Two weeks ago the United States Court of Appeals, Federal Circuit re-opened the door to recovery of Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") cleanup costs under contractual provisions that predate Superfund liability by decades. Companies faced with responsibility for cleaning up waste generated by the production, manufacture, sale, or delivery of commodities under a contract with a governmental agency should evaluate their ability to recover under contract theories if CERCLA contribution has proven frustrating.
Despite previously being held not liable as an "arranger" under CERCLA for cleanup costs incurred from the disposal of waste by-products from World War II aviation gas production, the United States government was found liable last week for the same clean-up costs in a breach of contract action. In Shell Oil Co. v. United States, No. 2013-5051 (Fed. Cir. Apr. 28, 2014), the court granted four oil companies summary judgment on their breach of contract claims against the United States, holding the government liable for CERCLA clean-up costs attributable to waste produced as a by-product of the manufacture of aviation gas during WWII.
The United States Court of Appeals, Federal Circuit began its decision of April 28, 2014, by noting that "we must recall and place into its appropriate context the atmosphere of stark determination for victory at all costs which drove our war effort after the Japanese Empire attacked the United States Naval Base at Pearl Harbor..." It was within that context that the oil companies had entered into contracts with the United States to provide high-octane aviation gas ("avgas"), used by military aircraft in WWII. The process used to produce avgas resulted in waste by-products, "spent alkylation acid" and "acid sludge." The oil companies disposed of the waste at a location in California that fifty years later became a Superfund Site.
The Environmental Protection Agency and the State of California cleaned up the site and then sued the oil companies in 1991 to recover the $100 million cleanup costs under CERCLA. The oil companies, in turn, sued the federal government for contribution/reimbursement of those costs. After several rounds of lower court decisions and appeals in the 1990s and 2000s, the oil companies' CERCLA contribution claims against the United States ultimately failed due to lack of proof that the government had "arranged" for the disposal of hazardous substances via contracting for the manufacture of avgas because it had no direct involvement in or knowledge of the disposal of the wastes (United States v. Shell Oil, et.al. 294 F.3d 1045 (9th Cir. 2002).
Seeking a new jurisdiction, the oil companies re-filed their breach of contract claims against the United States in the Federal Court of Claims, alleging that the government was contractually obligated to reimburse them for the clean-up costs, arguing that the "costs" were "charges" within the meaning of the "taxes" clause in the contracts. Though the claims were initially successful, they were overturned on appeal for procedural reasons; and, on remand, the district court rejected the argument that CERCLA cleanup costs fell under the meaning of the word "charge" in the taxes clause of the contract (Shell Oil Co. v. United States, No. 06-141C (Fed, Cl. Jan.14, 2013). The Court also ruled that even if the clause covered cleanup costs, the contracts were terminated in the 1940s and therefore, all contract claims were settled. The Court further found that the Anti-Deficiency Act ("ADA") forbid any government agency from spending more in a fiscal year than Congress' appropriations for that year, and consequently the government was prohibited from entering into open-ended indemnification clauses without specific appropriation or statutory authority.
Recent Ruling & Summary
On appeal for a second time, the United States Court of Appeals, Federal Circuit determined that the CERCLA cleanup costs were "charges" within the relevant contract provision. The Court said it was immaterial that the avgas contracts "additional charges provision" was different from the provisions found to require CERCLA indemnification in prior decisions. What was material were the circumstances of "World War II and the stark necessity of increased avgas production." The Court emphasized that 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." Therefore, the Court held that "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." The appellate court also rejected the arguments that the oil companies' contract claims were released and that the ADA barred the indemnification claims. However, it remanded the case for a trial on damages.