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Businesses engaging in commercial transactions with the federal government have long fretted over the extent to which the government will act and be treated like any other litigant during disputes involving contractual issues. The U.S. Supreme Court’s June 26 decision in a $158 million breach-of-contract suit that two oil companies brought against the federal government — a ruling that turned on the straightforward application of a passage from the Restatement of Contracts — should significantly diminish businesses’ concern about commercial litigation against the government. “A description at the outset of the few basic contract law principles applicable to this case will help the reader understand the significance of the complex factual circumstances that follow,” Justice Stephen G. Breyer wrote for the 8-1 majority in Mobil Oil Exploration & Producing Southeast Inc. v. U.S., No. 99-244. The passage was music to the plaintiffs’ ears: The allegedly breaching party may have been the federal government, but all that mattered to the Supreme Court were the provisions of the contract and black-letter law. This was the second time in three years the high court has ruled that the government should be treated no differently from any other party in commercial litigation. The first time was in Winstar Corp. v. U.S., 116 S. Ct. 2432, in which the court allowed hundreds of savings and loans to sue the government for damages for breach of contract. After the plaintiff thrifts had contracted with the government to take over their failing competitors, Congress passed a law eliminating the purchasers’ ability to use a certain lenient accounting standard. Although unable to forge a majority opinion, seven members of the Winstar court agreed that the government — sovereign immunity notwithstanding — could be ordered to pay damages, like any other commercial litigant, if both a contract and its breach are established. “When you take [Mobil Oil] with Winstar, the suggestion comes through that the court is increasingly willing to examine the government’s contractual commitments through the lens of traditional contract law, and that it will treat arguments about special exceptions skeptically,” says William E. Kovacic, who teaches government contracts at George Washington University School of Law. “The decision makes clear to government decision-makers that it’s going to be harder for them to walk away from their commitments, which forces them to do one of two things: abide by their original commitments, or write contracts that include escape hatches expressly and unmistakably.” Mobil shows “that the court meant what it said in [Winstar],” says Carter G. Phillips, a partner in the Washington, D.C., office of Chicago’s Sidley & Austin, who argued the case on behalf of Marathon Oil Co., Mobil’s co-plaintiff. “When you enter into contracts with the government, they’re going to have to play straight with you, just as if you’re a private person. In a sense you can say we knew that, but [Winstar] was a fractured court, and this is a very clean 8-1 opinion.” It began 19 years ago. The Mobil case dates to 1981, when several oil companies signed contracts with the federal government that allowed them to look for oil off the North Carolina coast and retrieve what they found — provided that the companies successfully completed a licensing procedure involving various state and federal authorities charged with safeguarding the ecology of coastal zones. The $158 million Mobil Oil and Marathon together paid the government upfront didn’t guarantee the companies the right to drill a single inch; it only gave them the right to submit exploration and drilling plans for government approval. On Aug. 18, 1990, however, the Outer Banks Protection Act (OBPA) took effect. The law was designed to ensure that government decisions concerning oil exploration along the outer banks of North Carolina properly protected an area that Solicitor General Seth P. Waxman’s Mobil brief called one “of exceptional environmental fragility.” The law mandated a new series of studies on the area, imposed new procedural requirements on the Interior Department and prohibited the secretary of commerce from overriding any state denials of exploration applications for at least 13 months. Waxman argued that the law did not materially breach the contract — not least because it had no effect on the oil companies’ exploration applications: The companies made them just before the law took effect, and the interior secretary quickly approved their submission to North Carolina — which rejected them that November. In 1994 — after the commerce secretary was again empowered to override state denials — he declined to do so in this case, relying largely on the state’s own environmental objections. But Justice Breyer said that Waxman’s argument was beside the point. The justice wrote, “If the Government said it would break, or did break, an important contractual promise, thereby ‘substantially impair[ing] the value of the contract[s]‘ to the companies, then … the Government must give the companies their money back. And it must do so whether [or not] the contracts” benefited the companies. That is a key point, says E. Edward Bruce, of Washington, D.C.’s Covington & Burling, who represented Mobil. If the breach was material, Bruce says, then the companies get restitution of their upfront payments; but if it was not, then they are entitled only to actual damages, which could be hard to prove if their plans would have been denied regardless of the OBPA. “This ruling will be a benchmark for looking at other similar situations to determine whether they are or are not material breaches,” he says. One important limitation to this case: It won’t have much effect on the major area of government contracting — procurement — because such contracts often contain “termination for convenience” clauses. “Procurement contracts are down to a science, containing standard clauses that embody the collective wisdom of all the mistakes made in the past century,” says Professor Joshua I. Schwartz, of George Washington University Law School, who is co-director of the school’s government procurement law program. “I think it’ll be common to overread this case to say, ‘All government contracts are like private contracts in every way,’ ” he says. “ The courts are moving in that direction, but while the government is in most cases like a private party, in a few instances, it’s not.” One such example: If the defendant in this case were a private party, it would have been entitled to a decade of interest. But under a well-settled principle, the sovereign does not pay interest.

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