Shell Oil Co. v. United States -- A Divided Federal Circuit Identifies An Exception To The Rule That "No Good Deed Goes Unpunished"

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It would be almost impossible to identify all of the individuals and companies that were critical to America's war efforts during World War II. The sacrifices of those who fought on the foreign battlefields in the European and Pacific Theatres should never be forgotten. But what also must be remembered are the investments of those charged with preparing American and allied forces to fight on a relatively new battlefield: the airspace above the Pacific Ocean (and the many islands that dot the ocean) and above Europe.

The attack on Pearl Harbor changed the United States' perception of World War II. What had been seen by many as "the rest of the world's problem" changed, virtually overnight, to a war that the United States had to win at any cost. This "win at all costs" approach became the main driver of a relationship between the government of the United States and major oil companies such as Shell, Union Oil Company of California, Texaco and the Atlantic Richfield Company.

The government recognized at an early stage that the production of high-octane aviation gas (known as "avgas") to fuel military aircraft would be critical to the national war effort. It was equally apparent to all involved that the military required unprecedented volumes of avgas, and that those volumes had to be produced as quickly as technologically possible for mobilization and delivery to the battle lines. The government and the oil companies understood that production of avgas would result – and did, indeed, result – in the creation of high volumes of waste products such as spent alkylation acid and acid sludge. While some of the by-products of avgas production could be re-used, large volumes of wastes would have to be disposed of (in the manner consistent with technology that existed in the 1940s).

With this in mind, the government entered into several contracts with several oil companies in 1942 and 1943 for the production of substantial volumes of avgas. Significantly, those government contracts included indemnification provisions, in which the government (by way of the Defense Supplies Corporation (the "DSC")) agreed to reimburse the contracting oil companies for "any new or additional taxes, fees, or charges … which [the oil companies] may be required by any municipal, state, or federal law in the United States or any foreign country to collect or pay by reason of the production, manufacture, sale or delivery of [avgas]." At about the same time, the oil companies entered into contracts with landowners for the right to dispose wastes from avgas production, including a contract with Eli McColl, a former Shell engineer who owned property in Fullerton, California (the "McColl Site"). During contract negotiation and the years that followed, the government's primary concern was maximum production of avgas. Thus, the government directed the oil companies to "undertake extraordinary modes of operation which were often uneconomical and unanticipated at the time of refiners' entry into their [avgas] contracts." Indeed, governmental direction of the oil companies' methods of purchasing raw materials – and other impacts of focusing enormous attention on using existing refineries to produce avgas rather than other refined oil products – caused the oil companies to work with the promise of only the narrowest of profit margins.

When World War II came to an end, so did the government's need for avgas (at least at levels approaching anything close to what was required during the war). The oil companies had expended substantial time, money, and other resources "retrofitting" refineries for avgas production and constructing new facilities in the name of patriotism, with the promise of little in the way of profit and, critical to the case at hand, indemnification against liabilities that may or may not have been foreseen or foreseeable at contracting during the height of global war.

Fast forward more than 45 years, to the efforts of the United States government and the government of the State of California to obtain compensation from these same oil companies for CERCLA-based cleanup of the McColl Site, where large volumes of waste byproducts of avgas production were deposited. Following CERCLA-based compensation awards to those governmental entities in federal court litigation in the 1990s, the oil companies filed suit in the Court of Federal Claims, arguing that the avgas contracts required the federal government to indemnify them for the CERCLA costs. The Court of Federal Claims granted summary judgment in favor of the United States, concluding that the CERCLA costs incurred by the oil companies were not "charges" within the meaning of the "new or additional taxes, fees, or charges" provision of the avgas contracts.

On appeal, in Shell Oil Co. v. United States, No. 2013-5051, slip op. (Fed. Cir. Apr. 28, 2014), the Federal Circuit panel majority undid the lower court's disservice to principles of contractual interpretation and to the sacrifices of private industry committed to a patriotic support of a vital war effort. The majority concluded that the CERCLA "costs" did, in fact, constitute new or additional "charges" under the avgas contracts, finding that such authorities as Black's Law Dictionary define "charges" as "costs" or "expenses incurred." Thus, the "new or additional taxes, fees, or charges" included in the avgas contracts refer to different classes of payments, which would include payments for cleanup costs under CERCLA. See Slip Op. at 18 ("In light of the common meaning of 'charges' as 'costs or expenses,' and because the Government's own proposed definition accords with that meaning, this court interprets 'charges' to mean 'costs.'"). In short, the majority found that "CERCLA is a federal law requiring responsible parties to pay the 'costs of removal or remedial actions," and is thus a charge (i.e., cost) imposed by federal law, which was incurred "by reason of" the avgas contracts. Id. at 19 (emphasis in original, internal citation omitted).

In so ruling, the majority ruled that the absence of a "hold harmless" provision or an "allowable costs" provision in the avgas contracts (as had existed in other cases previously decided by the Federal Circuit) was of no legal significance. Because "no special words are required to create a promise of indemnification," the proper question to be asked was simply "whether the avgas contracts require the Government to pay the Oil Companies' CERCLA charges." Id. at 22 (internal quotations omitted). The majority concluded that an indemnification obligation arose out of the avgas contracts' promise on the United States' part to pay for "any" government-imposed "charges" incurred "by reason of" the avgas contracts; whether the contracts' "new or additional … charges" language was identical to contractual provisions found in other cases where indemnification obligations were found to exist was immaterial.

In addition, though not necessary given the court's plain-meaning analysis, the majority noted that extrinsic evidence confirmed that the parties intended "charges" to mean "costs." Specifically, the majority pointed to correspondence among the parties during the 1940s, which routinely used the word "charges" in a manner that could only be interpreted to mean "costs" incurred – such as, "charge for raw materials," "investment charges," "overhead charges," and "interest charges." See id. at 25.

The majority's focus on plain meaning of the language used in the avgas contracts, supplemented by examination of extrinsic evidence to confirm its plain language analysis, appears to be spot-on. No other line of analysis really is needed. But, it is particularly telling that the majority chose to conclude its discussion regarding the avgas contracts with a somewhat lengthy tribute to the efforts and ingenuity of an industry that often is the subject of criticism by the media and environmental groups. Rejecting the truism that "no good deed goes unpunished," the majority acknowledged that the realities of war, and what is required to support a war effort, often require extraordinary concessions by all parties to an agreement. There was a clear understanding when the avgas contracts were signed that properties would house refining wastes; the political climate of the late 20th century and early 21st century regarding how environmental contamination should be dealt with is no basis for altering contractual terms agreed by sophisticated parties like the United States government and oil companies:

World War II and the stark necessity of increased avgas production are the circumstances surrounding the formation of the avgas contracts. The Government was in a position of near-complete authority over existing refineries, but needed the Oil Companies' cooperation to construct new production facilities to meet the extraordinary demand for avgas. The Oil Companies agreed to the avgas contracts' low profits in return for the Government's assumption of certain risks outside of the Oil Companies' control. The CERCLA charges in this case are one such risk. The Oil Companies could not have contemplated such CERCLA charges at the time they entered into the contracts; indeed, dumping the acid waste at the McColl site was expressly permitted [Mr. McColl had a permit issued by the City of Fullerton to dump the waste on his property]. These circumstances confirm that the new or additional charges provision must be interpreted to require reimbursement for the Oil Companies' CERCLA costs arising from avgas production.

Id. at 26 (internal citations omitted).

It should be noted that a judge dissented from the majority opinion. The dissent's position is premised almost entirely on the "new or additional … charges" provision's inclusion in a section entitled "Taxes." Given the generally-accepted proposition that the substance of a contract is not to be judged by a heading, but rather by the words used in the contract as a whole, the dissent's position appears to be grounded more in theory than reality. The dissent discounts the realities of the war, the impetus for the avgas contracts themselves, and the bargain the government struck to ensure the oil companies' cooperation in what otherwise would have been an unprofitable enterprise for private industry.

Jonathan L. Marsh
Houston
+1 713 276 7362
jlmarsh@kslaw.com
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Topics:  CERCLA, Energy, Environmental Policies, Oil & Gas, Shell Oil

Published In: Civil Procedure Updates, Energy & Utilities Updates, Environmental Updates, Government Contracting Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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