Legal SettlementIn a recent decision, the Federal Circuit added to its precedent explaining how a trial court should analyze what would have occurred in a “non-breach world” for purposes of awarding expectancy damages in a contract case. In Stockton East Water District v. United States, the Federal Circuit held that the trial court failed to sufficiently consider the parties’ conduct during the six years leading up to the breach when awarding damages for the breach period. The Federal Circuit and Court of Federal Claims issued numerous decisions addressing expectancy damages and the non-breach world in the Winstar cases; Stockton East adds to that precedent with guidance for contractors presenting damages claims in the tricky situation of the Government announcing what is likely to happen several years before its conduct constitutes a breach of contractual obligations. The Federal Circuit’s decision makes clear that the contractor can point to the parties’ conduct during the pre-breach period to explain what the non-breach world would have looked like—and how expectancy damages should be measured.

The Stockton East case involved a 1983 contract under which the United States Bureau of Reclamation would “make available” water to the Central San Joaquin Water Conservation District (Central). The contract at issue was signed in 1983 and involved water deliveries scheduled to begin in 1983, after a “ten-year buildup period.” Under the agreement, the Government was required to make available from 56,000 (minimum) to 80,000 (maximum) acre-feet of surface water per year.

In 1992, Congress passed the Central Valley Project Improvement Act (Improvement Act), which dedicated 800,000 acre-feet of water for fish, wildlife, and habitat restoration. As a result, in 1993, the Government informed Central that the affected water districts would receive some water in only the wettest years. During the next four years, Central requested 20,000 to 50,000 acre-feet, and the Government delivered 0 to 17,508 acre-feet. The parties agreed to an Interim Plan of Operations (IPO) for 1997 and 1998 (which allocated water based on annual storage and inflow forecasts), and the Government continued to use the IPO from 1999 to 2004.

The lawsuit began in 1993, and (in relevant part) was eventually transferred to the CFC. Initially, the CFC ruled that the Government’s actions did not constitute a breach. In an earlier (2009) decision, the Federal Circuit reversed the trial court’s liability ruling and held that the Government breached its contractual obligations, though only with respect to that 1999-2004 period. That was the period of time on which the trial court focused on remand, awarding Central $149,950 in “cost of cover damages” and denying any expectancy damages.

The CFC denied the claim for expectancy damages after determining that Central failed to present credible evidence with respect to how much water its farmers would have required or how much water it would have requested above the contract minimum during the 1999-2004 period. The Government asserted that the consideration of expectancy damages had to be limited to what the parties actually did during that period. After passage of the 1992 Improvement Act, Central had understood it would not receive water allocations in amounts near the minimum specified under the contract, so (during the breach-period years) it had either made no requests or had asked for water in amounts near what it expected to actually receive in the actual (breach) world. The trial court limited its analysis to the additional cost Central paid for water that it was supposed to but did not receive from the Government under the contract.

The Federal Circuit faulted the trial court for its preclusion of expectancy damages under the facts in the case, stating:

the question the trial court should have been examining in determining the “but for” non-breach world is: what would have happened had [the Government] not announced in 1993 (and later years) that it would be unable to meet–to “make available”–the minimum allocations provided for in the contract?

As the Federal Circuit noted, for six years the Government told Central there was not going to be enough water to fulfill the minimum quantity under the contract. In response, Central stopped asking for amounts of water it knew the Government would not provide, e.g., it sought amounts well below the contractual minimum. The court asked “[w]hy would Central request water it was told would not be available?” The court had previously explained that “[a]t some point most people stop asking for what they have been told they are not going to get, and they make other plans to meet their needs.” On remand, the Federal Circuit directed the CFC to consider the effect of the Government’s 1993 announcement on the expectations of Central and its customers.

Two practice tips can be drawn from the Federal Circuit decision. First, in answer to the court’s rhetorical “why would Central request water it was told would not be available” question, the answers “to expressly reserve its rights” and “to reduce uncertainty in later proceedings” come to mind. During the late 1990s and early 2000s, Central clearly believed that its contractual right to water allocations was being violated; had Central expressly told the Government what it wanted at the time—while reserving its right to challenge any allocation under the contractual minimum—it would have improved its litigation position.

Second, and related, from a trial practice perspective, the appeals court’s mandate that Central be allowed to develop evidence from the 1993-1998 period for what would have occurred in a non-breach (1999-2004) world will likely result in the Government arguing that the plaintiff’s additional evidence is speculative. Any expectancy recovery must satisfy the “reasonable certainty” requirement, and attempting to apply evidence from earlier years to a later time period opens the door to attacks by defense counsel. This will be particularly true if Central does not have written, contemporaneous evidence regarding its requirements, but relies instead on testimony from the Water District’s officials.

Finally, it’s worth noting that the Federal Circuit ruled that the Government was procedurally barred from presenting two attacks (which look reasonable from the short description in the opinion) on the CFC’s award of “cost of cover damages,” i.e., the additional costs paid for water procured to replace what would have been obtained from the Government under the contract. In its appellate brief, the Government argued that (i) the CFC erred because Central’s audited financial statements did not match the testimony it presented regarding the amount paid for Central’s purchases of water, and (ii) Central should not receive compensation for water purchased at a higher price than it would have paid the Government during years Central did not take its full allocation. But the Government failed to file a cross-appeal, and these issues were thus procedurally barred.