WWII Fuel Suppliers Denied Indemnification of Clean-up Costs

Claims for indemnification of environmental clean-up costs were summarily denied by the Court of Federal Claims because the costs did not constitute “charges” under the contracts’ taxes clause. The contractors manufactured and supplied aviation fuel to the government during World War II. After a 2002 decision (CA-9, 294 F3d 1045) found them liable for some of the costs of cleaning up a fuel waste disposal site, the contractors filed claims for indemnification under their contracts’ taxes clause, in which the government agreed to pay “any new or additional taxes, fees, or charges … which [the contractor] may be required by any … law … to pay by reason of the production, manufacture, sale or delivery of the [fuel].” The CFC initially granted summary judgment in favor of the contractors ( 54 CCF ¶79,343) but on appeal, the Court of Appeals for the Federal Circuit found the trial judge should have recused himself and vacated the ruling (672 F3d 1283). After the case was assigned to a new judge, both parties filed cross-motions for summary judgment.

Not a Tax

The contractors argued the environmental liability was a “charge” within the meaning of the taxes clause. However, read as a whole, the clause was plainly intended as a price adjustment mechanism in the event the contractors were assessed additional or unanticipated taxes as a result of their fuel production. The title of the clause— “Taxes”—and other textual signals within the clause supported this reading. The contractors maintained a “charge” is never synonymous with a “tax,” but under the canon of statutory interpretation that requires a word to be given more precise content by the neighboring words with which it is associated, “charges” connoted a “fairly narrow tax-related meaning,” not the “open-ended, indemnifying meaning” advanced by the contractors. The parties “surely would know how to draft broad hold harmless indemnification clauses extending in perpetuity if that w[as] their intent.” The contractors’ best opportunity to obtain reimbursement of the clean-up costs was in the environmental litigation, where those courts dealt directly with the proper allocation of the costs.

General Release

Further, any right to indemnification was discharged when the contracts were terminated. During the environmental litigation, the contractors stipulated their contracts “were terminated in 1945 or … shortly thereafter. Matters relating to … termination costs, and all other issues concerning these contracts were settled between the parties in the late 1940s.” There was no indication the contractors preserved their rights to indemnification. Although the actual termination agreements were not before the court, the contractors offered no evidence the “termination” and “settle[ment]” differed from a general release. Finally, the Anti-Deficiency Act prohibited the government from agreeing to indemnify the contractors. ( Shell Oil Co., et al. v. U.S., FedCl, 57 CCF ¶79,978)