Preparing for Flying Blind: The Possible Effects of a Government Default on Government Contracts

By:  Lawrence M. Prosen, Joel S. Rubinstein, Tim L. Peckinpaugh, James T. Walsh, Andrew R. McFall & Christopher M. Smith, K&L Gates, Washington DC

Government shutdowns, while very uncommon, are no longer a completely unknown beast to government contractors (or at least the threats of them are not).  Much has been written about their causes, effects, and the ways contractors can prepare for them.  The current discussions about raising the debt ceiling, however, present a completely different, and unknown, challenge to government contractors.  There is a very real fear that the gridlock in Congress may prevent a raising of the debt ceiling, forcing the government into default on its financial obligations.  This would be a novel occurrence, a first for the U.S. government, with unknown consequences.  The best-prepared contractors, however, will be the ones to weather the storm successfully and come out the other side better positioned in the marketplace, and in all possibility with significantly fewer competitors.

This Legal Insight is intended to make you aware of some of the unique aspects of a U.S. government default and its effects.

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