Federal Court of Appeals Rules that California Water District May Recover Expectancy Damages from the United States

by Best Best & Krieger LLP

Opinion Reverses Trial Court, and Bureau of Reclamation May Owe Additional Damages for Breach of Water Supply Contract

A recent federal appellate decision may clear the way for water purveyors to collect damages when the federal government shortens water deliveries, in breach of water supply contracts. The U.S. Court of Appeals for the Federal Circuit reversed a Court of Federal Claims (trial court) for its denial of expectancy damages in a decades-long breach of contract case, ruling on Aug. 1 that the trial court erred in its analysis of how expectancy damages are to be calculated based on the facts of the case. The decision opens the door to the possibility for water districts with federal government water supply contracts to obtain monetary damages from the government if their water deliveries are shorted due to an inexcusable breach of contract.

In 1983, Central San Joaquin Water Conservation District contracted with the United States Bureau of Reclamation for an appropriation of water from the New Melones Reservoir within the San Joaquin Valley to support agricultural interests in the Valley. However, nearly 10 years later, the Bureau informed the District it would not be able to meet the contract’s demands, and the District eventually purchased water from the South San Joaquin Irrigation District instead.

The District sued the United States for breach of contract in federal court in 1993. The trial and appellate courts disagreed on liability, and the appellate court reversed the trial court and determined that the United States was liable for breach of contract from 1999 to 2004. It returned the case to the trial court for a damages determination for the breaches that occurred during that time.

On remand, the trial court found that the District was entitled to recover damages in the amount of $149,950 — the difference between what the District paid to SSJID for water and the total amount it would have paid to the Bureau for the water in 2002 to 2004. The trial court denied any expectancy damages, finding that the District had failed to present evidence demonstrating how much water it might have needed from 1999 to 2004 in a non-breach circumstance. Expectancy damages are based on the value of the injured party's interest lost by the failure of the other party to fulfill its contractual obligations. The appeal followed.

Here, the appellate court ruled that the trial court erred in its expectancy damages analysis because it only examined the conduct during the period of liability (1999 to 2004) instead of beginning in 1993, and focused on the District’s failure to request water in certain years, following years of announcements from the Bureau that it could not provide the District water.

To determine expectancy damages, one must consider what would have happened had the contract been performed. The appellate court excused the District’s failure to request water from the Bureau in certain years because, at “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.”

Thus, the appellate court vacated the trial court’s judgment in part and remanded the case for a reconsideration of expectancy damages with instructions for the trial court to consider the effect of the Bureau’s announcements of non-delivery, beginning in 1993, on the expectations of the District and the agricultural community it served. The District was also awarded costs on appeal.

Based upon the court’s decision, it appears likely that the District will receive damages in excess of the $149,950 it originally received.

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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