Court of Claims Holds Government Contract Requires Reimbursement for CERCLA Clean-up Costs

    During World War II, the United States required huge amounts of aviation gas (avgas). The federal government had the authority to require the production of avgas at refineries and to seize refineries, if necessary. Instead the government entered into contracts with oil companies including Shell Oil Company and Atlantic Richfield Company for the production of avgas. Avgas is a blend of chemical elements which produces sulfuric acid waste as a byproduct. Because of the large quantity of avgas required for World War II, much larger quantities of acid were generated than before the War. As a result, Shell and Atlantic Richfield had to send some of the acid waste to a hazardous materials dump (the McColl Site). This site was chosen because of its proximity to the refineries and the shortage of tank cars available to transport the waste elsewhere for reprocessing.

 

    In 1991, the United States and the State of California brought suit against Shell and Atlantic Richfield pursuant to CERCLA for the recovery of costs incurred in cleaning up the acid waste at the McColl Site. Shell and Atlantic Richfield counterclaimed against the United States claiming that it had arranger liability under CERCLA and also that it was contractually required to reimburse the oil companies. In 1994, the parties entered into a partial Consent Decree in which Shell and Atlantic Richfield agreed to pay $18 million for CERCLA costs incurred by the United States and California, but retained the right to recover those costs should the United States ultimately be held liable.

 

    In 1995, the district court granted partial summary judgment to Shell and Atlantic Richfield holding that the United States was an arranger. In addition, the district court allocated 100% of the cost of clean-up to the United States including the $18 million previously paid by Shell and Atlantic Richfield.

 

    The district court decision was reversed by the Ninth Circuit and remanded to the district court. The district court resolved all remaining counterclaims except that it transferred the Shell and Atlantic Richfield claims for breach of contract to the United States Court of Claims. In the Court of Claims, the oil companies contended that the "Taxes" clause in the avgas contracts required the United States to reimburse them for CERCLA expenses. The clause reads as follows:

 

[The Government] shall pay . . ., any new or additional taxes, fees, or charges, other than income, excess profits, or corporate franchise taxes, which Seller may be required to pay 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 the [avgas] . . .

 

In a May 27 decision, the Court of Claims denied the government's motion to dismiss and granted the oil companies' motions for partial summary judgment. Shell Oil Co. v. United States, 2010 WL 2197741 (Ct. Cl. May 27, 2010). The first issue resolved by the Court was whether the CERCLA clean-up costs are "charges" as the term was used in the contract. The government contended that the "Taxes" clause was a supplemental pricing term not an indemnification clause. The Court rejected this argument relying on the definitions in Black's Law Dictionary (8^th Ed. 2004); Black's Law Dictionary (3^rd Ed. 1933); American Heritage Dictionary of the English Language; The New Century Dictionary; Webster's New Century Dictionary of the English Language. All of these authorities defined "charges" as "costs" or "expenses" in one form or another. Based on this, the Court concluded that the CERCLA clean-up costs attributable to disposing of the acid were "charges" under the contract.

 

The United States also argued that the Taxes clause did not support an argument that the obligations of the United States for additional charges extended into the indefinite future – many years after the contracts were closed out and that the clause only covered costs imposed during performance of the contract. In addition, the United States argued that the CERCLA costs were not imposed "by reason" of the production, manufacture, sale or delivery of the avgas as required by the "Taxes" clause. The Court of Claims disagreed with these contentions. According to the Court, the only limitation on recoverable costs is that they be incurred "by reason of" the production of avgas in the performance of the contract. The Court found nothing in the language of the contract to support the idea that reimbursement was limited to costs incurred during contract performance. The Court held that the "by reason of" language created a proximate causation or but for causation standard which was met by the showing that the production of avgas to satisfy the oil company's contractual obligations necessarily entailed disposal of hazardous waste. 

 

The Court also rejected the United States' last argument that the clause when read as an indemnity clause as advocated by the plaintiffs violated the Anti-Deficiency Act which prohibits the government from expending in any one fiscal year any sum in excess of appropriations made by Congress for that year.

 

This article was authored by James R. Snyder, Jackson Kelly PLLC. For more information on the author see here.