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By W. Samuel Niece
Thelen Reid Brown Raysman & Steiner LLP
SUMMARY
A fundamental principle of our three-branch system of government is that Congress has the power of the purse strings - the Executive Branch cannot spend money that Congress has not appropriated. This principle is reflected in the Anti-Deficiency Act, formerly R.S. § 3679, now 31 USC §1341, which provides:
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An officer or employee of the United States Government or of the District of Columbia government may not. involve either government in a contract or obligation for the payment of money before an appropriation is made unless authorized by law.
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Previously, courts had held that the Anti-Deficiency Act barred inferring open-ended indemnification clauses into federal government contracts. See, e.g., Hercules, Inc. v. United States, 516 U.S. 417 (1996); California-Pacific Utilities Co. v. United States, 194 Ct.Cl. 703 (Ct.Cl. 1971); Johns-Manville Corp. v. United States, 12 Cl.Ct. 1 (Cl.Ct. 1987).
Then, in E.I. du Pont de Nemours & Co. v. United States, 54 Fed.Cl. 361 (Fed.Cl. 2002), the Court of Federal Claims held that the Anti-Deficiency Act barred enforcement of an express, open-ended indemnification provision under which DuPont sought indemnification from the United States for costs DuPont incurred pursuant to the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) in cleaning up an ordinance plant that it had built and operated during World War II.
However, the Court of Appeals for the Federal Circuit recently reversed the Court of Federal Claims and held that the Anti-Deficiency Act did not bar DuPont's indemnity claim. E.I. du Pont de Nemours & Co. v. United States, 2004 U.S. App. LEXIS 8368 (Fed. Cir. 2004).
THE FACTS
In 1940, the United States entered into a cost-plus-fixed-fee contract with DuPont under which DuPont would construct and operate a facility at Morgantown, West Virginia, for the production of anhydrous ammonia for the war effort. The contract included an open-ended indemnification clause:
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It is the understanding of the parties hereto, and the intention of this contract, that all work under this Title III is to be performed at the expense of the Government and that the Government shall hold [DuPont] harmless against any loss, expense (including expense of litigation), or damage (including damage to third persons because of death, bodily injury or property injury or destruction or otherwise) of any kind whatsoever arising out of or in connection with the performance of work under this Title III. [emphasis supplied]
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In 1944, when it began to look like the United States would win the war, Congress enacted the Contract Settlement Act of 1944 (41 USC §§101 et seq.). Section 120 (a) of it provided:
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Each contracting agency shall have authority, notwithstanding any provisions of law other than contained in this chapter, (1) to make any contract necessary and appropriate to carry out the provisions of this chapter; (2) to amend by agreement any existing contract, either before or after notice of its termination, on such terms and to such extent as it deems necessary and appropriate to carry out the provisions of this chapter; and (3) in settling any termination claim, to agree to assume, or indemnify the war contractor against, any claims by any person in connection with such termination claims or settlement. [emphasis supplied]
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In 1946, the United States terminated DuPont's contract by a Supplement No. 22. Neither DuPont nor the United States could locate a copy of this Supplement No. 22, so its contents had to be established by secondary evidence, including the termination supplements from similar contracts. The DuPont supplement included language similar to the following:
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Upon payment of said sum of $ [____] as aforesaid, all rights and liabilities under the Contract and under the Act [Contract Settlement Act of 1944], insofar as it pertains to the Contract, shall cease and be forever released except:....
All rights and liabilities of the parties under the contract articles, if any, applicable to options (except options to continue or increase the work under the Contract), covenants not to compete, covenants of indemnity, and agreements with respect to the future care and disposition by the Contractor of Government-owned facilities remaining in his custody. [emphasis supplied]
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In 1984, the Environmental Protection Agency added the Morgantown plant site to the National Priorities List for clean-up pursuant to CERCLA, an action that ultimately cost DuPont more than $1 million in attorney and environmental consultant fees.
THE LITIGATION
After receiving no response to a Contract Disputes Act claim for indemnification, DuPont sued the United States in the Court of Federal Claims, which "reluctantly" accepted the federal government's argument that the Anti-Deficiency Act bars an open-ended indemnification clause because such a clause obligates funds without an appropriation.
In reversing, the Federal Circuit: (1) focused on the Anti-Deficiency Act's "unless authorized by law" language; (2) found such an authorization in the Settlement Act's language that the "contracting agency shall have authority, notwithstanding any provisions of law other than contained in this chapter,. to agree to assume, or indemnify the war contractor against, any claims."; and (3) found an exercise of such authorization in the contract and Supplement No. 22.
The Federal Circuit remanded the case to the Court of Federal Claims for determination of DuPont's damages.
APPLICATION
The Federal Circuit's decision is of great interest to any other business facing CERCLA liability based on a World War II facilities contract. But, there is more. The Federal Circuit observed that "although the government contends that 'war' in section 22 (a) means only 'World War II,' the statute does not so state or indicate." So, 41 USC §§101 et seq. and the Federal Circuit's decision in du Pont should be consulted when it comes time to close out Iraq war contracts.
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For more information about the issues covered in this report, please contact W. Samuel Niece in our Silicon Valley office at 408-282-1842 or at wsniece@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.
©2004 Thelen Reid Brown Raysman & Steiner LLP
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