Government immunity from damages for breach of contract is not automatic. The contracts, made in the early 1980s with the Federal Savings and Loan Insurance Corporation and the Federal Home Loan Bank Board, allowed the thrifts to use special accounting practices to encourage bank mergers. Shortly thereafter, three affected thrifts filed suit asking for damages from the federal agencies, and the case went to the Supreme Court. A splintered Court held that the federal agencies had breached the contracts and that the United States could be held liable for losses incurred by the thrifts due to the breach. The plurality noted that the agencies had contracted to assume the risk of loss as a result of future legislation that affected the contracts.
Most government contracts contain termination clauses.
These clauses authorize contracting officers to make settlement agreements to terminate contracts when it is convenient for the contracting agency to do so. A government agency also may terminate a contract if a contractor defaults, or fails to fulfill the terms of the contract. Many of the disputes over government contracts arise in connection with performance and payment. Various sections in the FAR delineate when it is acceptable for a party to a government contract to withhold service or payment. The vast majority of government agencies sometimes need to contract with private businesses.