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Notes -
It's kinda a mess. On one hand, the US military as a policy doesn't like contractors putting conditions on use of material. That's not the hard-rule that they want to pretend it is, as anyone that's remotely familiar with a leased military base can tell you, but it's also not something made up for this one exercise.
On the other hand, this is one of those technologies that's unusually dangerous in unobvious ways. A guy that makes missiles doesn't have to get contractual assurances that Schmuck A isn't intended to shoot them into a busload of American orphans, because if they were going to do that no contract would stop them. Trying to use an LLM for hypersonic missile defense is, presumably, not obviously batshit insane, and would easily be plumbing new depths of stupid ways to start WWIII just because someone thought the temperature value needed to go up a bit higher.
On the gripping hand, there's particular reasons to be skeptical of Anthropic, here. Their position and the nature of the technology gives it unique capability to check for compliance, and while I don't think the company would blow up a massive contract just to get a short-lived news cycle falsely claiming Republicans were doing something awful, I absolutely think individual employees would. Even outside of the politics, leaving interpretation of where an 'autonomous lethal system' begins and human-assist ends, or where 'mass domestic surveillance' begins and 'a test of any sensor system ever' ends, and whatever favorable Californian court hearing Anthropic could bring is... not a pleasant consideration. There's a more cynical take where laws prohibiting a behavior don't real where governments don't want them to, while contract requirements could, but it runs face-first into Anthropic not being particularly focused on the money, and that's about all you could recover.
On the other gripping hand, there's a lot of reasons that Anthropic is skeptical of the military (and intelligence) sectors, here. Those legal constraints have turned to anarchotyranny already, where they mean require thirty levels of approval for a data collection that's never going to be read and will be deleted, but the NSA has their warehouse and a lot of very long gloves.
On yet another side, there's a problem where supply chain issues are Big Problems when they involve anyone this distributed. I'm not even in the military, and I've been pretty badly screwed over by a fuel vendor deciding that they just Weren't Really Feeling It before. The possibility that someone might cut off translation and transcription services can get people killed if they're in the air and dependent on them. Even if this disagreement was focused on something where I might sympathize with Anthropic on, it's a major warning shot to a government organization based around not getting warning shot.
But it's also both unprecedented and very rapid escalation.
Indeed, and I think you've touched upon but merits more depth: how one operationalizes compliance with contract restrictions.
Certainly I don't think the DOW can abide a contractor not just having conditions (which may or may not be objectionable depending on their substance) but on the assertion that this contractor itself gets to decide on matter and cut off support on the fly seems like a bridge too far.
Searching in vain for deescalation here, one hopes the parties could come to an understanding where the substantive restrictions are acknowledged without creating a procedural veto for the contractor.
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