## United States Court of Appeals for the Federal Circuit

2007-5142

STOCKTON EAST WATER DISTRICT, and CENTRAL SAN JOAQUIN WATER CONSERVATION DISTRICT, Plaintiffs-Appellants, and SAN JOAQUIN COUNTY, STOCKTON CITY, and CALIFORNIA WATER SE RVICE COMPANY, Plaintiffs,

v. UNITED STATES, Defendant-Appellee.

Jennifer L. Spaletta , Herum Crabtree Brown, of Stockton, California, argued for plaintiffs-appellants. With her on the brief were Jeanne M. Zolezzi and Natalie M. Weber . Of counsel on the brief were Roger J. Marzulla , Nancie E. Marzulla and Gregory T. Jaeger , Mazulla & Marzulla, of Washington, DC. Kathryn E. Kovacs , Attorney, Appellate Secti on, Environment & Natural Resources Division, United Stat es Department of Justice, of Washington, DC, argued for defendant-appellee. With her on the brief were Ronald J. Tenpas , Assistant Attorney General, and Katherine J. Barton , Attorney. Of counsel was Kristine S. Tardiff , Attorney, of Concord, New Hampshire. John D. Echeverria , Georgetown Environmental Law & Policy Institute, of Washington, DC, for amicus curiae. Of counsel on the brief was Katherine S. Poole , Natural Resources Defense Coun cil, of Washington, DC. Appealed from: United States Court of Federal Claims Judge Christine O.C. Miller

## United States Court of Appeals for the Federal Circuit

2007-5142

STOCKTON EAST WATER DISTRICT, and CENTRAL SAN JOAQUIN WATER CONSERVATION DISTRICT, Plaintiffs-Appellants, and SAN JOAQUIN COUNTY, STOCKTON CITY, and CALIFORNIA WATER SERVICE COMPANY, Plaintiffs,

v. UNITED STATES, Defendant-Appellee.

Appeal from the United States Cour t of Federal Claims in 04-CV-541, Judge Christine O.C. Miller.

__________________________ DECIDED: September 30, 2009

__________________________ Before NEWMAN, PLAGER, and GAJARSA, Circuit Judges

. Opinion for the court filed by Circuit Judge PLAGER. Circuit Judge GAJARSA dissents. PLAGER, Circuit Judge

. In the history of t he western United States, the fight for water rights is a central theme. California, because a goodly part of the state s hares the desert-like conditions that lie at the root of the fight, since bef ore its founding has been one of the locales forthis battle. This case is another chapter in that state’s long-running history of water disputes. 1
Plaintiffs Stockton East Water Distric t (“Stockton East”) and Central San Joaquin Water Conservation District (“Central”) (collect ively, “plaintiffs” or “the Districts”) are water agencies organized under the laws of Calif ornia for the purpose of providing water to municipal, industrial, and agricultural users. 2 They allege that the United States (sometimes “Federal Government” or just “Government”) in managing water resources in California that are under f ederal control has failed to pr ovide the quantities of water that it agreed to make avail able. The agencies claim to have binding contracts for the water, and that the Federal Governm ent has breached these contracts. The water at issue is from the New Me lones Unit of the vast federal water resources project in California known as the Central Valley Project (“C VP” or “Project”). The Project and the water resource facilities c ontained in it are situat ed wholly within the state of California, but ar e owned and operated by the United States through its Bureau of Reclamation (“Reclamation”), a part of the Department of the Interior. When Reclamation would not meet the quantity commitments in their contracts because of other demands for the water to wh ich Reclamation gave priority, plaintiffs sued the United States in federal district court. That was in 1993, and marked the beginning of this continuing saga that has yet to see its end.

1 For another glimpse at the cu rrent battles, see Jim Carlton, Parched State Searches for Ways to Expand Water Supply , Wall St. J., July 9, 2009, at A4; Sabrina Shankman, California Gives Desalination Plants a Fresh Look , Wall St. J., July 9, 2009, at A4. 2 Other plaintiffs, not parties to the c ontracts in this case, sought third-party beneficiary status. They have not appealed the trial court’s ruling against them on that issue.

2007-5142 2In 2007, the suit, having been transferred earlier by the district court to the United States Court of Federal Claim s, was decided by that court after an eight-day trial. Subsequently, in an exhaustive 85-page opinion, the Court of Federal Claims concluded that, though the obligations for water deliv ery were indeed breached, certain contract provisions gave the Government the defenses it claimed. Judgm ent was awarded to the Government. Plaintiffs ti mely appealed to this court. BACKGROUND The historical record and procedural history of this case occupy a substantial part of the trial court’s extensive opinion. See Stockton E. Water Dist. v. United States , 75 Fed. Cl. 321, 330-47 (2007). For more of the details, we refer the reader there. We recite in only summary fashion the facts nec essary to place our decision in context. A. The Central Valley Project, New Melones, and the 1983 Contracts The Central Valley Project is the largest federal wate r management project in the United States. It was built to serve the wate r needs in California’s Central Valley Basin. Originally conceived by the St ate of California, the CVP was taken over by the Federal Government in 1935 and initially funded by Congress as part of the nation’s effort to use public works projects to return the economy to health during the Depression. 3 Congress reauthorized the CVP in 1937, assi gning to the Bureau of Reclamation the tasks of constructing and operating the CVP. 4 The CVP today consists of twenty dams and reservoirs, eleven power plants, over500 miles of major canals, and numerous

3 Rivers and Harbors Act of 1935, P ub. L. No. 74-409, 49 Stat. 1028; Emergency Relief Appropriation Act of 1935, Pub. L. No. 74-11, 49 Stat. 115. 4 Rivers and Harbors Act of 1937, Pub. L. No. 75-392, § 2, 50 Stat. 844, 850.

2007-5142 3other facilities. 5 Reclamation continues to operat e the CVP under the various federal reclamation laws that have been amended and supplemented many times over the
years. The New Melones Unit of the CVP wa s completed in 1979 and consists of a large concrete dam on the Stanislaus River and a reservoir with a storage capacity of 2.4 million acre-feet of water. 6 New Melones was the last unit of the CVP to be constructed, after final authorization by Congress in 1962. 7 As Reclamation’s history of the project explains, 8 the construction of the New Me lones dam and power plant was one of the more controversial chapters in t he history of the CVP. The controversy focused on the loss of a popular stretch of recreational white water, inundation of archeological sites, and flooding of the West ’s deepest limestone canyon. Controversy over the project lasted over a decade bef ore the decision to proceed and provide irrigation water, flood control, and power generation occurred. The battle over construction of New Melones portended the end of the era of large dam construction. The 1962 Act authorizing New Melones required among other things that Reclamation determine the quantity of wate r required to satisfy all existing and

5 About the Central Valley Projec t, http://www.usbr.gov/mp/cvp/about.html (last visited Sept. 29, 2009). 6 An acre-foot is the volume of wate r necessary to cover one acre of land with water to a depth of one foot and is equal to approximately 325,580 U.S. gallons. When gallons are too cumbersome a measure, the acre-foot is the standard unit of water used in this country in reference to large-scale water resources. 7 Flood Control Act of 1962, Pub. L. No. 87-874, 76 Stat. 1173, 1191. Congress had earlier authorized a New Melones pr oject to alleviate flooding problems. Flood Control Act of 1944, Pub. L. No. 78-534, 58 Stat. 887, 901. The 1962 Act authorized the expansion of New Melones and its operation as part of the CVP. 8 http://www.usbr.gov/projects/ (selec t “New Melones Unit Project”; then follow “Project History” hyperlink) (last visited Sept. 29, 2009).

2007-5142 4anticipated future needs within the Stanislaus River Basin. 9 Also, as with every federal reclamation project, Reclamation was obligat ed to comply with state law in appropriating water for New Melones. 10 This required Reclamation to apply for permits from the California State Water Resources Control Board (“SWRCB”), which has the power to make decisions for the state regarding water appropriation. In 1973, the SWRCB initially approved Reclamation’s application for a permit to appropriate water from New Melones, subject to twenty-five conditions and limitations. 11 Among other things, the SW RCB mandated annual releases from New Melones of 98,000 acre-feet for fishery and wildlife purpos es. The SWRCB also established water quality standards and estimated that annual releases of up to 70,000 acre-feet would be necessary to meet those standards. Ta king into account these state-imposed requirements, Reclamation prepared a plan fo r operation of New Melones. As detailed in a 1980 report, Reclamation estimated t hat 180,000 acre-feet of water would be available annually for agricultural and muni cipal and industrial uses after other anticipated needs, including state-mandated re leases for fishery and wildlife purposes and water quality, were satisfied. 12
Another condition attached to the SW RCB’s approval of Reclamation’s application prohibited full im poundment of water in the reservoir until Reclamation had firm commitments for the beneficial use of the water. In part to demonstrate such

9 76 Stat. at 1191. 10 See Reclamation Act of 1902, Pub. L. No. 57-161, § 8, 32 Stat. 388, 390 (codified at 43 U.S.C. § 383); see also California v. United States , 438 U.S. 645, 652 (1978). 11 California State Water Resources C ontrol Board, Decision 1422 (Apr. 14, 1973). 12 J.A. at 2977 (Stanislaus River Basi n Alternatives and Water Allocation Special Report (1980)).

2007-5142 5commitments, Reclamation began contract negotiations in the early 1980s with Stockton East and Central to provide the Distr icts with water from New Melones. These negotiations culminated in the signing by Reclamation of near ly identical contracts with Stockton East and Central (“the 1983 contracts”). These are the contracts at issue in this case. Article 3 of each cont ract specifies the maximum amount of water to be made available annually from the New Melones re servoir—75,000 acre-feet for Stockton East and 80,000 acre-feet for Central. Thus, Recl amation committed to provide the Districts with up to 155,000 acre-feet out of the 180,000 acre-feet per year that the 1980 report estimated would be available for consumptive uses. Article 3 also establishes for each year of the contract a minimum amount of water that Reclam ation is obligated to make available, and for which the Districts must pay, beginning with the first full year after notification by Reclamation that wate r is available to the Districts. As required by the 1983 contracts, the Districts constructed and installed at their own expense multi-million dollar water deliver y systems to carry water from the New Melones reservoir to their facilities. In May 1988, Reclamation announced that water was available and that the init ial delivery date for purposes of the contracts was January 1, 1989. This triggered t he start of the annual minimum purchase and supply schedule of Article 3; however, from 1989 through 1992, the first four year s after the initial delivery announcement, the Districts did not request any water from New Melones, and no water was delivered to them.

2007-5142 6B. The Central Valley Project Improvement Act In 1992, before the Districts ever received water from New Melones under the 1983 contracts, Congress enacted the Cent ral Valley Project Improvement Act (“CVPIA”). 13 The purposes of the Act include the following: (a) to protect, restore, and enhanc e fish, wildlife, and associated habitats in the Central Valley and Trin ity River basins of California; (b) to address impacts of the Cent ral Valley Project on fish, wildlife and associated habitats;

. . . . (f) to achieve a reasonable bal ance among competing demands for use of Central Valley Project wate r, including the requirements of fish and wildlife, agricultural, m unicipal and industrial and power contractors. 14 The CVPIA expressly required the release of substantial quantities of water for fish, wildlife, and habitat restoration needs, di recting Reclamation to dedicate annually 800,000 acre-feet of the total CVP yield to those purposes. 15 This legislation significantly affected Reclamation’s operati on of the CVP. Though no provision of the CVPIA was directed specifically at the oper ation of the New Me lones Unit, as will be discussed below Reclamation’s decisions regarding implementat ion of the CVPIA impacted the amount of water made available from New Melones for consumptive uses. C. Contract Performance — 1993-2004 The first year the Districts requested water under the contracts was 1993, the fifth year after the initial delivery date announced by Reclamation, and the year immediately following enactment of the CVPIA. The following c hart from the trial court’s

13 Pub. L. No. 102-575, §§ 3401-12, 106 Stat. 4600, 4706-31 (1992). 14 CVPIA § 3402, 106 Stat. at 4706. 15 CVPIA § 3406(b)(2), 106 Stat. at 4715-16.

2007-5142 7opinion, referred to by the trial court as the “Build-Up Schedule,” 16 shows the annual minimum quantities of water in acre-feet that Reclamation was obligated under the contracts to make available to Stockt on East and Central fr om 1993 through 2004, the last year at issue in this case: Annual Minimum Obligations

Year Stockton East Central 1993 500 0 1994 23,350 28,000 1995 23,450 28,000 1996 23,550 28,000 1997 46,400 56,000 1998 46,500 56,000 1999 66,700 56,000 2000 67,400 56,000 2001 68,100 56,000 2002 68,800 56,000 2003 69,500 56,000 2004 70,200 56,000

Under Article 4 of the cont racts, the Districts were required to submit annual schedules indicating their monthly water require ments. Initially the Districts submitted such schedules, but it soon bec ame apparent that Reclamation did not intend to provide the requested water, so according to the Dis tricts they eventually stopped submitting schedules, or else requested less water than they actually desired. The trial court found

16 Stockton , 75 Fed. Cl. at 365.

2007-5142 8that failure by the Districts to submit schedul es did not excuse any breach of contract by Reclamation; 17 that finding is not disputed. Following is a synopsis of the Districts’ requests for water and the amount of water delivered by Reclamation under the 1983 contracts during the years 1993-2004. As will be seen, for most of the years at issue the water received by the Districts fell far short of the amounts request ed and the minimum amounts required by Article 3 of the
contracts. 1993 Although the Districts requested a total of 20,000 acre-feet for 1993, Reclamation delivered no water under the contracts that year. 1994 For 1994, Stockton East requested 75,000 acre-feet of water and Central requested 25,000 acre-feet. In February of that year, Reclamat ion announced an initial forecast of available CVP water based on “c onditions caused by California’s fourth driest year in 85 years . . . result[ing] in Re clamation forecasting a critically dry year for 1994.” 18 The initial forecast pr ovided a “zero water supply” for the Districts from New Melones, stating that “every effort is needed to avoid allowing the level of New Melones reservoir to drop below the minimum storage level (300,000 acre-feet) needed to generate power. . . . The available water will be allocated to fish and wildlife, and to meet water quality requirements.” 19 In May 1994, Reclamation responded to the Districts’ water requests with a letter stati ng that no water could be delivered because

17 Id. at 363. 18 J.A. at 3962 (Def.’s Ex. 276). 19 Id. at 3963.

2007-5142 9rain and snowfall conditions had not been sufficient to support CVP contract deliveries. In the letter, Reclamation explicitly invok ed the shortage provision of Article 9 of the 1983 contracts (which will be discussed in more detail later): The shortage provision in your contra ct provides for the apportionment of CVP water among users from the same source when there is a shortage in the quantity of water available to C VP contractors. In accordance with that authority, the Unit ed States hereby informs you that there will be no available water supply from New Me lones Reservoir for meeting your contractual commitments for the 1994 water year. 20 Neither Stockton East nor Central received any water from New Melones in 1994. 1995 For 1995, Stockton East requested 65,000 acre-feet of water and Central requested 50,000 acre-feet. In April 1995, Reclamation announced that a total of 37,000 acre-feet would be made available to t he Districts. Water delivery was delayed, however, when Reclamation informed the Distric ts that their water conservation plans, which were required by the contract and had been submitted two ye ars earlier, did not meet Reclamation’s criteria. After the Distr icts’ revised water conservation plans were approved in August 1995, Central requested delivery of 5,000 ac re-feet and Stockton East requested delivery of 6,750 acre-feet for the rema inder of 1995. Ultimately Reclamation delivered in 1995 only 4,003 acre -feet to Stockton East and 4,564 acrefeet to Central. 1996 For 1996, Stockton East requested 32, 400 acre-feet and Central requested 40,000 acre-feet. Stockton East later r educed its requested amount significantly.

20 J.A. at 3384 (Pls.’ Ex. 99).

2007-5142 10Reclamation delivered 15,197 acre-feet to Stockton East and 17,508 acre-feet to Central. 1997-98 Reclamation, the United States Fish and Wildlife Service (“FWS”), the Districts, and other interested parties undertook negotiati on of an Interim Plan of Operations (“IPO”). Completed and agreed to by the parties in 1997, the IPO provided a computational mechanism for allocating wa ter to the Districts based on annual storage and inflow forecasts at the New Melones Reservoir. The amount to be allocated annually to the Districts combined ranged from 0 to 90,000 acre-feet. The trial court found that the Districts agreed to the terms of the IPO as a short- term modification to the 1983 contracts for 1997 and 1998. 21 Under the IPO, the Districts were allocated a combined total of 50,000 acre-feet for each of those years; the tria l court found that Reclamation’s water deliveries in those years complied with the terms of the IPO. 1999-2004 Although the IPO was designed for us e in 1997 and 1998, Reclamation continued to use the formulas in the IPO to a llocate water to the Districts for each year from 1999 to 2004. The follo wing table, adapted from t he trial court’s opinion, summarizes (in acre-feet) the water requested by the Districts, the allocations made by Reclamation using the IPO, and the water ac tually delivered to each District between 1999 and 2004:

21 Stockton , 75 Fed. Cl. at 356.

2007-5142 11Year Requested by Stockton East Requested by Central Allocated (Total) Delivered to Stockton East Delivered to Central 1999 23,000 None 60,000 31,112 33,786 2000 24,000 None 90,000 7,377 27,759 2001 24,000 None 34,000 7,030 25,747 2002 3,500 12,000 15,500 3,493 10,508

2003 10,000 (combined with Central) 10,000 (combined with Stockton East) 10,000 2,210 9,846

2004 None 25,000 15,000 (Central

only) 1,486 13,605

D. Procedural History As noted, this case began in 1993 with a co mplaint filed in the United States District Court for the Eastern Dis trict of California. Plaintiffs’ 1993 complaint alleged, inter alia, that implementati on of the CVPIA caused the impai rment of their vested water rights under the contracts in violation of the Fifth Amendment takings clause. Some ten years later, the di strict court transferred the takings cause of action to the Court of Federal Claims. Soon thereafter, plaintiffs, now in the Court of Federal Claims, amended their complaint to include a br each of contract claim for failure to provide water from 1993 to 2004 in accordance with the 1983 contra cts. In 2005, the parties filed cross-motions for summary judgm ent on liability for the breach of contract claim. The trial court denied both motions and set the contract issues for trial. Stockton E. Water Dist. v. United States , 70 Fed. Cl. 515 (2006). Following an eight-day trial in 2006, the tria l court issued its extensive opinion, in which it detailed the facts and set out various findings and conclusions. The court found

2007-5142 12that in each year from 1993 to 2004, Reclamation breached the 1983 contracts by not making available the amounts of water in the annual minimum purchase and supply schedule of Article 3. The court concluded, however, that Reclamation’s failure to deliver the required water was excused because Reclamation validly invoked the shortage provision of Article 9 and its determinat ions were not arbitrary, capricious, or unreasonable in violation of Article 12(d) (both sections to be discussed below). Stockton , 75 Fed. Cl. at 363-66. The court re jected the Government’s alternative defense that liability would be precluded by the sovereign acts doctrine. Id. at 372-73. Finally, although the takings claim was stay ed pending resolution of the contract claim and was not at i ssue at trial, id. at 324 n.2, the trial cour t nevertheless dismissed the takings claim, concluding that the appropriate remedy for plaintiffs’ claims arises from the contracts themselves rat her than the constitutional prot ection of property rights. Id. at 373-74. Subsequently, the trial court granted in part and denied in part the Districts’ motion to alter or amend the j udgment. The court corrected several factual errors in its earlier opinion, but refused to delete the portion of the opinion that dismissed the takings claim. Stockton E. Water Dist. v. United States , 76 Fed. Cl. 470 (2007). The trial court also denied the Districts ’ motion for reconsideration. Stockton E. Water Dist. v. United States , 76 Fed. Cl. 497 (2007). The Districts filed a timely appeal in wh ich they challenge the trial court’s nonliability judgment for 1994, 1995, and 1999-2004. They also appeal the trial court’s dismissal of their takings claim. We have jurisdiction under 28 U.S.C. § 1295(a)(3).

2007-5142 13DISCUSSION The history of this litigation is long, the facts are complex, as the above condensation and the trial court’s more ext ensive opinion testify, and the determinative legal issues, at least if one accepts the par ties’ views, are seve ral, and are strongly disputed. Even so, the basic case is fairly straightforward and the legal issues are not that difficult to follow. We will begin with a capsule restatement of the causes of the dispute, and how the issues became framed. This will simplify the problem of explaining exactly what has to be decided, and how we have decided it. A. Overview: The CVP and Changing Priorities When the CVP was begun in t he 1930s, the stated purposes of the Project were “improving navigation, regulating the flow of the San Joaquin Riv er and the Sacramento River, controlling floods, providing for storage and for the delivery of the stored waters thereof, for the reclamation of arid and semiar id lands and lands of Indian reservations, and other beneficial uses, and fo r the generation and sale of electric energy . . . .” 22
The dams and reservoirs were to be used “fir st, for river regulation, improvement of navigation, and flood control; second, for irrigation and domestic uses; and third, for power.” 23 As earlier noted, under the terms of t he Congressional enactments establishing the CVP, the Federal Govern ment in building and administering the Project was to be subject to the same state rules that applied to other water users in California. That

22 Rivers and Harbors Act of 1937, Pub. L. No. 75-392, § 2, 50 Stat. 844, 850. 23 Id.

2007-5142 14meant complying with the Stat e’s regulations applicable to water users, particularly users who wished to capture the water for consumptive uses. A brief refresher of key terms may be hel pful. “Consumptive uses” refers to uses, such as irrigation, domestic uses , and industrial processes, that involve withdrawals from the water source, a lake orstream or in this case a man-made reservoir. These withdrawals may result in diminished quantity and quality of water available to downstream users for their cons umptive uses, and may significantly impair such “non-consumptive uses” as boat ing, fishing, and wildlife habitat. In the arid western states, developm ent depended on assured supplies of scarce fresh water for consumptive use. In contra st to the “riparian rights” regime in the Eastern United States, 24 where water was abundant, the legal regime that developed for Western water rights is called “prior appropriation.” 25 As a general proposition, under prior appropriation doctrine the right to a consumptive use of water belongs to the first person to make beneficial use of it. T hat person becomes the owner of a right to the quantity of water put to beneficial use, and that right takes priority over later claimants to the water. 26 For purposes of this case, the import ant point is that when the CVP was established and for many years after, both federal and state water law and policy gave

24 The “riparian rights” system for water allocation attributed water rights to land adjacent to surface water sources. T he legal measure of t he right was reasonable use. Ground water was freely accessed and belonged to the owner of the overlying land. See generally F.E. Maloney, S.J. Pl ager & F.N. Baldwin, Jr., Water Law and Administration ch.2 (1968). 25 See generally 2 Waters and Water Rights chs.11-12 (Robert E. Beck ed., repl. vol. 2008). California, because it has riparian-type geography as well as arid regions, has some of both of t hese water rights regimes. 1 Waters and Water Rights § 8.02(a) (Robert E. Beck ed., repl. vol. 2007). 26 2 Waters and Water Rights § 12.01 (Robert E. Beck ed., repl. vol. 2008).

2007-5142 15high priority to making the water resources av ailable for consumptive uses. This meant providing water for irrigation, which created the fertile fields of California’s central valley agricultural industry, and later for withdraw als for domestic and industrial uses in support of the state’s burgeoning population and it s cities. That wa s still the state of affairs when the New Melones project was undertaken in 1962, and this focus on consumptive uses was reflected in t he 1983 contracts between the Districts and Reclamation governing consumptiv e use of the water in the New Melones reservoir. However, by the late 1980s and early 1990s , as environmental concerns became more pronounced and fish and wildlife intere sts moved more to the forefront, Government policy began to sh ift. For example, in 1973 when the SWRCB initially approved Reclamation’s permit for New Melones , it required 98,000 acre-feet of water to be released annually for fish and wildlife. However, under a 1987 agreement entered into by Reclamation and the California Depar tment of Fish and Game, Reclamation was required to release for the same purpose up to 302,100 acre-feet of water annually. At the same time, while Reclamation antici pated when it signed the 1983 contracts that water quality standards mandated by the state would be attained with annual releases of 70,000 acre-feet from New Melones, signific antly greater releases were necessary in later years to meet the standards. At the federal level, the shift in policy culminated in the Congressional enactment in 1992 of the CVPIA. The legislation added “mi tigation, protection, and restoration of fish and wildlife” to t he purposes of the CVP 27 and for the first time under federal law specified that substantial quantities of water from the CVP were to be dedicated

27 CVPIA § 3406(a)(1), 106 Stat. at 4714.

2007-5142 16annually to non-consumptive uses—fis h, wildlife, and habitat restoration. 28 Furthermore, and significantly, t he Act expressly altered the priorities for use of the CVP dams and reservoirs to now include fish and wild life, adding the italicized phrases: “first, for river regulation, improvem ent of navigation, and flood cont rol; second, for irrigation and domestic uses and fish and wildlife mitigation, pr otection and restoration purposes ; and third, for power and fish and wildlife enhancement.” 29 As the trial court found, “t he ever-increasing imposition of additional obligations for salinity and fisheries water releases l ed to a clash of management objectives and priorities, the unpredictability of available water supply, and an inherent conflict between demands for consumptive use by plaint iffs and environmental concerns.” Stockton , 75 Fed. Cl. at 338. Ultimately the changing priorities “required Reclamation to alter the manner in which it made operational decisions regarding the allocati on of water to the Contracting Parties pursuant to the 1983 Contracts.” Id. at 338-39. Reclamation’s own website sums it up by noting that the Ne w Melones Dam is a reminder of the conflicts surrounding growth , the environment, and water in the West: “Even without the environmental controversy that surrounds the project, the operational and water yield problems will certainly cause c ontinued difficulties well into the future. With the enormity of the problems facing New Melones, it seems unlikely that the project will ever realize its full potential as a multi use unit. Indeed, New Melones may become a case study of all that can go wrong with a project.” 30

28 CVPIA § 3406(b)(2), 106 Stat. at 4715. 29 CVPIA § 3406(a)(2), 106 Stat. at 4714 (emphasis added). 30 http://www.usbr.gov/projects/ (selec t “New Melones Unit Project”; then follow “Project History” hyperlink) (last visited Sept. 29, 2009).

2007-5142 17B. Contract Interpretation and Performance The record establishes and the trial court found as a fact that Reclamation failed to provide the water that was promised under the 1983 contracts for the years 1994, 1995, and 1999-2004, the years at issue in this appeal. Absent an affirmative defense, that failure by the Government would consti tute a breach of the contracts and render the Government liable for damages for the breach. The Government essentially raises three affirmative defenses to this breach of contract suit. First, the contracts were enter ed into in light of federal reclamation law and state permits, and any changes in law, even changes such as the CVPIA made years after the contracts were entered into, are incorporated as a matter of fundamental law into the contracts. This will be referr ed to as the ‘inherency’ defense. Second, specific provisions of the contracts, namely Articles 9(a) and 12(d), provide the Government with a valid defense. This is the ‘contract provisi on’ defense. And third, in addition to these other defenses, the sovereign acts doctrine stands as a defense to the Districts’ contract claims; this we call the ‘sovereign acts’ defense. We address each of these defenses in turn. 1. The Inherency Defense: Are the contracts by their inherent nature subject to changes in the law? The Government’s argument is that, because these contracts involve the administration of a government progr am by a government agency, and the administration of that program is subject to later changes in federal and, in this case state, law and policy, the contra cts are effectively adhesion cont racts. That is, whatever changes may occur in the Government’s law and policies with regard to the contract, for example, the CVPIA and Reclamat ion’s administration of it, the Districts must adhere to

2007-5142 18them. The Government finds as the source of this doctrine the basic nature of contracts with a sovereign United States, and also cite s as authority the bas ic principles of California water law, including the public trust doctrine, which the Government refers to as ‘background principles.’ The Districts di spute that the CVPIA is relevant to the proper administration of the contracts. They further dispute that the so-called ‘background principles’ of California stat utory and common law hav e any bearing on the question of obligations under these supply contracts with regard to the specified quantities of water within the c ontrol of the Government. We note here that this defense shares in some respects the conceptual underpinnings of the sovereign acts defense, a matter we take up below. Because the Government raised this first defense separate and apart from that of the sovereign acts defense, we address it separately. a. Federal Law We have no problem rejecting the Governm ent’s argument insofar as it pertains to changes in federal law. First, there is the obvious question of whether making the contracts subject to whatever future feder al law or policy may hold would make the contracts illusory. Torncello v. United States , 681 F.2d 756, 760 (Ct. Cl. 1982) (“[A] party may not reserve to itself a method of unlimited exculpation without rendering its promises illusory and the contract vo id . . . .”); 1 Richard A. Lord, Williston on Contracts § 4.27 (4th ed. 1999) (“[W]here t he promisor retains an unlimited right to decide later the nature or extent of hi s or her performance[, the] unlimit ed choice in effect destroys the promise and makes it illusory. ”). Relatedly, there is the question whether such a construction would also make the Government subject to a claim of unfair dealing and

2007-5142 19fraud in inducing a party to enter into such a contract and expend substantial sums in compliance with it. But more to the point in this case, ther e is nothing in these contracts to suggest that the Government’s r eading of the contracts and t he claim of inherent law incorporated into them is w hat either party to the cont racts understood was intended. Indeed, the contract provisions suggest quite the contrary. Specific provisions in the contracts afford the Government complete defenses to a failure to perform, but the defenses are circumscribed by the terms in whic h they are cast, so that the exculpatory provisions apply only in the specified circumstances. See 30 Richard A. Lord, Williston on Contracts § 77.38 (4th ed. 1999) (“The express te rms of a contract can be pertinent evidence in undermining a supposed implied condition.”). If the Government intended or expected to have unilateral control over it s legal obligation to perform, control that could be exercised by the simp le expedient of a change in its own law or policy, it hardly would need the protections that the pr ovisions in the contracts afford. b. State Law Changes in state law, however, present a somewhat different question. California is not a party to these contracts. A change in the applicable state law is not the same kind of unilateral action by a party to the contracts as when the change is made by the Federal Government. T he issue about illusory contracts and misrepresentation is attenuated. Further, as noted earlier, the original legislation creating the CVP made the Federal Government ’s access to the Project’s water subject to the State of California’s laws and rules governing water rights. At the time the contracts were executed, Reclamation had complied with the state r equirements then in

2007-5142 20force and had obtained the necessary permits from the SWRCB. At that time, as far as the contracting parties were concerned, the Government could only expect to deliver the water that it controlled purs uant to state law, and the two state-created agencies that are the plaintiffs no doubt understood this. The Government argues accordingly that the Districts’ contract rights have always been subordinate to the requirements of state law as provided in the state permits for New Melones, including releases for senior water rights holders, water quality, and fishery. T he Districts in fact do not contest that releases of water for these specified uses take priority over the Districts’ contracts; the Districts so stipulated. 31 The Government then argues that, as a consequence of these mandated releases, “in some years, the releases of water to satisfy state law utilized a large portion of the water available from New Melones Reservoir. . . . Thus , at least for some years, the Districts’ concession that t heir contract rights are subordinate to Reclamation’s obligation to sa tisfy state permit requirements may dispose of their entire claim.” 32 The Districts respond that the Govern ment did not produce actual evidence that operating New Melones in accordance with state law and purs uant to the state permits necessarily caused a shortage of water for consumptive uses in any given year. They cite as an example the year 1994, the only year at i ssue designated as a “critical” water year ( see Annual New Melones Data, col.2, J. A. at 4976, a copy of which is appended to this opinion as Appendix A). In that year, releases from New Melones for senior water rights holders and to satisfy state permit requirements totaled some 700,000 acre-feet of water, and CVPIA releases totaled an additional 70,600. The

31 Appellants’ Br. 14. 32 Appellee’s Br. 19-20 (emphasis added).

2007-5142 21Districts note that, even so, there remai ned some 425,000 acre-feet in storage at New Melones, and that it was within the discretion of Reclamation to allocate some water to the contracts, rather than, as was the case, provide none. It is not clear from the Government’s argument whether the state mandates that allegedly caused the shortages were mandates included in the original state permits, or were mandates that, like the C VPIA statute, were enacted a fter the contracts were in place. However, that may not matter to the Government’s position. As we understand that position, changes in management practices, however mandated, were inherently the Government’s right, and that, apparently , these changes need not be specifically justified by the particular circumstances. In that the Government errs. A party to a contract generally has the option of performing or paying damages for non-performance. If the Government chooses to not perform but wishes to avoid having to pay damages, arguing that “the state made me do it,” then the Government mu st prove it was the state mandates that caused the unavailability of water to meet the Governm ent’s contract obligations and not simply choices that the Government made. There is no doubt that the State imposed substantial mandates for use of the water in the CVP, including New Melones, m andates to meet senior water rights and fish and wildlife needs and water quality concerns . Some of these mandates were built in to the permit that initially authorized t he New Melones withdrawals, and some came later. The trial court in vari ous parts of its opinion set out in extensive detail what these mandates were, and how they changed over the years at issue. See Stockton , 75 Fed. Cl. at 334 (senior water rights); id. at 335-36 (SWRCB requirements); id. at 336 (initial

2007-5142 22fish and wildlife releases); id. at 337 (in-basin needs); id. at 339 (fishery releases); id. at 342 (salinity requirements at Vernalis). However, what is missing from the reco rd, from the Government’s argument, and from the trial court’s conclusions, is t he necessary showing of a causal connection between the particular state mandates and Reclamation’s inability to meet its obligations under the contracts. The Governm ent did not establish nor did the trial court find the critical connection between the state law mandates, whatev er they were, and the management practices of Reclamat ion that caused the shortages. The Government was on notice that this question of causal connection was in contention. The Districts made it a point of their case at trial and again on appeal to us. They argued that there was insu fficient evidence that the shortages in their contracts were caused by anything except unilateral dec isions by Reclamation regarding how the available water was to be allocated, and that those decisions breached the contracts. If there was evidence that something other than Reclamation’s decision making caused the breaches, the Government had fifteen years of litigation in which to make its case of record. It is a part of the Government’s affirmative defense that state law and policy caused the shortages, rather than simply Federal management choi ces; the burden of persuasion resides with the Government. c. Burdens of Proof With regard to this burden of persuasi on and who has what, a considerable part of the trial court’s opinion and the parties’ briefs and argum ents before this court were devoted to the question of who had what bur den of proof, on this issue as well as

2007-5142 23others. Much of that discussion and argument about the issue is c onfused and difficult to follow. The rules governing the allocation of the burdens of proof are straightforward. When dealing with burdens of proof it is essential to distinguish between two distinct burdens, the burden of persuasion and the bur den of production (sometimes described as the burden of going forward). Since this is a suit for breach of contract, it is elementary that the pl aintiff Districts have the burden of persuasion on the issues of whether there is a contract, and whether that contract was breached by defendant United States. 23 Richard A. Lord, Williston on Contracts § 63:14 (4th ed. 1999) (“The plaintiff or party alleging the breach has the burden of proof on a ll of its breach of contract claims.”). Here, the record, the trial court’s findings and conclusions, and the defendant’s concessions, all support the determinat ion that plaintiffs carried their burden on these issues. Once the Government’s breach of contract has been established, the Government is liable for the breach and ensuing damages, unless it can prove an affirmative defense of some kind that absolves it from that liability. As explained earlier, the Government mounted three affirmative defenses. For each of these defenses, the Government has the burden of persuasion; the plaintiff Districts have no burden to carry, beyond the burden of going forward with whatever efforts they may undertake to disprove the alleged defenses. Id. (“Once the facts of br each are established, the defendant has the burden of pleadi ng and proving any affirmative defense that legally excuses performance.”).

2007-5142 24After considering the evidence on both sides of the issue, t he court must grant judgment for the plaintiff Distr icts with regard to each of the affirmative defenses for which the Government has failed to carry its burden of persuasion, applying the usual standards of proof for civil litigation. The proponent of the affirmative defense must prove all elements of the defense. 33 On this record, we conclude that, sinc e the Government has not carried its burden of proving its affirmative defense that the shortages were entirely or to some specified extent the result of state requirements for fis hery and other such uses, the Government’s defense on this point fails. Further, the Government’s position is not helped by its invocation of ‘background principl es’ of California water law. The issue here is not the fundament als of rights vis-à-vis the Un ited States and the State of California regarding its water, but the obligations, once the wa ter is under the control of the United States, between Reclam ation and the Districts pursuant to their contracts. 2. The Contract Provision Defense: Was the failure to perform excused by specific contract provisions? The two contract provisions that lie at the heart of this Gove rnment defense are Articles 9 and 12. Article 9 of the Stockton East contract, entitled “Water Shortage and Apportionment,” reads (with emphases added): 9. (a) In its operation of the Project, the United States will use all reasonable means to guard against a condition of shortage in the quantity of water available to the Contract or pursuant to this contract. Nevertheless, if a shortage does occur dur ing any year because of drought, or other causes which, in the opinion of the Contracting Officer [i.e., the Secretary of the Interior or his duly authorized representative], are beyond the control of t he United States, no liability shall accure [sic]

33 For a further explication of bur dens of proof, burden of persuasion, and the shifting burden of going forward, see the discussion in Technology Licensing Corp. v. Videotek, Inc. , 545 F.3d 1316 (Fed. Cir. 2008).

2007-5142 25against the United States or any of its officers , agents, or employees for any damage, direct or indirect, arising therefrom. (b) In any year that the Contra cting Officer determines that there is a shortage in the quantity of water available to customers of the United States from the New Melones Unit of the Project, the Contracting Officer will apportion available water among the water users capable of receiving water from said Unit, consistent with the existing c ontracts and Project authorizations. During such water short years, the quantity of water available to the Contractor pursuant to the terms of this contract shall be reduced, as necessary, to meet the fu ll needs of the Basin contractors and the needs of Central San Joaquin Wate r Conservation District for its firm and interim water supply. . . . 34 Article 12(d) governs determinations made by the parties under the contract: Where the terms of this contract provide for action to be based upon the opinion or determination of either party to this contract, whether or not stated to be conclusive, said terms shall not be construed as permitting such action to be predicated upon arbi trary, capricious, or unreasonable opinions or determinations. a. Interpretation of the Applicable Articles The Government points to t he phrase in Article 9 that absolves the Government from liability “if a shortage does occur dur ing any year because of drought, or other causes which, in the opinion of the Contra cting Officer are beyond the control of the United States.” The Government argues that th is phrase has the effect of vesting in the contracting officer discretion over the determination of w hether a shortage is beyond the Government’s control. The Government fu rther argues that, in any case, under Article 12 it is the plaintiffs who bear the burden of proving that the contracting officer’s decision not to provide the contracted-fo r water was arbitrary, capricious, or unreasonable. According to the Government, t he trial court did not err in holding that

34 Article 9 of the Central contract is identical, except that the second sentence of section (b) ends after “Basin cont ractors.” Thus, the needs of Central are to be satisfied before any water is delivered to Stockton East.

2007-5142 26plaintiffs failed to carry their burden becaus e Reclamation followed proper procedure in invoking the shortage provision in each of the affected years, including notifications to the parties. The Districts respond that the provisi on in Article 9 is simply a typical force majeure provision, and that it applies only to drought and other ‘acts of God.’ And in any case, the burden of proof of whether the contracting o fficer correctly invoked the provision is on the Government whose defens e it is, and not on the plaintiffs. The Districts are correct. First, as prev iously discussed, the burden of proof—the burden of persuasion with regard to this defense—began with and remained with the Government. The procedural niceties fo llowed by Reclamation and that preceded the Government’s breach of contract do not change that. Second, the plain meaning of t he critical part of the phra se at issue, “because of drought, or other causes which . . . are beyond the control of the United States” on its face excludes anything that is within the control of the United Stat es. Examples of causes beyond the control of the United States, in addition to a drought, might be earthquakes, sabotage (assuming the Governm ent had taken proper precautions), an internal failure of the dam, and other such causes. By contrast, changes in law, or changes in government policy, or changes in management practices brought about by the Gove rnment’s changes in law or policy, are all causes within the control of the United States. The fa ct that certain changes in management of the New Melones unit by Reclam ation were the result of mandates by Congress regarding the allocation between c onsumptive and non-consumptive uses of the water in the CVP—mandates that Recl amation may not have had a voice in—is

2007-5142 27nonetheless a change within the cont rol of the “United States,” a term that of course includes Congress as well as the administering agency. Indeed, it does not matter underthis branch of the case if the federal change in management practice was in response to a change in allocation policy by the state, rather than a change mandated by the federal government itself. This is because a federal decision to adjust its management of the CVP to accommodate a change in state allocation policy is a policy decision det ermined by the Federal Government itself. Nothing in the contracts, in particular Article 9, as written absolves the Government from liability for the allocation decisions it makes unless they are caused by an event included within the scope of Article 9(a). The interior clause, “in the opinion of the Contracting Officer,” cannot change the intent or thrust of the governi ng phrase in Article 9(a). At most, it gives the Contracting Officer some leeway in assessing how much of a shortage condition may have resulted from actions within the Government’s cont rol and how much from causes beyond its control. At a minimum, underArticle 12(d), it would be arbitrary and capricious on its face for the Contracting Officer to dete rmine that a conscious change in allocation practice, made by Reclamation in response to a change in law or poli cy, is not within the control of the United States. Is our reading of the plain meaning of this provision consistent with the intent of the parties at the time the contracts were executed, since contract interpretation is fundamentally a question of the c ontracting parties’ intent? In this case we have the

2007-5142 28testimony of both parties’ r epresentatives on this point, the officials who were responsible for the contracts. 35 The General Manager of Sto ckton East and the General Counsel of Central both testified to the effect that Article 9(a) was understood at the ti me the contract was executed to provide for shortages caused by external circumstances , for example there could be a reduced amount of water in dry y ears or as a result of other physical problems, such as failure of the reservoir or earthquakes. Stockton , 75 Fed. Cl. at 357. The official who signed the 1983 contracts on behal f of Reclamation also testified. He responded to a direct question with regard to w ho bore the risk under Article 9 of future changes in the Reclamation law. He answe red in the same vein: though Article 9 did not expressly allocate the risk, “‘my expectation is that if you have a contract, the United States would live up to its c ontracts the same way any private party would . . . that everybody will honor their contracts.’” Id. at 358. The trial court acknowledged the import of that testimony, but considered it trumped by the Ninth Circuit opinion in O’Neill v. United States , 50 F.3d 677 (9th Cir. 1995), a case on which the Government placed great weight. Stockton , 75 Fed. Cl. at 358-59. O’Neill dealt with rights under a similar cont ract, again involving use of water from the CVP. However, the exculpatory clause in that ca se—the clause equivalent to Article 9 here—was different in significant respects. The language there was “in no event shall any liability accrue against the United States . . . for any damage . . . arising from a shortage on account of errors in operation,

35 Ordinarily when a provision is f ound to have a plain meaning, that is deemed to conclusively estab lish the parties intent. McAbee Constr., Inc. v. United States , 97 F.3d 1431, 1435 (Fed. Cir. 1996). Here, because the trial court thought the provision ambiguous, the court took extensive testimony on the issue.

2007-5142 29drought, or any other causes.” O’Neill , 50 F.3d at 682 n.2. As plaintiffs note, that language is much broader—the examples offer ed are not limited to drought or similar causes, but include “operation [ and] any other causes.” Most significantly, there is no limitation to causes “beyond t he control of the Un ited States.” Thus, even assuming the Ninth Circuit correctly held that that language makes unavailability of water resulting from the mandates of later legislation a s hortage for which the United States is not liable, the O’Neill case is not persuasive in determi ning the meaning of the different language used in Article 9(a) of the Stockton East and Central c ontracts. And of course the facts of the Ninth Circuit case do not te ll us anything about the ex press intent of the parties regarding the relevant contract provisions in this case. With this understanding of the contract prov isions, we are confronted with the key question that lies at the heart of Article 9(a) —during any of the y ears at issue in the case, were there circumstances of drought (or other cause within the proper meaning of Article 9(a)) that could excuse the Governm ent’s failure to provide the contracted-for quantities of water? As far as drought is concerned, the table of Annual New Melones Data for the years 1993 to 2004 (Appendix A) indi cates that seven of those years were wet or above normal, one was below normal, th ree were dry, and one was “critical.” What is the evidence, and w hat are the trial court’s findings and conclusions, that support a determination that drought or other of the causes under Article 9(a) lay at the root—were the cause of—Reclamation’s failure to provide the contracted-for quantities of water? With the possible exception of two of the years, 1994 and 1995, there is

none.

2007-5142 30As previously explained in the Background section, for the y ear 1994 the contract required Reclamation to provide at a mini mum 23,350 acre-feet of water to Stockton East and 28,000 acre-feet to C entral. Stockton East reques ted 75,000 acre-feet, and Central requested 25,000. Recl amation provided no water to either. Reclamation’s explanation for this breach of the contra ct cited the general drought conditions, and noted that “every effort is needed to avoid a llowing the level of New Melones reservoir to drop below the minimum storage leve l (300,000 acre-feet) needed to generate power. . . . The available water will be allocat ed to fish and wildlife, and to meet water quality requirements.” J.A. at 3963 (Def.’s Ex. 276). The trial court held that Reclamation m ade the determination of shortage on the basis of forecasted hydrology measured against available water storage levels in the New Melones reservoir, held that “the evidence does not support a finding that Reclamation violated Article 12(d),” 36 and concluded that Reclam ation validly invoked Article 9(b)’s shortage prov ision, thereby excusing its non-performance. We note, however, that New Melones st arted the year 1994 with more than 747,000 acre-feet in its reservoir, and ended the year , despite the drought and after providing for other uses, with 425,000. Had Reclamat ion provided the 100,000 acre -feet requested by the Districts, there would have remained someth ing over 325,000 acre-feet, more than the minimum needed for power production. Neverthel ess, given the uncertainties of supply in a critically dry year, and in order to accord the trial court the defer ence it is entitled to, we uphold the court’s conclusion and affi rm its judgment of no liability for the Government for that year.

36 Stockton , 75 Fed. Cl. at 364.

2007-5142 31The year 1995 is similar. In that year , the minimum contract obligation for the two Districts was essentially the same as in 1994, in the range of 25,000-30,000 acrefeet for each. Stockton East initially requested 65,000 acre -feet, and Central 50,000. After negotiations with Reclamation, the r equests were scaled down during the year. Reclamation cited the general drought and the related wate r level conditions as the reason for its inability to meet the reques ts, and ultimately delivered only about 4,000 acre-feet to each. The trial court held that “the determination of the contracting officer that the shortage was due to causes outside of the control of the United States is supported adequately by the facts,” 37 and again concluded that Reclamation validly invoked the relevant contract provisions so as to excuse its non-performance. Again we note that the year 1995 started with 425,000 acre-feet in the reservoir, and, being a wet year, this time the year concluded with some thing over 1,800,000 acre-feet, leaving us with a large question about why Reclamation could not meet the relatively minor requests of the Districts for that year. Nevertheless, based on the court’s explicit evidentiary findings and conclusions which, under the circumstances, we cannot say are clearly erroneous, we again affirm the trial cour t’s conclusion in favor of the Government for that year. That, however, is as far as we can go on t he record before us. With regard to the remaining years at issue, 1999-2004, the trial court made no such explicit findings and the Government has offered no persuasive ex planation for the absence of proof of its defense under Article 9(a) for those years. Furthermore, with the ex ception of the year 1994 discussed earlier, when New Melones storage was down to 425,504 acre-feet,

37 Stockton , 75 Fed. Cl. at 364.

2007-5142 32and the preceding year, 1993, at 747,512 acre-f eet, all the years from 1993 to 2004 had storage levels well above 1,000,000 acre-feet. Here again the Government was on notice that evidence regarding the impact of the conditions of drought was rele vant. The Districts’ view of how Article 9(a) should be understood was extensively liti gated before the trial court, and made a major matter of contention on appeal. If, in the course of t he years of litigation, the evidence was available to the Government that drought caus ed the shortages of water to the Districts, it behooved the Government to make that evidenc e of record. It coul d be expected that, if there was available evidence to suppor t the argument, the Go vernment would have responded to the Districts’ case by ar guing that, even assuming the Districts’ interpretation of Article 9(a) was correct, underthe facts of the case the Districts still lose. Having failed to make its case, and given the apparent surplus of water in the New Melones Unit for all of the relevant year s, which, as the Districts allege, clearly suggests that drought was not the reason for Re clamation’s failure to meet the contract requirements, the failure of the Government to prove its affirma tive defense with regard to the years 1999-2004 means that judgment for the Districts on this point should have been granted. b. The “All Reasonable Means” Issue Plaintiff Districts and the Government di spute whether Reclamation, in dealing with the water allocations in the years at issue, complied with the opening phrase of Article 9(a) that “the Unit ed States will use all reasonable means to guard against a condition of shortage in the quantit y of water available to the Contractor pursuant to this contract.” Whether that language actua lly adds anything to the Government’s

2007-5142 33obligations under the contracts is an open question. Surely both parties to the contracts have a common law duty to perform their contra ctual duties fairly and in good faith. “A covenant of good faith and fair dealing is implied [in] all contract s. The covenant imposes on a party . . . the duty . . . to do everything that the contract presupposes should be done by a party to accomplish the c ontract’s purpose.” 30 Richard A. Lord, Williston on Contracts § 77.10 (4th ed. 1999). Furthermore, as a matter of law, a government agency is obligated to not act in a manner that is arbitr ary or capricious. See Administrative Procedure Act, 5 U.S.C. § 706(2)(A). Whether that amounts to an obligation to use all reasonable means to perfo rm its contracted duties is an interesting question. The simple answer to this appar ent conundrum is that on thes e facts it is of little, if any, consequence. Let us assume, as the Go vernment insists and the plaintiffs deny, that Reclamation used all reasonable m eans to avoid shortages under the circumstances in which it found itself—Reclamation was unable to both comply with the new allocation priorities and its contract ual obligations, so it reasonably under the circumstances chose to breach the contracts. Does that provide a defense to its breach of the contracts? The short answer is no. The abstract question of whether Reclamation used all reasonable means to avoid breaching the cont racts is beside the point—a “reasonable” breach of contract is nonetheless a breach.

2007-5142 34Let us assume the alternative—except for the two years 1994 and 1995, the Government did not use all reasonable means to avoid shortages. 38 Does that add anything to the conclusion that there was a br each of contract, or to the conclusion that the Government’s defenses to that breach are unavailing? Absent a showing that punitive damages are warranted—not present in this case—the moral basis for liability generally is irrelevant to contract damages. 3. The Sovereign Acts Defense: Does it absolve the Government of liability? The Government, anticipating that it might find itself in ex tremis on its other defenses, falls back on the classic gov ernment defense invoked whenever a Congressional enactment or other official government action unsettles what were thought to be settled contractual arrangements. The Government argues that the act of Congress in question, the CVPIA, and t he implementation of the CVPIA by governmental agencies, are sovereign acts , and any incidental (and presumably unintended) consequences are simply that, fo r which the Government cannot be held liable. The argument does not often work; in th is case the trial court rejected it, as do

we. The sovereign acts defense was born of a trio of cases decided by the Court of Claims in the ninet eenth century. See Conner Bros. Constr. Co. v. Geren , 550 F.3d 1368, 1372 (Fed. Cir. 2008) (discussing Deming v. United States , 1 Ct. Cl. 190 (1865), Jones v. United States , 1 Ct. Cl. 383 (1865), and Wilson v. United States , 11 Ct. Cl. 513

38 With regard to those two years, t he trial court found that the Government had in fact acted reasonably. Since on the co mplexity of the conditions then prevailing we found no basis for saying that finding wa s clearly erroneous, the assumption is inapplicable.

2007-5142 35(1875)). The definitive statem ent of the doctrine is credi ted to the Supreme Court’s opinion in Horowitz v. United States , 267 U.S. 458, 461 (1925), in which the Court, citing those Court of Claims cases, said, “t he United States when sued as a contractor cannot be held liable for an obstruction to the performance of the particular contract resulting from its public and general acts as a sovereign.” The basic notion of the sove reign acts doctrine is that the United States as a contracting party acts in a different capacit y from its role as a sovereign. As a contractor, it stands in t he same shoes as any private party would in dealing with another private party; as a sovereign, it stands apart. The acts of the one are not to be ‘fused’ with the other—if an ac t of the Government as sovereign would justify nonperformance by any other defendant being sued for contract breach, then the Government as contractor is equally free from liability for non-performance. Recently, the sovereign acts doctrine was the Government’s final line of defense in the multi-billion dollar liability action ar ising from Congress’s intervention in the savings and loan imbroglio. The Supreme C ourt’s plurality opinion in that case, United States v. Winstar Corp. , 518 U.S. 839 (1996), discussed at length the application of the sovereign acts doctrine, id. at 891-911; that discussi on has become the current understanding of the doctrine. See Conner Bros. , 550 F.3d at 1374 (“[T]his court has treated [the plurality opinion in Winstar ] as setting forth the core principles underlying the sovereign acts doctrine.”) In Winstar , the Court explained that “[a]s Horowitz makes clear, [the sovereign acts] defense simply relieves the Government as contractor from the traditional blanket rule that a contracting party may not obtain discharge if its own act rendered

2007-5142 36performance impossible.” 518 U.S. at 904. The Court posed a two-part test, first asking “whether the sovereign act is properly attributable to the Government as contractor.” Id. at 896. That is, is the act simply one designed to relieve the Governm ent of its contract duties, or is it a genuinely public and general act that only incidentally falls upon the contract? If the answer is that the act is a genuine public and general act, the second part of the test asks “whetherthat act would otherwise re lease the Government from liability under ordinary principl es of contract law.” Id. at 896. This second question turns on what is known in contract la w as the “impossibility” (sometimes “impracticability”) defense. As the Court in Winstarput it, “even if the Government stands in the place of a private party with respect to ‘public and general’ sovereign acts, it does not follow that dischar ge will always be available, for the common-law doctrine of impossibility imposes additional requirement s before a party may avoid liability for breach.” Id. at 904. Regarding the first part of the test, the Supreme Court in Winstarnoted two polar interpretations of what is a public and general act. One is that any official act by the sovereign may qualify as a public and general act regardless of its contractual consequences. The polar opposite is that any ac t that benefits the sove reign directly by relieving it of its cont ractual duties in any way is disqualified. Id. at 899. The Court then stated: “Our holding that a governmental act will not be public and general if it has the substantial effect of releasing the Government from its contractual obligations strikes a middle course between t hese two extremes.” Id. (emphasis added). Another way of stating the test for whether a governmental act is public and general is that “the

2007-5142 37sovereign acts defense is unavailable where the governmental acti on is specifically directed at nullifying contract rights.” Conner Bros. , 550 F.3d at 1374. The trial court in this case did not address the question of whether the CVPIA qualifies as a public and general act, turni ng instead to the second question: was the ability of the Government to provide t he contracted-for quantit ies of water rendered impossible by the enactment of the CVPIA? At trial, the Districts argued that performance was not impossible because Re clamation could have fulfilled CVPIA water-release requirements by taking water from other CVP reservoirs rather than from New Melones. See Seaboard Lumber Co. v. United States , 308 F.3d 1283, 1294 (Fed. Cir. 2002) (under the common-law doctrine of impossibility, performance is excused only when it is objectively impossible to ca rry out the contract). The trial court concluded that the Government “did not meet its burden of proof r egarding impossibility of performance due to CVPIA § 3406(b)(2), and therefore, would be barred from invoking the sovereign acts and unmistakabilit y doctrines, if liability had been found for breach of the 1983 Contracts.” Stockton , 75 Fed. Cl. at 373. The focus of the Government’s argument on appeal is that the trial court defined the scope of the sovereign act too narrowly. Citing Casitas Municipal Water District v. United States , 543 F.3d 1276, 1287-88 (Fed. Cir. 2008), the Government contends that the sovereign act at issue includes not only the CVPIA but also the decision by Reclamation and FWS 39 to use water from New Melones to satisfy CVPIA requirements. But even assuming the so vereign act is understood to include the

39 The Government alleges that FW S dictated how much of the 800,000 acre-feet of water required by CVPIA § 3406(b)(2) was to come from New Melones each year.

2007-5142 38agencies’ discretionary implement ation of the CVPIA, the Go vernment would have to demonstrate that the agencies’ actions made it impossible for Reclamation to deliver to the Districts the full amount of water prov ided for in the contracts, a showing the Government has not made. Furthermore, even if the specific impl ementation of the CVPIA chosen by the agencies rendered performance impossible, the Government cannot rely on the sovereign acts doctrine without returning to t he first part of the test and establishing that such implementation is a public and general act. Here it is obvious that Reclamation’s operational decisions to comp ly with the CVPIA by denying water to the Districts in violation of its duties under t he contract fail the test of a “public and general” act. The only users affected negatively by Reclamation’ s actions were the Districts. The conduct of Reclamation in shorting the Districts, pres umably in order to make the water available for other users, was directly aimed at the contracts and Reclamation’s duties under them, nullifying the rights of t he Districts to receive water under the contracts. Whether viewed in terms of having a “substantial effe ct of releasing the Government from its contractual obligations,” Winstar , 518 U.S. at 899, or as a “governmental action . . . specifically directed at nullifying contract rights,” Conner Bros. , 550 F.3d at 1374, Reclamation’s acts here cannot qualify as public and general. Whether under the first part or the sec ond part of the analysis set out by the Supreme Court, the Government’s sovereign acts defense does not survive scrutiny. The trial court correctly rejected that defense, and is affirmed on that point.

2007-5142 39C. The Takings Issue The trial court early in its opinion noted that the takings claim, which was initially the reason why the case was tr ansferred from the district c ourt to the Court of Federal Claims, was stayed pending resolution of the contract claim. The latter claim was raised by plaintiffs in an amendm ent to the complaint after the transfer. The trial court expressly stated that “[t]he takings claims [sic] were stayed pending resolution of the contract claims [sic] and were not at issue at trial.” Stockton , 75 Fed. Cl. at 324 n.2. Some fifty pages later, the trial court ruled, without further opportunity for the parties to be heard, that the takings claim was dismissed. The court, citing Hughes Communications Galaxy, Inc. v. United States , 271 F.3d 1060 (Fed. Cir. 2002), opined that, since there was a contract claim, t he Government was acting in its commercial capacity and a separate constitutional takings claim could not lie. Stockton , 75 Fed. Cl. at 373-74. That is not a corre ct understanding of the law. It is true that there is language in earlier cases from this court to the effect that “[i]n general, takings claims do not arise under a government contract because . . . the government is acting in its proprietary ra ther than its sovereign capacity, and because remedies are provided by the contract.” See St. Christopher Assocs., L.P. v. United States , 511 F.3d 1376, 1385 (2008) (citing Hughes , 271 F.3d at 1070). But that language is nothing more than a passing comm ent about government contract law, and has to be understood in that context. It cannot be understood as precluding a par ty from alleging in the same complaint two alternative theories for reco very against the Govern ment, for example, one for breach of contract and one for a ta king under the Fifth Amendment to the

2007-5142 40Constitution. That is expressly permitted by the Federal Rules, and the fact that the theories may be inconsistent is of no moment. See Fed. R. Civ. P. 8(d)(3) (“A party may state as many separate claims . . . as it has, regardless of consistency.”). On the other hand, it can be understood to mean that, when a case arises in which both a contract and a taking cause of ac tion are pled, the trial court may properly defer the taking issue, as it did here, in fa vor of first addressing th e contract issue. It has long been the policy of the courts to decide cases on non-constitutional grounds when that is available, ra ther than reach out for the constitutional issue. See Nw. Austin Mun. Util. Dist. No. One v. Holder , 129 S. Ct. 2504, 2513 (2009). And of course when a plaintiff is awarded recovery for the all eged wrong under one theory, there is no reason to address the other theories. In Hughes , the plaintiff, having been awar ded contract damages against the Government, sought prejudgment interest on it s damages award as if there had been a simultaneous Fifth Amendment taking. The trial court refused to award the interest. On appeal, we affirmed the trial court. We not ed that “[t]his court’s predecessor has cautioned against commingling takings co mpensation and contract damages,” and explained that these were two separate caus es of action, one based on the Government acting in its proprietary capacity, and one based on the Government as sovereign. Hughes , 271 F.3d at 1070. Our cour t went on to note that, in any event, plaintiff had failed to prove a taking, only a contractual right. Id. In Sun Oil Co. v. United States , 572 F.2d 786 (Ct. Cl. 1978), also cited as support by the trial court, the suit was by a group of oil companies against the United States for an alleged breach of a lease agreement includi ng denial of a permit. The court held for

2007-5142 41the oil companies on the permit issue. Plai ntiffs had also included in their complaint a Fifth Amendment takings clai m, regarding which the cour t commented that it was difficult to tell whether that claim was an independent and additional claim or an alternative claim. The court treated it as an alternative claim, and opined that “recovery on one claim theory would seem to preclude recovery on the other claim theory.” Id. at 817-18. Nevertheless, because the parties had placed much importance on the takings question, the court proceeded to discuss it, and held there was no taking. Id. at 819. It is well established, as these cases expl ain, that a party can obtain only one recovery for a single harm regardless of how many legal theories there may be for a recovery. In our case, while one recovery is all that can be had for the same harm, the fact that a cause of action was pled under a contract theory did not preclude a separate count for a cause of action based on a taking. Certainly this is the case when the Government alleges it was acting within it s authority in breaching the contract. Of

course, as Sun Oil illustrates, the fact that an alte rnative theory for recovery can be posited does not mean that a recovery under that theory will prevail. In this case, the trial judge denied the c ontract claim, and then dismissed without trial the takings claim on the ground that the c ontract claim precluded the takings claim. That is error. To the ext ent that the trial court purport ed to issue a judgment regarding the takings count in the compla int, that judgment is vacated. *************************************** To sum up: the Districts and Reclamati on have binding contracts for specified quantities of water which Reclamation is obligat ed to provide. As t he trial court found, Reclamation failed to provide t hose specified quantities in the years at issue. The first

2007-5142 42defense raised by the Government, that Reclam ation had implicit author ity to reallocate the water in the New Melones unit in res ponse to a change in law and policy, is not a valid defense on this record. The second defense raised by the Government, that the shortages were the result of causes “beyond t he control of the United States” such as to absolve it under the contract provisions, spec ifically Articles 9( a) and 12(d), again, with the exception of 1994 and 1995, on this record fa ils for lack of proof. Except for those two years, the trial court’s contrary determinations regardi ng these defenses are reversed. With regard to the defense under the sovere ign acts doctrine, the trial court was correct; that doctrine is unava iling and the trial court is affi rmed thereon. Finally, as noted, the dismissal of the ta kings claim is vacated. The Districts are free to pursue their takings claim if they so choose with r egard to the years for which the Government has been found not liable as a matter of cont ract law. We offer no opinion on the validity or propriety of such a claim. Regarding the breach of contract claim here before this court, the case is remanded for a determination of damages for t he years for which the Government is liable.

CONCLUSION

AFFIRMED-IN-PART, REVERSED-IN-PAR T, VACATED-IN-PART, and REMANDED

GAJARSA, Circuit Judge , dissents.

2007-5142 43APPENDIX A – ANNUAL NEW MELONES DATA (J.A. 4976)

2007-5142 44