Federal Water Decision Could Complicate Breach of Contract Claims Related to Water Shortages

In a decision that could have a substantial impact on water agency contract disputes with the Government – especially where they relate to water supply shortages – a federal appeals court has found that the United States Bureau of Reclamation (“Bureau”) breached its contract with the Stockton East Water District and Central San Joaquin Water Conservation District (“Water Districts”) during several years where the federal agency failed to provide contract-specified quantities of water.

Given recent proclamations that California is in an unprecedented water crisis, this decision creates a difficult situation for the Government regarding its reliance on drought or regulatory conditions as an excuse for breaching its water supply contracts.

The case, Stockton East Water Dist. v. United States, highlights an important need to review the shortage provisions within such contracts in order to fully understand the Government’s liability for water shortages during drought conditions. The decision also requires greater scrutiny of the Government’s water allocations among different users to determine if it was impossible to meet the water supply demands of the contracts.

The Federal Circuit Court of Appeals, in its opinion issued Wednesday, ultimately concluded that the Bureau did not have inherent authority to reallocate water based on changes in law and policy, and that the enactment and implementation of the Central Valley Project Improvement Act, calling for the release of water for restoration needs, did not constitute a sovereign act that would otherwise excuse the Bureau’s liability for breach.

However, based on the specific shortage provision in the case, which absolved the Bureau’s liability for causes “beyond the control of the United States,” the Court indicated that the Bureau’s failure to deliver water could be excused if it was able to prove that drought conditions were the root cause. Although the Court generally held that there was inadequate proof, the Court did find adequate proof of drought conditions in two of the years, and invoked this provision to find that the Bureau was not liable for the shortages in water supply in those two years.

Where there was inadequate proof of drought conditions, the Court remanded the case to the Claims Court to determine the amount of damages that was owed to the Water Districts for the years during which a breach of contract occurred. However, for the two years during which the Court found that the Bureau was not liable for breach of contract, the Court indicated that the Water Districts were, nonetheless, free to pursue a takings claim.