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Government's Breach of Oil and Gas Leases, Remedy, Affirmed

The Court of Appeals for the Federal Circuit affirmed the Court of Federal Claims' determination 1990 amendments to the Coastal Zone Management Act amounted to a repudiation of offshore oil and gas leases, because the government breached the leases when it implemented the federal courts' interpretation of the amendments. The contractors filed suit in the CFC in 2001 when the government altered the procedures for granting requested lease suspensions in response to a federal district court's interpretation of the CZMA amendments. According to the district court, the amendments required the government to provide a consistency determination to the relevant state agency before granting requested suspensions ( California v. Norton, 150 F Supp 2d 1046 (ND Cal 2001), aff'd 311 F3d 1162 (CA-9 2002)). The CFC found the 1990 amendments effected an anticipatory repudiation of the leases and ordered the government to pay more than $1.1 billion as restitution for the lessees' upfront bonus payments (68 FedCl 535).
Subsequent Conduct
On appeal, the Federal Circuit disagreed with the CFC's conclusion the 1990 legislation itself constituted a breach or anticipatory repudiation, noting the parties initially treated the leases as unaffected by the amendments and continued performance. Rather, the breach occurred when the government implemented the courts' interpretation of the amendments. However, because the CFC's holding was based in part on the government's conduct following the courts' rulings, the CFC's determination anticipatory repudiation occurred in 1990 was not essential to its resolution of the case. The Federal Circuit also rejected the government's attempts to distinguish Mobil Oil Exploration v. U.S. (45 CCF ¶77,730), which held enactment of a statute repudiated similar oil and gas leases by imposing new requirements inconsistent with the lease terms. The court acknowledged the breach in Mobil Oil was somewhat more clear-cut and the parties in Mobil Oil did not perform for many years before the statutory interpretation that led to the breach. Nevertheless, the court was persuaded the Supreme Court's analysis applied to the circumstances of the case.
Restitution
The Federal Circuit affirmed the CFC's judgment regarding restitution "in all respects." The court confirmed the lessees stood "in the shoes" of the original lessees, and the assignment of the leases included the right to enforce the contracts and pursue all available contract remedies. The Federal Circuit also upheld the CFC's denial of the lessees' development costs as part of the restitutionary award because the benefit the lessees' due diligence activities conferred on the government was uncertain. ( Amber Resources Co., et al. v. U.S., CA-FC, 52 CCF ¶78,992)

(The news featured above is a selection from the news covered in the Government Contracts Report Letter, which is published weekly and distributed to subscribers of the Government Contracts Reporter. )

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