
the following two points. First, uniformity in Federal assistance
procedures is an important issue. In this regard, please review Vol. 3
of [It=s The Law]{.smallcaps}, ASay What You Mean@. Second, as the Court
points out, the government also receives important benefits by having
the Tucker Act apply.