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August 19, 2014  |  Written by Richard S. Deitchman

Federal Circuit Remands Water Agency’s Contract Case for Expectation Damages Determination in Light of Recurring Announced Breaches

On August 1, 2014, the United States Court of Appeals for the Federal Circuit (Court) issued its decision in Stockton East Water District, et al. v. United States, No. 2013-5078, 2014 U.S. App. LEXIS 14764 (Fed. Cir. Aug. 1, 2014), remanding to the trial court on the grounds that it erred by not adequately considering the impact of the United States Bureau of Reclamation’s (Reclamation) series of announced breaches on the amount of water Central San Joaquin Water Conservation District (Central) would receive under its contract with Reclamation for Central Valley Project (CVP) water.  The Court affirmed the trial court’s award of damages to Central for the cost of covering its loss, and remanded to determine Central’s expectancy damages.

Background

In 1983, Central contracted with Reclamation for the appropriation of CVP water from the New Melones Reservoir.  Following the 1992 enactment of the Central Valley Project Improvement Act (CVPIA), Reclamation announced that it would not fulfill water delivery quantities in its existing contracts because of additional CVPIA demands, including environmental uses.  In 1993, Central sued the United States for breach of contract in federal district court.  After a transfer of venue, the Court of Federal Claims held an initial trial on liability in 2006 and ruled for the United States.  On appeal, the Federal Circuit found the United States breached the contract for the years 1999-2004 and remanded for a trial to determine damages.  The trial court found that Central was entitled to $149,950, which was the cost to cover damages paid to another district for water that Central would have paid Reclamation in the years 2002 to 2004.  The trial court denied Central’s request for expectation damages resulting in this appeal.  Expectation damages put the non-breaching party in the position the party would have occupied had the contract been performed.

The Court’s Opinion

The Court found that the trial court should have considered what would have happened had Reclamation not announced in 1993 and subsequent years that it would be unable to make available the minimum allocations provided for in its contract with Central.  The Court found that the trial court failed to adequately assess Reclamation’s poor performance in water delivery prior to 1999 and improperly focused its damages analysis on Central’s failure to request its minimum allocation in the years following Reclamation’s non-performance announcements.  The Court found that by 1994, and absolutely by 1999, Central and its members were on notice that Reclamation would not provide its contractual minimum.  The Court stated, “[a]t some point most people stop asking for what they have been told they are not going to get, and they make other plans to meet their needs.”  2014 U.S. App. LEXIS 14764 at *18.

The Court remanded the matter to the trial court to consider the effect of Reclamation’s non-performance announcements on the expectations of Central and the agricultural community.

Conclusion and Implications

The Court’s conclusion is relatively straightforward—if someone announces they are not going to do something over the course of several years, the receiver of those recurring announcements will reasonably stop asking and look elsewhere for what they seek.  The Court did not allow the United States to take advantage of a legal technicality (i.e., the requirement that Central request its minimum contractual allocation) under such circumstances.  As a result, on remand, Central’s decade-long litigation may end with a significant expectation damages award.

For additional information please contact Richard Deitchman at rdeitchman@somachlaw.com.

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