On August 4, 2021, the U.S. Court of Appeals for the Federal Circuit rebuked the government’s “overly technical” attempt under res judicata to avoid responsibility for cleanup costs stemming from the large-scale production of aviation fuel as part of the World War II effort. Shell Oil Co. v. United States (No. 20-2221). “In doing so,” the Court explained, it “hope[d] to put an end to the government’s continued resistance to making payments . . . it is obligated to make.”
During World War II, Shell Oil, Atlantic Richfield, Texaco, and Union Oil (the “Oil Companies”) agreed to expand dramatically the production of aviation fuel and to sell it to the government at a reduced profit margin. In exchange the government promised to indemnify the Oil Companies for “any new or additional taxes, fees, or charges” that any domestic laws imposed in connection with the fuel production. The Oil Companies’ efforts led to increased acid waste as a byproduct, which they deposited at what is now the McColl Superfund Site. With the passage of various federal environmental laws in the second half of the 20th century, those fees and charges proved to be significant.
In 1993, the U.S. Court of Appeals for the Ninth Circuit held that the government was not responsible for cleanup costs under CERCLA, reasoning it was not a liable “arranger” of the waste but merely an end purchaser of it. As a result, the Oil Companies have been on the hook—at least statutorily—for all cleanup costs since then. In 2005, though, the Oil Companies filed suit in the Claims Court, seeking indemnification for these costs as “taxes, fees, or charges” based on their contracts with the government in the 1940s. Significantly, in their complaint the Oil Companies raised, but did not ultimately pursue, a claim for all future costs. In 2017, the Claims Court awarded them nearly $100 million in damages, which represented 100% of the cleanup costs through November 30, 2015.
The instant dispute concerns responsibility for an additional $1.6 million in costs between December 1, 2015 and September 30, 2019, for which the Oil Companies filed another indemnification action in November 2019. The government argued that under the doctrine of res judicata, the Oil Companies’ failure to litigate this issue in the first Claims Court case precluded them from doing so now. Specifically, the government argued that the complaint in that case sought judgment for future costs. Though the Oil Companies did not ultimately seek recovery for those costs, they did not voluntarily dismiss the request for them, either. As a result, the government explained, that request could never be made again.
Citing the “partial breach exception” to res judicata, the Court rejected this argument. Generally, where a breach of contract is partial, the injured party can only recover damages incurred to the time of trial; it cannot recover anticipated damages for future nonperformance. This concept works as an exception to traditional res judicata principles because a party is not required to sue based on speculation of future nonperformance or nonpayment. Here, in the first Claims Court litigation, the government’s breach was failing to pay for the Oil Companies’ costs through 2015. The Oil Companies were not obligated to bring a claim for the government’s failure to pay through 2019 because the latter failure had not yet occurred. The government acknowledged the partial breach exception but contended that the Oil Companies’ raising future damages in their first Complaint obligated them to litigate those costs. The Court called this argument “overly technical,” explaining that “[t]he bottom line is that a plaintiff cannot be precluded from bringing a claim that was unavailable in the first action . . . . This is true regardless of the relief sought in the first action.”
Substantively, the partial breach exception is a sensible doctrine in limiting a plaintiff’s duty to sue only for breaches that have already occurred. But as this decision shows, in the context of indemnity the exception can lead to successive litigation related to the same underlying remediation.