World War II Government Procurement Contracts and CERCLA Liability

The U.S. Court of Appeals for the Federal Circuit’s July 18 ruling, in Shell Oil Company, et al., v. U.S., may have brought to an end a long-running dispute over the impact on World War II government procurement contracts on the liability of major oil companies for the remediation costs at a major Southern California Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA or Superfund) site — the “McColl site.”

In its ruling, the Court of Appeals affirmed the holding of the U.S. Court of Federal Claims awarding nearly $100 million in damages to four oil companies (Shell OI, Atlantic Richfield, Texaco, and Union Oil of California) for breach of contract. Pursuant to these contracts, the oil companies agreed to produce 100 octane aviation fuel—known as “avgas”- for the war effort. Avgas was described as “the most critically needed refining product “ in World War II. The large scale production of avgas also produced large amounts of waste to be managed: spent alkylation and acid sludge. Much of this waste was dumped at the “McColl site,” which closed in 1946. However, by 1991, the McColl site had become a Superfund site that was placed on the Environmental Protection Agency’s (EPA) National Priority List (NPL) of sites to be remediated.

In the same year, the U.S. Government filed a CERCLA cost recovery lawsuit against these oil companies for the costs of cleaning up the McColl site, and the oil companies counter sued, charging that the Government was also liable under CERCLA for costs at the site. The CERCLA lawsuit proceeded through the courts of the Ninth Circuit, where in 2002, the U.S. Court of Appeals for the Ninth Circuit held that the Government was responsible under CERCLA for only a minor fraction of these costs.

The oil companies then filed a complaint in the Court of Federal Claims seeking reimbursement for most of their CERCLA costs under a breach of contract theory. They argued that a provision in these World War II contracts requires the Government to reimburse the companies for charges they were required to pay by reason of the production or delivery of avgas. This line of argument was ultimately successful in the Court of Federal Claims, and has now been affirmed by the Court of Appeals.

It is interesting to note that the courts would not allow the Government to raise an issue regarding any offsetting insurance proceeds the companies received because this issue was not timely raised.