Federal Circuit Upholds San Joaquin Water Districts Against USBR in CVP Contract Dispute

Stockton East Water District, and Central San Joaquin Water Conservation District v. United States

United States Court of Appeals for the Federal Circuit, Case No. 2007-5142 (Sept. 30, 2009)

In this case, the Federal Circuit Court of Appeals sternly held the United States to its contractual obligations to deliver Central Valley Project water. In 1993, Stockton East Water District and Central San Joaquin Water Conservation District ("Districts") sued the United States for a "taking" of their vested (contractual) water rights under the Fifth Amendment to the U.S. Constitution as a result of the Bureau of Reclamation's failure to deliver requested supplies from New Melones Reservoir. Ten years later, after Reclamation repeatedly reduced deliveries below contract levels (or delivered no water at all), the Districts amended their complaint to allege breaches of contract by Reclamation. The takings issue was deferred by the Court of Federal Claims (the trial court with jurisdiction over most contract disputes with federal agencies) and the contract issues were tried in 2006 over disputed deliveries from 1993 through 2004.

The trial court dismissed the Districts' takings claims (see below), but found that Reclamation had indeed breached the contracts. Reclamation contended that changes both to federal policy and to state law instream flow requirements (because the contracts are subject to state water law) "inherently" changed Reclamation's allocation and delivery obligations. Reclamation also argued that both changes to state law mandates and drought conditions necessitated these breaches and they therefore fell within the exculpatory provisions of the contracts, excusing Reclamation's performance. The trial court agreed that drought conditions constitute circumstances, in the language of the contracts, "beyond the control of the United States," thereby meeting the "shortage" criteria of the contracts.

The Federal Circuit rejected out of hand the argument that the United States' own legislative and policy changes justify breaching its contracts, reasoning that the protections Reclamation enjoyed under the contracts were flatly inconsistent with the notion that the United States had inherent unilateral control over whether or not to perform. In contrast, the circuit court tacitly allowed the possibility that state water law may change Reclamation's allocation obligations, but rejected the defense because Reclamation had failed to prove any relationship between its allocation policy and the state law mandates it complained of. As to the exculpatory effect of state law, the circuit court further noted that "a federal decision to adjust its management of the CVP to accommodate a change in state allocation policy is a policy decision determined by the Federal Government itself." (Slip Op. at 28.)

The circuit court similarly rejected Reclamation's defense under the contracts' shortage provisions, again finding that Reclamation had failed to demonstrate either that state law or drought conditions had brought about the allocation policies under which it determined to deliver less than contracted-for supplies to the Districts. Regarding drought conditions, the circuit court expressed considerable skepticism toward Reclamation's defense given the evidence of substantial storage in New Melones Reservoir during the relevant time period, but nevertheless deferred to the trial court's evidentiary rulings in favor of Reclamation in two of the 10 years in question. For the remaining eight years, the circuit court reversed on the contract claims and remanded the case to the trial court for a determination of contract damages – originally claimed by the Districts to amount to some $500 million.

This decision is important for a couple of reasons. First, the circuit court made very plain that no special policy protections favor a federal agency's contract interpretation or excuse an agency's breach of its contractual obligations, so long as the government is not acting in its "public and general" sovereign capacity. Second, the circuit court very pointedly put Reclamation to the proof of the claims that circumstances beyond its control caused its failure to deliver water, and the circuit court unmistakably put the onus of changes in government policy – in particular, changes to address environmental concerns – on the government itself. The circuit court also took a very narrow view of what lies outside the government's control for purposes of interpreting the contracts, placing it potentially at odds with Ninth Circuit law that Reclamation is not contractually liable for later-adopted federal policies that result in reallocation and shortages. ( See, O'Neill v. United States, 50 F.3d 677 (9th Cir. 1995).

Much discussion will likely attend the circuit court's ruling on the Districts' takings claims since these constitutional issues naturally attract attention. As a practical matter, however, the circuit court merely vacated the trial court's dismissal of these claims because the trial court had prematurely invoked the (well-established) principles that (1) recovery on a contract claim precludes identical recovery on a constitutional claim, and (2) a "takings" claim is not available against the government when it is acting in its limited "proprietary" (contracting) authority, as opposed to its sovereign authority. In this instance, the contract claims were ruled invalid for two of the years in question and the takings claims should have been considered in the alternative. The circuit court held that the Districts are free to pursue their constitutional claims for those two years because the trial court should have allowed them to go forward after ruling on the contract claims. While the circuit court offered no opinion regarding the validity of those claims, its unqualified agreement with the trial court that in these circumstances Reclamation had acted in its proprietary capacity would seem (for the reason noted above) to make the Districts' constitutional claims somewhat dubious.

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