Mobil Oil Exploration and Producing Southeast, Inc. v. United States
530 U.S. 604 (2000)
Mobil paid the Federal
government $158M for a conditional permit to drill for oil off the coast
of North Carolina.
The deal had a caveat that
Mobil's drilling plan had to be in compliance with other Federal
regulations such as the Outer Continental Shelf Lands Act (OCSLA) and the Coastal Zone Management Act of 1972 (CZMA).
That required getting
approval from the Department of the Interior (DOI).
Mobil submitted their plan to
DOI. While DOI was reviewing it, Congress passed the Outer Banks
Protection Act (OBPA), which put a moratorium on offshore drilling.
In addition, North Carolina started arguing that the Mobil plan was not in
compliance with the CZMA.
Mobil sued for breach of
Mobil argued that their
original deal had a clause that the Federal government would grant a
final permit to Mobil within 30 days after they submitted a plan in
compliance with OCSLA. Since
more than 30 days had passed since Mobil submitted their plan, the
Federal government was in breach of contract.
The Federal government made
numerous arguments in their defense:
The Federal government
argued that the original deal said that Mobil had to be in compliance
with other regulations, and OBPA
is an 'other regulation', so the contract had not been breached.
They also argued that even
if they were in breach, it wasn't a substantial breach because the 30-day clause wasn't 'the
essence of the contract'.
They also argued that Mobil
knew that North Carolina was likely to block the drilling, so they
weren't really harmed by the delay resulting from the passage of OBPA.
They also argued that Mobil
had waived their right to sue for breach of contract because they had
continued performance under the contract.
Mobil kept submitting their
plans to the government after the
passage of OBPA.
The Trial Court found for
Mobil. The Federal government appealed.
The Trial Court found that
passage of the OBPA effectively
breached the contract with Mobil, since it was impossible for the Federal
government to live up to their end of the contract.
The Appellate Court reversed.
The Appellate Court found
that since North Carolina could have vetoed the drilling, the OBPA wasn't the ultimate reason Mobil couldn't
drill, so there was no breach of contract.
The US Supreme Court reversed
and awarded Mobil $158M.
The US Supreme Court found
that the Federal government had sold the drilling rights to Mobil. Since
Mobil was now forbidden to drill because of the OBPA, the Federal government should give them
their money back.
"We find that the oil
companies gave the United States $158 million in return for a
contractual promise to follow the terms of pre-existing statutes and
regulations. The new statute prevented the Government from keeping that
promise, therefore the Government must give the companies their money
The Court found that the
Federal government was in breach of the contract because the original
deal did not contemplate the new Statute.
The problem was the
contract was not drafted in a way to anticipate future actions that
might change the government's position.
If it had been in there,
then Mobil might have paid less for the lease because of uncertainty.
But Mobil thought they had a guaranteed deal.
The Court found that Mobil's
continued performance was not a bar to bringing suit.
The Court found that any
problems related to getting North Carolina's approval was not relevant
because Mobil was not asking for damages, they were only asking for
restitution for an uncontested breach.
The Court found that since OBPA had prevented drilling for over 4 years, and
might never allow drilling again, it was a substantial
breach, and therefore required compensation.
Basically, this case said that
when a new Statute prevents the Federal government from following a
contractual promise to follow the terms of pre-existing Statutes and
regulations, that constitutes a repudiation of a contract, and damages
should be awarded.