Virtually every aspect of government’s work depends on contracts, whether they be with manufacturers of naval ships, civilian contractors, the companies that sell office supplies, or the landlords who lease the office space that houses the vast bureaucracy. These contracts, like any contract, only work when both parties have legal certainty; each must be able to depend on the promises made by the other.
That said, federal contractors do have to assume less certainty when dealing with the government because the Supreme Court has held that contracts can’t bind Congress from passing new legislation, or agencies from adopting new regulations. For example, while the government could enter into a contract promising to buy 100 widgets, Congress could pass a law making it illegal to manufacture or sell widgets—effectively voiding the agreement.
In the case of Century Exploration v. United States, an energy company leased the rights to an oil field in the Gulf of Mexico owned by the government for $23 million dollars up front, and $50,000 per year of the lease. Because oil drilling is a heavily regulated industry, Century only felt safe spending that kind of money because the lease contained a promise that Century wouldn’t be subject to any changes to the law that the government might make in the future, except for a specific class of regulations created under the authority of a single statute, the Outer Continental Shelf Lands Act (OSCLA). Without this promise, there would have been nothing to stop the government from taking Century Exploration’s money and then outlawing drilling in the Gulf of Mexico, or passing new regulations that would make it prohibitively expensive for Century to make use of the leased plot.
Unfortunately, the government did the very thing it promised not to. Under the Oil Pollution Act (OPA), drilling companies have to calculate the volume of oil that would be released in a “worst case scenario” and prove that they have the financial resources to fund cleanup efforts. The method for calculating the amount of oil, and the cost of cleanup, are governed by regulations issued under the OPA. Two years into Century’s lease, however, a civil servant in the Interior Department sent the company an email demanding a recalculation of the “worst case scenario” using a more extreme methodology contained in an attached FAQ. Using that new method, the cost of cleaning up a hypothetical spill increased from $4.5 million to $1.8 billion. Because Century couldn’t prove that it would have $1.8 billion on-hand in the event of a disaster, it could no longer operate on the leased plot.
Century appealed to the courts, relying on a 2000 case called Mobil Oil in which the Supreme Court interpreted a nearly identical lease to mean that the government would breach its contract if it tried to apply new laws or regulations to the leaseholders (except, again, for regulations under OSCLA). Under Mobil Oil, unilaterally changing the method of calculating the volume and cost of a spill would be just such a breach; the regulatory changes were made under the OPA, not OSCLA, and the changes were made by email, not by formal regulation. The government insisted it had done no wrong and, remarkably, the U.S. Court for the Federal Circuit agreed.
Cato has filed an amicus brief urging the Supreme Court to review this case and make clear that the government can’t violate contractual obligations with impunity. We make two key points: