SW Legal Educational Publishing

Breach of Contract Principles Apply to Federal Government
Description The Supreme Court held that the federal government should be treated like other parties in commercial litigation. The government breached its promise to some oil companies, by adding new regulatory requirements to an oil exploration contract. The new requirements repudiated the contract and required the government to pay back the oil exploration fees collected.
Topic Contracts
Key Words Breach; Restitution; Federal Government
C A S E   S U M M A R Y
Facts Two oil companies paid the federal government $158 million for lease contracts giving them the rights to explore for and develop oil off the North Carolina coasts, provided that the companies complied with regulatory requirements under the Coastal Zone Management and the Outer Continental Shelf Lands Acts. After the companies had submitted their plans to the Department of Interior to show compliance with those Acts, Congress passed the Outer Banks Protection Act, which created significant new regulatory hurdles to the planned exploration. The companies filed a breach of contract suit in the Court of Federal Claims. That court ruled for the companies, finding that the government broke its promise to follow the existing statutory scheme and ordered restitution of the funds they paid. The Federal Circuit reversed, holding that the government could change the terms of the arrangement. The companies appealed.
Decision Reversed. The government broke its promise, repudiated the contracts, and must give the companies their money back. A contracting party is entitled to restitution if the other party substantially breached a contract or communicated its intent to do so. The contracts were clearly subject to existing laws, not ones added later by Congress or the Department of Interior. The new laws created new requirements that could not be incorporated into the existing contract. The breach was substantial, depriving the companies of the benefit of their bargain.
Citation Mobil Oil Exploration & Producing Southeast, Inc. v. U.S., S.Ct. , 2000 WL 807187

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