U.S. Must Pay Oil Companies Back for Broken Contracts
© Environment News Service (ENS) 2000
June 27, 2000
By Cat Lazaroff
WASHINGTON, DC, June 27, 2000 (ENS) - The U.S. Supreme Court has ordered the federal government to repay two oil companies $156 million for money they lost after a new federal law limited oil drilling in North Carolina’s Outer Banks.
The Supreme Court found the the U.S. had breached its contracts with the oil companies (Photo by Franz Jantzen. All photos courtesy Collection of the Supreme Court of the United States)
The decision by the nation’s highest court, which ruled that the government had breached contracts with the two companies, could affect other agreements between private companies and the federal government.In an 8-1 decision, the Supreme Court ruled that the passage of a law preventing offshore oil drilling broke the contract contained in exploration leases it had already granted.
"The government broke its promise; it repudiated the contracts; and it must give the companies their money back," Justice Stephen Breyer wrote for the court.
In 1981, Mobil Corporation and Marathon Oil Corporation each paid $78 million for the right to explore for oil in the Outer Banks off Cape Hatteras. The contracts did not guarantee the companies the right to drill for oil, but authorized the issuance of drilling permits as long as drilling plans passed environmental inspections.
The companies were among 11 companies that paid a total of $356 million to lease areas in the Outer Banks for exploration.
In September 1989, Mobil and Marathon submitted a draft exploration plan to the Department of Interior (DOI), which administers the offshore lease program. DOI determined that the draft plans would not significantly impact either the marine environment or "the quality of the human environment."
But North Carolina officials objected due to concerns that drilling could have a negative effect on tourism, one of the state’s prime money makers.On August 20, 1990, the companies filed their final exploration plan. But just two days earlier, Congress had passed the Outer Banks Protection Act, which blocked the DOI from issuing new leases, approving new exploration plans or granting any drilling permits.
North Carolina filed papers later that same year intended to halt the project on environmental grounds and lobbied Congress for protection.
All 11 oil producers filed litigation against the federal government to recover the fees they had paid up front. The government signed out of court settlements with nine producers, though the Outer Banks Protection Act was repealed in 1996.
In 1992, Mobil and Marathon sued in federal court, and won. The U.S. Court of Federal Claims found in 1996 that the government was in breach of contract. An appeals court overturned that ruling in 1998, and the two companies took their case to the Supreme Court.
The federal government argued that drilling permits would never have been granted, because of North Carolina’s legal objections to the project. The appeals court had ruled on those grounds, saying that drilling leases are subject to state laws, including coastal management programs.
Justice Stephen Breyer wrote the court's majority opinion
The Supreme Court disagreed. "This argument ... misses the basic legal point," wrote Justice Breyer. "The oil companies do not seek damages for breach of contract. They seek restitution of their initial payments."
"If a lottery operator fails to deliver a purchased ticket, the purchaser can get his money back - whether or not he eventually would have won the lottery," Breyer wrote.
The lone dissenting opinion, written by Justice John Paul Stevens, called the court ordered repayment "excessive," as the oil companies knew from the outset that the project was "fraught with problems."
Justice John Paul Stevens, the only dissenting voice, found the $156 million judgement too harsh
"It was apparent that the Outer Banks project might not succeed for a variety of reasons," Stevens wrote. "Among those was the risk that the state of North Carolina would exercise its right to object to the completion of the project. That was a risk that the parties knowingly assumed."
Officials for Marathon and Mobil said they will continue to pursue the right to drill in the Outer Banks.
Legal experts said the ruling could prompt a flood of lawsuits by oil, gas and mineral rights leaseholders affected by other federal legislation, including the creation of new National Monuments.