Opinion ID: 207966
Heading Depth: 1
Heading Rank: 9

Heading: The Inherency Defense: Are the contracts by their inherent nature subject to changes in the law?

Text: The Government's argument is that, because these contracts involve the administration of a government program 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 contracts are effectively adhesion contracts. That is, whatever changes may occur in the Government's law and policies with regard to the contract, for example, the CVPIA and Reclamation's administration of it, the Districts must adhere to them. The Government finds as the source of this doctrine the basic nature of contracts with a sovereign United States, and also cites as authority the basic principles of California water law, including the public trust doctrine, which the Government refers to as `background principles.' The Districts dispute that the CVPIA is relevant to the proper administration of the contracts. They further dispute that the so-called `background principles' of California statutory and common law have any bearing on the question of obligations under these supply contracts with regard to the specified quantities of water within the control 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 Government'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 federal law or policy may hold would make the contracts illusory. Torncello v. United States, 231 Ct.Cl. 20, 681 F.2d 756, 760 (1982) ([A] party may not reserve to itself a method of unlimited exculpation without rendering its promises illusory and the contract void....); 1 Richard A. Lord, Williston on Contracts § 4.27 (4th ed. 1999) ([W]here the promisor retains an unlimited right to decide later the nature or extent of his or her performance[, the] unlimited 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 fraud 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, there is nothing in these contracts to suggest that the Government's reading of the contracts and the claim of inherent law incorporated into them is what either party to the contracts 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 which 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 terms of a contract can be pertinent evidence in undermining a supposed implied condition.). If the Government intended or expected to have unilateral control over its legal obligation to perform, control that could be exercised by the simple expedient of a change in its own law or policy, it hardly would need the protections that the provisions 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. The 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 requirements then in force 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 pursuant 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. The 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 their contract rights are subordinate to Reclamation's obligation to satisfy state permit requirements may dispose of their entire claim. [32] The Districts respond that the Government did not produce actual evidence that operating New Melones in accordance with state law and pursuant 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 issue 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 Districts note that, even so, there remained 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 CVPIA statute, were enacted after 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 must prove it was the state mandates that caused the unavailability of water to meet the Government'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, mandates 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 the New Melones withdrawals, and some came later. The trial court in various 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 fish 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 record, from the Government's argument, and from the trial court's conclusions, is the necessary showing of a causal connection between the particular state mandates and Reclamation's inability to meet its obligations under the contracts. The Government did not establish nor did the trial court find the critical connection between the state law mandates, whatever they were, and the management practices of Reclamation 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 insufficient evidence that the shortages in their contracts were caused by anything except unilateral decisions 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 choices; the burden of persuasion resides with the Government. c. Burdens of Proof With regard to this burden of persuasion and who has what, a considerable part of the trial court's opinion and the parties' briefs and arguments before this court were devoted to the question of who had what burden of proof, on this issue as well as others. Much of that discussion and argument about the issue is confused 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 burden of production (sometimes described as the burden of going forward). Since this is a suit for breach of contract, it is elementary that the plaintiff 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 all of its breach of contract claims.). Here, the record, the trial court's findings and conclusions, and the defendant's concessions, all support the determination 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 breach are established, the defendant has the burden of pleading and proving any affirmative defense that legally excuses performance.). After considering the evidence on both sides of the issue, the court must grant judgment for the plaintiff Districts 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, since 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 fishery 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 principles' of California water law. The issue here is not the fundamentals of rights vis-à-vis the United States and the State of California regarding its water, but the obligations, once the water is under the control of the United States, between Reclamation and the Districts pursuant to their contracts.