Supreme Court: Feds must pay for broken oil contracts

Published September 1, 2000

In an 8-1 decision, the U.S. Supreme Court ruled on June 26 that the federal government must repay two oil companies, Marathon Oil Co. and Mobil Oil, for breach of contract for offshore oil leases.

Writing for the majority in Mobil Oil Exploration & Producing Southeast, Inc. v. United States, decided together with Marathon Oil Co. v. United States, Justice Stephen Breyer noted, “We agree that the government broke its promise; it repudiated the contracts; it must give the companies their money back.”

The two companies had paid the federal government $156 million for rights to drill for oil off the North Carolina coast, contingent on obtaining environmental approvals for their drilling plans. However, Congress passed the Outer Banks Protection Act shortly thereafter, prohibiting the Interior Department from approving the oil companies’ “plans of exploration” or granting drilling permits.

Mark Rubin, upstream general manger for the American Petroleum Institute, said, “Today’s decision is a step in the right direction but points to the need for a long-term solution. We urge Congress and the White House to adopt a domestic energy policy that recognizes the importance to U.S. consumers and the economy of domestic oil and natural gas production.”

In 1992, the two oil companies sued in federal court and won. A federal appeals court overturned that ruling in 1998, and the case was brought before the U.S. Supreme Court.

The federal government argued that, even though the companies had purchased the offshore drilling rights, and even if the plans of exploration had been approved, the companies nevertheless would not have been allowed to drill: drilling leases are subject to state environmental and coastal impact laws, and the state of North Carolina objected to the drilling.

Justice Breyer rejected that argument. “This argument misses the basic legal point,” he wrote. “The oil companies do not seek damages for breach of contract. They seek restitution of their initial payments.”

Justice John Paul Stevens issued the sole dissent in the matter, and even he agreed with the majority’s breach of contract finding, dissenting only with respect to the remedy. Stevens wrote, “[The oil companies did not] assume the risk that Congress would enact additional legislation that would delay the completion of what would obviously be a lengthy project in any event. I therefore agree with the Court that the Government did breach its contract with petitioners in failing to approve, within 30 days of its receipt, the plan of exploration petitioners submitted. . . .

“I do not, however, believe that the appropriate remedy for the Government’s breach is for petitioners to recover their full initial investment,” Stevens continued. “When the entire relationship between the parties is considered, with particular reference to the impact of North Carolina’s foreseeable exercise of its right to object to the project, it is clear that the remedy ordered by the Court is excessive. I would hold that petitioners are entitled at best to damages resulting from the delay caused by the Government’s failure to approve the plan within the requisite time.”

“Legal experts said the ruling could prompt a flood of lawsuits by oil, gas, and mineral rights leaseholders affected by other federal legislation, including the creation of new National Monuments,” according to Environment New Service.

For more information

The syllabus, majority opinion, and dissent in Mobil Oil Exploration & Producing Southeast, Inc. v. United States are available in HTML and PDF formats on the Internet at