OCTOBER TERM, 1995
Syllabus
UNITED STATES
v. WINSTAR CORP. ET AL.
CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FEDERAL
CIRCUIT
No. 95-865. Argued April 24, 1996-Decided July 1, 1996
Realizing that the Federal Savings and Loan Insurance
Corporation (FSLIC) lacked the funds to liquidate all of the
failing thrifts during the savings and loan crisis of the 1980's,
the Federal Home Loan Bank Board (Bank Board) encouraged healthy
thrifts and outside investors to take over ailing thrifts in a
series of "supervisory mergers." As inducement, the Bank Board
agreed to permit acquiring entities to designate the excess of the
purchase price over the fair value of identifiable assets as an
intangible asset referred to as supervisory goodwill, and to count
such goodwill and certain capital credits toward the capital
reserve requirements imposed by federal regulations. Congress's
subsequent passage of the Financial Institutions Reform, Recovery,
and Enforcement Act of 1989 (FIRREA) forbade thrifts to count
goodwill and capital credits in computing the required reserves.
Respondents are three thrifts created by way of supervisory
mergers. Two of them were seized and liquidated by federal
regulators for failure to meet FIR REA's capital requirements, and
the third avoided seizure through a private recapitalization.
Believing that the Bank Board and FSLIC had promised that they
could count supervisory goodwill toward regulatory capital
requirements, respondents each filed suit against the United States
in the Court of Federal Claims, seeking damages for,
inter
alia, breach of contract. In granting each respondent summary
judgment, the court held that the Government had breached its
contractual obligations and rejected the Government's
"unmistakability defense"-that surrenders of sovereign authority,
such as the promise to refrain from regulatory changes, must appear
in unmistakable terms in a contract in order to be enforceable, see
Bowen v.
Public Agencies Opposed to Social Security
Entrapment, 477 U.
S. 41, 52-and its "sovereign act" defense-that a "public and
general" sovereign act, such as FIRREA's alteration of capital
reserve requirements, could not trigger contractual liability, see
Horowitz v.
United States, 267 U. S. 458, 461. The
cases were consolidated, and the en banc Federal Circuit ultimately
affirmed.
Held: The judgment is affirmed, and the case is remanded.
64 F.3d
1531, affirmed and remanded.
JUSTICE SOUTER, joined by JUSTICE STEVENS, JUSTICE O'CONNOR, and
JUSTICE BREYER, concluded in Parts II, III, IV, and IV-C that
840
Syllabus
the United States is liable to respondents for breach of
contract. pp. 860-896; 904-910.
(a) There is no reason to question the Federal Circuit's
conclusion that the Government had express contractual obligations
to permit respondents to use goodwill and capital credits in
computing their regulatory capital reserves. When the law as to
capital requirements changed, the Government was unable to perform
its promises and became liable for breach under ordinary contract
principles. Pp. 860-871.
(b) The unmistakability doctrine is not implicated here because
enforcement of the contractual obligation alleged would not block
the Government's exercise of a sovereign power. The courts below
did not construe these contracts as binding the Government's
exercise of authority to modify its regulation of thrifts, and
there has been no demonstration that awarding damages for breach
would be tantamount to such a limitation. They read the contracts
as solely risk-shifting agreements, and respondents seek nothing
more than the benefit of promises by the Government to insure them
against any losses arising from future regulatory change. Applying
the unmistakability doctrine to such contracts not only would
represent a conceptual expansion of the doctrine beyond its
historical and practical warrant, but also would compromise the
Government's practical capacity to make contracts, which is "of the
essence of sovereignty" itself,
United States v.
Bekins, 304 U.
S. 27, 51-52. pp. 871-887.
(c) The answer to the Government's unmistakability argument also
meets its two related ultra vires contentions: that, under the
reserved powers doctrine, Congress's power to change the law in the
future was an essential attribute of its sovereignty that the Bank
Board and FSLIC had no authority to bargain away; and that in any
event no such authority can be conferred without an express
delegation to that effect. A contract to adjust the risk of
subsequent legislative change does not strip the Government of its
legislative sovereignty, and the contracts did not surrender the
Government's sovereign power to regulate. And there is no serious
question that FSLIC (and the Bank Board acting through it) lacked
authority to guarantee respondents against losses arising from
subsequent regulatory changes. Pp. 888-891.
(d) The facts of this case do not warrant application of the
sovereign act doctrine. That doctrine balances the Government's
need for freedom to legislate with its obligation to honor its
contracts by asking whether the sovereign act is properly
attributable to the Government as contractor. If the answer is no,
the Government's defense to liability depends on whether that act
would otherwise release the Government from liability under
ordinary contract principles. Pp.891-896.
841
(e) Even if FIR REA were to qualify as a "public and general"
act, the sovereign act doctrine cannot excuse the Government's
breach here. Since the object of the doctrine is to place the
Government as contractor on par with a private contractor in the
same circumstances,
Horowitz v.
United States, supra,
at 461, the Government, like any other defending party in a
contract action, must show that passage of the statute rendering
its performance impossible was an event contrary to the basic
assumptions on which the parties agreed, and, ultimately, that the
language or circumstances do not indicate that the Government
should be liable in any case. The Government has not satisfied
these conditions. There is no doubt that some changes in the
regulatory structure governing thrift capital reserves were both
foreseeable and likely when the parties contracted with the
Government. In addition, any governmental contract that not only
deals with regulatory change but allocates the risk of its
occurring will, by definition, fail the further condition of a
successful impossibility defense, for it will indeed indicate that
the parties' agreement was not meant to be rendered nugatory by a
change in the regulatory law. That the Bank Board and FSLIC could
not themselves preclude Congress from changing the regulatory rules
does not stand in the way of concluding that those agencies assumed
the risk of such change, for determining the consequences of legal
change was the point of the agreements. Pp. 904-910.
JUSTICE SOUTER, joined by JUSTICE STEVENS and JUSTICE BREYER,
concluded in Parts IV-A and IV-B that, since the Government should
not be excused by legislation when the substantial effect of
regulation was to help itself out of improvident agreements, it is
impossible to attribute the exculpatory "public and general"
character to FIRREA. Not only did that statute have the purpose of
eliminating the very accounting "gimmicks" that acquiring thrifts
had been promised, but also the congressional debates indicate
Congress's expectation, which there is no reason to question, that
FIR REA would have a substantial effect on the Government's
contractual obligations. The evidence of Congress's intense concern
with contracts like those at issue is not neutralized by the fact
that FIRREA did not formally target particular transactions or by
FIRREA's broad purpose to advance the general welfare. Pp.
896-903.
JUSTICE SCALIA, joined by JUSTICE KENNEDY and JUSTICE THOMAS,
agreed that the Government was contractually obligated to afford
respondents favorable accounting treatment, and violated its
obligations when it discontinued that treatment under FIR REA. The
Government's sovereign defenses cannot be avoided by characterizing
its obligations as not entailing a limitation on the exercise of
sovereign power;
842
Syllabus
that approach, although adopted by the plurality, is novel and
fails to acknowledge that virtually
every contract regarding
future conduct operates as an assumption of liability in the event
of nonperformance. Accordingly, it is necessary to address the
Government's various sovereign defenses, particularly its
invocation of the "unmistakability" doctrine. That doctrine simply
embodies the commonsense presumption that governments do not
ordinarily agree to curtail their sovereign or legislative powers.
Respondents have overcome that presumption here in establishing
that the Government promised, in unmistakable terms, to regulate
them in a particular fashion, into the future. The Government's
remaining arguments are readily rejected. The "reserved powers"
doctrine cannot defeat a claim to recover damages for breach of
contract where subsequent legislation has sought to minimize
monetary risks assumed by the Government. The "express delegation"
doctrine is satisfied here by the statutes authorizing the relevant
federal bank regulatory agencies to enter into the agreements at
issue. Finally, the "sovereign acts" doctrine adds little, if
anything, to the "unmistakability" doctrine, and cannot be relied
upon where the Government has attempted to abrogate the essential
bargain of the contract. pp. 919-924.
SOUTER, J., announced the judgment of the Court and delivered an
opinion, in which STEVENS and BREYER, JJ., joined, and in which
O'CONNOR, J., joined except as to Parts IV-A and IV-B. BREYER, J.,
filed a concurring opinion,
post, p. 910. SCALIA, J., filed
an opinion concurring in the judgment, in which KENNEDY and THOMAS,
JJ., joined,
post, p. 919. REHNQUIST, C. J., filed a
dissenting opinion, in which GINSBURG, J., joined as to Parts I,
III, and IV,
post, p. 924.
Deputy Solicitor General Bender argued the cause for the United
States. With him on the briefs were Solicitor General Days,
Assistant Attorney General Hunger, James A. Feldman, Douglas
Letter, and Jacob M. Lewis.
Joe G. Hollingsworth argued the cause for respondent Glendale
Federal Bank, FSB. With him on the brief were Jerry Stouck, Donald
W Fowler, Catherine R. Baumer, Carter G. Phillips, Richard D.
Bernstein, Theodore R. Posner, and Jesse H. Choper. Charles
J. Cooper argued the cause for respondents Winstar Corp. et
al. With him on the brief
843
were Michael A. Carvin, Robert
J. Cynkar, and Vincent
J. Colatriano.
*
JUSTICE SOUTER announced the judgment of the Court and delivered
an opinion, in which JUSTICE STEVENS and JUSTICE BREYER join, and
in which JUSTICE O'CONNOR joins except as to Parts IV-A and
IV-B.
The issue in this case is the enforceability of contracts
between the Government and participants in a regulated industry, to
accord them particular regulatory treatment in exchange for their
assumption of liabilities that threatened to produce claims against
the Government as insurer. Although Congress subsequently changed
the relevant law, and thereby barred the Government from
specifically honoring its agreements, we hold that the terms
assigning the risk of regulatory change to the Government are
enforceable, and that the Government is therefore liable in damages
for breach.
*Briefs of
amici curiae urging affirmance were filed for
the Chamber of Commerce of the United States by
Herbert L.
Fenster, Tami Lyn Azorsky, and
Robin S.
Conrad;
for the Aerospace Industries Association of America, Inc., et al.
by
Clarence T. Kipps, Jr., Alan I. Horowitz, and
Mac
S.
Dunaway; for AmBase Corp. et al. by
Laurence H. Tribe,
Brian Stuart Koukoutchos, Harvey Silverglate, and
John
C.
Millian; for the American Association of State Colleges
and Universities et al. by
Joseph N. Onek, Kent R. Morrison,
Robert P. Charrow, Sheldon Elliot Steinbach, and
J.
Mark Waxman; for Coast Federal Bank, FSB, by
Daniel
J. Goldberg and
Matthew G.
Ash; for
Dollar Bank, FSB, by
Paul Blankenstein, John K. Bush, and
Robert T. Messner; for the Franklin Financial Group, Inc.,
et al. by
Thomas M. Buchanan, Paul M. Fish, Ronald R. Glancz,
John F.
Cooney, Don S.
Willner, and
Jerrold J. Ganzfried; for Keystone Holdings,
Inc., et al. by
Melvin C.
Garbow and
Edward H.
Sisson; for Long Island Savings Bank, FSB, by
Russell E.
Brooks and
Fred W Reinke; for Trinity Ventures, Ltd., et
al. by
John C.
Millian, John K. Bush, and
Wesley G.
Howell, Jr.; for the Watts Health
Foundation, Inc., et al. by
Peter J. Gregora
and
Kenneth R. Heitz; and for the Western Federal Savings
and Loan Association et al. by
Dennis A. Winston.
844
Opinion of SOUTER, J.
I
We said in
Fahey v.
Mallonee, 332 U. S. 245, 250
(1947), that "[b]anking is one of the longest regulated and most
closely supervised of public callings." That is particularly true
of the savings and loan, or "thrift," industry, which has been
described as "a federally-conceived and assisted system to provide
citizens with affordable housing funds." H. R. Rep. No. 101-54, pt.
1, p. 292 (1989) (House Report). Because the contracts at issue in
today's case arise out of the National Government's efforts over
the last decade and a half to preserve that system from collapse,
we begin with an overview of the history of federal savings and
loan regulation.
A
The modern savings and loan industry traces its origins to the
Great Depression, which brought default on 40 percent of the
Nation's $20 billion in home mortgages and the failure of some
1,700 of the Nation's approximately 12,000 savings institutions.
Id., at 292-293. In the course of the debacle, Congress
passed three statutes meant to stabilize the thrift industry. The
Federal Home Loan Bank Act created the Federal Home Loan Bank Board
(Bank Board), which was authorized to channel funds to thrifts for
loans on houses and for preventing foreclosures on them. Ch. 522,
47 Stat. 725 (1932) (codified, as amended, at 12 U. S. C. §§
1421-1449 (1988 ed.)); see also House Report, at 292. Next, the
Home Owners' Loan Act of 1933 authorized the Bank Board to charter
and regulate federal savings and loan associations. Ch. 64, 48
Stat. 128 (1933) (codified, as amended, at 12 U. S. C. §§ 1461-1468
(1988 ed.)). Finally, the National Housing Act created the Federal
Savings and Loan Insurance Corporation (FSLIC), under the Bank
Board's authority, with responsibility to insure thrift deposits
and regulate all federally insured thrifts. Ch. 847, 48 Stat. 1246
(1934) (codified, as amended, at 12 U. S. C. §§ 1701-1750g (1988
ed.)).
845
The resulting regulatory regime worked reasonably well until the
combination of high interest rates and inflation in the late 1970's
and early 1980's brought about a second crisis in the thrift
industry. Many thrifts found themselves holding long-term,
fixed-rate mortgages created when interest rates were low; when
market rates rose, those institutions had to raise the rates they
paid to depositors in order to attract funds. See House Report, at
294-295. When the costs of short-term deposits overtook the
revenues from long-term mortgages, some 435 thrifts failed between
1981 and 1983.
Id., at 296; see also General Accounting
Office, Thrift Industry: Forbearance for Troubled Institutions
19821986, p. 9 (May 1987) (GAO, Forbearance for Troubled
Institutions) (describing the origins of the crisis).
The first federal response to the rising tide of thrift failures
was "extensive deregulation," including "a rapid expansion in the
scope of permissible thrift investment powers and a similar
expansion in a thrift's ability to compete for funds with other
financial services providers." House Report, at 291; see also
id., at 295-297; Breeden, Thumbs on the Scale:
The Role that Accounting Practices Played in the Savings and
Loan Crisis, 59 Ford. L. Rev. S71, S72-S74 (1991) (describing
legislation permitting nonresidential real estate lending by
thrifts and deregulating interest rates paid to thrift
depositors).l Along with this deregulation came moves to weaken the
requirement that thrifts maintain adequate capital reserves as a
cushion against losses, see 12 CFR § 563.13 (1981), a requirement
that one commentator described as "the most powerful source of
discipline for financial institutions." Breeden,
supra, at
S75. The result was a drop in capital reserves required by the Bank
Board from five to
1 The easing of federal regulatory requirements was accompanied
by similar initiatives on the state level, especially in
California, Florida, and Texas. The impact of these changes was
substantial, since as of 1980 over 50 percent of federally insured
thrifts were chartered by the States. See House Report, at 297.
846
Opinion of SOUTER, J.
four percent of assets in November 1980, see 45 Fed. Reg. 76111,
and to three percent in January 1982, see 47 Fed. Reg. 3543; at the
same time, the Board developed new "regulatory accounting
principles" (RAP) that in many instances replaced generally
accepted accounting principles (GAAP) for purposes of determining
compliance with its capital requirements.2 According to the House
Banking Committee, "[t]he use of various accounting gimmicks and
reduced capital standards masked the worsening financial condition
of the industry, and the FSLIC, and enabled many weak institutions
to continue operating with an increasingly inadequate cushion to
absorb future losses." House Report, at 298. The reductions in
required capital reserves, moreover, allowed thrifts to grow
explosively without increasing their capital base, at the same time
deregulation let them expand into new (and often riskier) fields of
investment. See Note, Causes of the Savings and Loan Debacle, 59
Ford. L. Rev. S301, S311 (1991); Breeden,
supra, at
S74-S75.
While the regulators tried to mitigate the squeeze on the thrift
industry generally through deregulation, the multitude of
already-failed savings and loans confronted FSLIC with deposit
insurance liabilities that threatened to exhaust its insurance
fund. See
Olympic Federal Savings and Loan Assn. v.
Director, Office of Thrift Supervision, 732 F. Supp.
2 "Regulatory and statutory accounting gimmicks included
permitting thrifts to defer losses from the sale of assets with
below market yields; permitting the use of income capital
certificates, authorized by Congress, in place of real capital;
letting qualifying mutual capital certificates be included as RAP
capital; allowing FSLIC members to exclude from liabilities in
computing net worth, certain contra-asset accounts, including loans
in process, unearned discounts, and deferred fees and credits; and
permitting the inclusion of net worth certificates, qualifying
subordinated debentures and appraised equity capital as RAP net
worth." House Report, at 298. The result of these practices was
that "[b]y 1984, the difference between RAP and GAAP net worth at
S&Us stood at $9 billion," which meant "that the industry's
capital position, or ... its cushion to absorb losses was
overstated by $9 billion."
Ibid.
847
1183, 1185 (DC 1990). According to the General Accounting
Office, FSLIC's total reserves declined from $6.46 billion in 1980
to $4.55 billion in 1985, GAO, Forbearance for Troubled
Institutions 12, when the Bank Board estimated that it would take
$15.8 billion to close all institutions deemed insolvent under
GAAP. General Accounting Office, Troubled Financial Institutions:
Solutions to the Thrift Industry Problem 108 (Feb. 1989) (GAO,
Solutions to the Thrift Industry Problem). By 1988, the year of the
last transaction involved in this case, FSLIC was itself insolvent
by over $50 billion. House Report, at 304. And by early 1989, the
GAO estimated that $85 billion would be needed to cover FSLIC's
responsibilities and put it back on the road to fiscal health. GAO,
Solutions to the Thrift Industry Problem 43. In the end, we now
know, the cost was much more even than that. See,
e.
g., Horowitz, The Continuing Thrift Bailout, Investor's
Business Daily, Feb. 1, 1996, p. A1 (reporting an estimated $140
billion total public cost of the savings and loan crisis through
1995).
Realizing that FSLIC lacked the funds to liquidate all of the
failing thrifts, the Bank Board chose to avoid the insurance
liability by encouraging healthy thrifts and outside investors to
take over ailing institutions in a series of "supervisory mergers."
See GAO, Solutions to the Thrift Industry Problem 52; L. White, The
S&L Debacle: Public Policy Lessons for Bank and Thrift
Regulation 157 (1991) (White).3
3 See also White 157 (noting that "[t]he FSLIC developed lists
of prospective acquirers, made presentations, held seminars, and
generally tried to promote the acquisitions of these insolvents");
Grant, The FSLIC:
Protection through Professionalism, 14 Federal Home Loan Bank
Board Journal 9-10 (Feb. 1981) (describing the pros and cons of
various defaultprevention techniques from FSLIC's perspective).
Over 300 such mergers occurred between 1980 and 1986, as opposed to
only 48 liquidations. GAO, Forbearance for Troubled Institutions
13. There is disagreement as to whether the Government actually
saved money by pursuing this course rather than simply liquidating
the insolvent thrifts. Compare,
e. g., Brief for
Franklin Financial Group, Inc., et al. as
Amici Curiae
7,
848
Opinion of SOUTER, J.
Such transactions, in which the acquiring parties assumed the
obligations of thrifts with liabilities that far outstripped their
assets, were not intrinsically attractive to healthy institutions;
nor did FSLIC have sufficient cash to promote such acquisitions
through direct subsidies alone, although cash contributions from
FSLIC were often part of a transaction. See M. Lowy, High Rollers:
Inside the Savings and Loan Debacle 37 (1991) (Lowy). Instead, the
principal inducement for these supervisory mergers was an
understanding that the acquisitions would be subject to a
particular accounting treatment that would help the acquiring
institutions meet their reserve capital requirements imposed by
federal regulations. See Investigation of Lincoln Savings &
Loan Assn.: Hearing Before the House Committee on Banking, Finance,
and Urban Affairs, 101st Cong., 1st Sess., pt. 5, p. 447 (1989)
(testimony of M. Danny Wall, Director, Office of Thrift
Supervision) (noting that acquirers of failing thrifts were allowed
to use certain accounting methods "in lieu of [direct] federal
financial assistance").
B
Under GAAP there are circumstances in which a business
combination may be dealt with by the "purchase method" of
accounting. See generally R. Kay & D. Searfoss, Handbook of
Accounting and Auditing 23-21 to 23-40 (2d ed. 1989) (describing
the purchase method); Accounting Principles Board Opinion No. 16
(1970) (establishing rules as to what method must be applied to
particular transactions). The critical aspect of that method for
our purposes is that it permits the acquiring entity to designate
the excess of the purchase price
quoting remarks by H. Brent Beasley, Director of FSLIC, before
the California Savings and Loan League Management Conference (Sept.
9, 1982) (concluding that FSLIC-assisted mergers have
'''[h]istorically ... cost about 70% of [the] cost of liquidation'
"), with GAO, Solutions to the Thrift Industry Problem 52 ("FSLIC's
cost analyses may ... understat[e] the cost of mergers to the
government").
849
over the fair value of all identifiable assets acquired as an
intangible asset called "goodwill."
Id.,' 11, p. 284; Kay
& Searfoss,
supra, at 23-38.4 In the ordinary case, the
recognition of goodwill as an asset makes sense: a rational
purchaser in a free market, after all, would not pay a price for a
business in excess of the value of that business's assets unless
there actually were some intangible "going concern" value that made
up the difference. See Lowy 39.5 For that reason, the purchase
method is frequently used to account for acquisitions, see A.
Phillips, J. Butler, G. Thompson, & R. Whitman, Basic
Accounting for Lawyers 121 (4th ed. 1988), and GAAP expressly
contemplated its application to at least some transactions
involving savings and loans. See Financial Accounting Standards
Board Interpretation No.9 (Feb. 1976). Goodwill recognized under
the purchase method as the result of an FSLIC-sponsored supervisory
merger was generally referred to as "supervisory goodwill."
Recognition of goodwill under the purchase method was essential
to supervisory merger transactions of the type at issue in this
case. Because FSLIC had insufficient funds to
4 See also Accounting Principles Board Opinion No. 17, , 26, p.
339 (1970) (providing that "[i]ntangible assets acquired ... as
part of an acquired company should ... be recorded at cost," which
for unidentifiable intangible assets like goodwill is "measured by
the difference between the cost of the ... enterprise acquired and
the sum of the assigned costs of individual tangible and
identifiable intangible assets acquired less liabilities
assumed").
5 See
Newark Morning Ledger Co. v.
United States,
507 U. S. 546,
556 (1993) (describing "goodwill" as "the total of all the
imponderable qualities that attract customers to the business").
Justice Story defined "goodwill" somewhat more elaborately as "the
advantage or benefit, which is acquired by an establishment, beyond
the mere value of the capital, stock, funds, or property employed
therein, in consequence of the general public patronage and
encouragement, which it receives from constant or habitual
customers, on account of its local position, or common celebrity,
or reputation for skill or affluence, or punctuality, or from other
accidental circumstances, or necessities, or even from ancient
partialities, or prejudices." J. Story, Law of Partnership § 99, p.
139 (1841).
850
Opinion of SOUTER, J.
make up the difference between a failed thrift's liabilities and
assets, the Bank Board had to offer a "cash substitute" to induce a
healthy thrift to assume a failed thrift's obligations. Former Bank
Board Chairman Richard Pratt put it this way in testifying before
Congress:
"The Bank Board ... did not have sufficient resources to close
all insolvent institutions, [but] at the same time, it had to
consolidate the industry, move weaker institutions into stronger
hands, and do everything possible to minimize losses during the
transition period. Goodwill was an indispensable tool in performing
this task." Savings and Loan Policies in the Late 1970's and
1980's:
Hearings before the House Committee on Banking, Finance, and
Urban Affairs, 101st Cong., 2d Sess., Ser. No. 101-176, p. 227
(1990).6
Supervisory goodwill was attractive to healthy thrifts for at
least two reasons. First, thrift regulators let the acquiring
institutions count supervisory goodwill toward their reserve
requirements under 12 CFR § 563.13 (1981). This treatment was, of
course, critical to make the transaction possible in the first
place, because in most cases the institution resulting from the
transaction would immediately have been insolvent under federal
standards if goodwill had not counted toward regulatory net worth.
From the acquiring
6 See also 135 Congo Rec. 12061 (1989) (statement of Rep. Hyde)
(observing that FSLIC used goodwill as "an inducement to the
healthy savings and loans to merge with the sick ones"); Brief for
Franklin Financial Group, Inc., et al. as
Amici Curiae 9,
quoting Deposition of Thurman Connell, former official at the
Atlanta Federal Home Loan Bank, Joint App. in
Charter Federal
Savings Bank V.
Office of Thrift Supervision, Nos.
91-2647, 91-2708
(CA4), p. 224 (recognizing that treating
supervisory goodwill as regulatory capital was "'a very important
aspect of [the acquiring thrifts'] willingness to enter into these
agreements,'" and concluding that the regulators "'looked at
[supervisory goodwill] as kind of the engine that made this
transaction go. Because without it, there wouldn't have been any
train pulling out of the station, so to speak' ").
851
thrift's perspective, however, the treatment of supervisory
goodwill as regulatory capital was attractive because it inflated
the institution's reserves, thereby allowing the thrift to leverage
more loans (and, it hoped, make more profits). See White 84; cf.
Breeden, 59 Ford. L. Rev., at S75-S76 (explaining how loosening
reserve requirements permits asset expansion).
A second and more complicated incentive arose from the decision
by regulators to let acquiring institutions amortize the goodwill
asset over long periods, up to the 40-year maximum permitted by
GAAP, see Accounting Principles Board Opinion No. 17, , 29, p. 340
(1970). Amortization recognizes that intangible assets such as
goodwill are useful for just so long; accordingly, a business must
"write down" the value of the asset each year to reflect its waning
worth. See Kay & Searfoss, Handbook of Accounting and Auditing,
at 15-36 to 15-37; Accounting Principles Board Opinion No. 17,
supra, , 27, at 339-340.7 The amount of the write down is
reflected on the business's income statement each year as an
operating expense. See generally E. Faris, Accounting and Law in a
Nutshell § 12.2(q) (1984) (describing amortization of goodwill). At
the same time that it amortizes its goodwill asset,
7 In this context, "amortization" of an intangible asset is
equivalent to depreciation of tangible assets. See
Newark
Morning Ledger Co. v.
United States, supra, at 571, n. 1
(SOUTER, J., dissenting); Gregorcich, Amortization of Intangibles:
A Reassessment of the Tax Treatment of Purchased Goodwill, 28 Tax
Lawyer 251, 253 (1975). Both the majority opinion and dissent in
Newark Morning Ledger agreed that "goodwill" was not subject
to depreciation (or amortization) for federal tax purposes, see 507
U. S., at 565, n. 13;
id., at 573 (SOUTER, J., dissenting),
although we disagreed as to whether one could accurately estimate
the useful life of certain elements of goodwill and, if so, permit
depreciation of those elements under Internal Revenue Service
regulations.
Id., at 566-567;
id., at 576-577
(SOUTER, J., dissenting). Neither of the
Newark Morning
Ledger opinions, however, denied the power of another federal
agency, such as the Bank Board or FSLIC, to decide that goodwill is
of transitory value and impose a particular amortization period to
be used for its own regulatory purposes.
852
Opinion of SOUTER, J.
however, an acquiring thrift must also account for changes in
the value of its loans, which are its principal assets. The loans
acquired as assets of the failed thrift in a supervisory merger
were generally worth less than their face value, typically because
they were issued at interest rates below the market rate at the
time of the acquisition. See Black, Ending Our Forebearers'
Forbearances: FIRREA and Supervisory Goodwill, 2 Stan. L. &
Policy Rev. 102, 104-105 (1990). This differential or "discount,"
J. Rosenberg, Dictionary of Banking and Financial Services 233 (2d
ed. 1985), appears on the balance sheet as a "contra-asset"
account, or a deduction from the loan's face value to reflect
market valuation of the asset, R. Estes, Dictionary of Accounting
29 (1981). Because loans are ultimately repaid at face value, the
magnitude of the discount declines over time as redemption
approaches; this process, technically called "accretion of
discount," is reflected on a thrift's income statement as a series
of capital gains. See Rosenberg,
supra, at 9; Estes,
supra, at 39-40.
The advantage in all this to an acquiring thrift depends upon
the fact that accretion of discount is the mirror image of
amortization of goodwill. In the typical case, a failed thrift's
primary assets were long-term mortgage loans that earned low rates
of interest and therefore had declined in value to the point that
the thrift's assets no longer exceeded its liabilities to
depositors. In such a case, the disparity between assets and
liabilities from which the accounting goodwill was derived was
virtually equal to the value of the discount from face value of the
thrift's outstanding loans. See Black, 2 Stan. L. & Policy
Rev., at 104-105. Thrift regulators, however, typically agreed to
supervisory merger terms that allowed acquiring thrifts to accrete
the discount over the average life of the loans (approximately
seven years), see
id., at 105, while permitting amortization
of the goodwill asset over a much longer period. Given that
goodwill and discount were substantially equal in overall values,
the more rapid
853
accrual of capital gain from accretion resulted in a net paper
profit over the initial years following the acquisition. See
ibid.; Lowy 39-40.8 The difference between amortization and
accretion schedules thus allowed acquiring thrifts to seem more
profitable than they in fact were.
Some transactions included yet a further inducement, described
as a "capital credit." Such credits arose when FSLIC itself
contributed cash to further a supervisory merger and permitted the
acquiring institution to count the FSLIC contribution as a
permanent credit to regulatory capital. By failing to require the
thrift to subtract this FSLIC contribution from the amount of
supervisory goodwill generated by the merger, regulators
effectively permitted double counting of the cash as both a
tangible and an intangible asset. See,
e. g., Transohio Savings
Bank v.
Director, Office of Thrift Supervision,
967 F.2d
598, 604 (CADC 1992). Capital credits thus inflated the
acquiring thrift's regulatory capital and permitted leveraging of
more and more loans.
As we describe in more detail below, the accounting treatment to
be accorded supervisory goodwill and capital credits was the
subject of express arrangements between the regulators and the
acquiring institutions. While the extent to which these
arrangements constituted a departure from prior norms is less
clear, an acquiring institution would rea-
8See also National Commission on Financial Institution Reform,
Recovery and Enforcement, Origins and Causes of the S&L
Debacle: A Blueprint for Reform, A Report to the President and
Congress of the United States 38-39 (July 1993) (explaining the
advantages of different amortization and accretion schedules to an
acquiring thrift). The downside of a faster accretion schedule, of
course, was that it exhausted the discount long before the goodwill
asset had been fully amortized. As a result, this treatment
resulted in a net drag on earnings over the medium and long terms.
See Lowy 40-41; Black, Ending Our Forebearers' Forbearances:
FIRREA and Supervisory Goodwill, 2 Stan. L. & Policy Rev.
102, 104-105 (1990). Many thrift managers were apparently willing
to take the shortterm gain, see Lowy 40-41, and others sought to
stave off the inevitable losses by pursuing further acquisitions,
see Black,
supra, at 105.
854
Opinion of SOUTER, J.
sonably have wanted to bargain for such treatment. Although GAAP
demonstrably permitted the use of the purchase method in acquiring
a thrift suffering no distress, the relevant thrift regulations did
not explicitly state that intangible goodwill assets created by
that method could be counted toward regulatory capital. See 12 CFR
§ 563.13 (a)(3) (1981) (permitting thrifts to count as reserves any
"items listed in the definition of net worth"); § 561.13(a)
(defining "net worth" as "the sum of all reserve accounts ... ,
retained earnings, permanent stock, mutual capital certificates ...
, and any other non-withdrawable accounts of an insured
institution").9 Indeed, the rationale for recognizing goodwill
stands on its head in a supervisory merger: ordinarily, goodwill is
recognized as valuable because a rational purchaser would not pay
more than assets are worth; here, however, the purchase is rational
only because of the accounting treatment for the shortfall. See
Black,
supra, at 104 ("GAAP's treatment of goodwill ...
assumes that buyers do not overpay when they purchase an S&U').
In the end, of course, such reasoning circumvented the whole
purpose of the reserve requirements, which was to protect
depositors and the deposit insurance fund. As some in Congress
later recognized, "[g]oodwill is not cash. It is a concept, and a
shadowy one at that. When the Federal Government liquidates a
failed thrift, goodwill is simply no good. It is valueless. That
means, quite simply, that the taxpayer picks up the tab for the
shortfall." 135 Congo Rec. 11795 (1989) (remarks of Rep. Barnard);
see also White 84 (acknowledging
9The 1981 regulations quoted above were in effect at the time of
the Glendale transaction. The 1984 regulations relevant to the
Winstar transaction were identical in all material respects, and
although substantial changes had been introduced into § 563.13 by
the time of the Statesman merger in 1988, they do not appear to
resolve the basic ambiguity as to whether goodwill could qualify as
regulatory capital. See 12 CFR § 563.13 (1988). Section 563.13 has
since been superseded by the Financial Institutions Reform,
Recovery, and Enforcement Act.
855
that in some instances supervisory goodwill "involved the
creation of an asset that did not have real value as protection for
the FSLIC"). To those with the basic foresight to appreciate all
this, then, it was not obvious that regulators would accept
purchase accounting in determining compliance with regulatory
criteria, and it was clearly prudent to get agreement on the
matter.
The advantageous treatment of amortization schedules and capital
credits in supervisory mergers amounted to more clear-cut
departures from GAAP and, hence, subjects worthy of agreement by
those banking on such treatment. In 1983, the Financial Accounting
Standards Board (the font of GAAP) promulgated Statement of
Financial Accounting Standards No. 72 (SFAS 72), which applied
specifically to the acquisition of a savings and loan association.
SFAS 72 provided that "[i]f, and to the extent that, the fair value
of liabilities assumed exceeds the fair value of identifiable
assets acquired in the acquisition of a banking or thrift
institution, the unidentifiable intangible asset recognized
generally shall be amortized to expense by the interest method over
a period no longer than the discount on the long-term
interest-bearing assets acquired is to be recognized as interest
income." Accounting Standards, Original Pronouncements (July
1973-June 1, 1989), p. 725. In other words, SF AS 72 eliminated any
doubt that the differential amortization periods on which acquiring
thrifts relied to produce paper profits in supervisory mergers were
inconsistent with GAAP. SFAS 72 also barred double counting of
capital credits by requiring that financial assistance from
regulatory authorities must be deducted from the cost of the
acquisition before the amount of goodwill is determined. SFAS 72, ,
9.10 Thrift acquirers relying on such credits, then, had
10 Although the Glendale transaction in this case occurred
before the promulgation of SF AS 72 in 1983, the proper
amortization period for goodwill under GAAP was uncertain prior to
that time. According to one observer, "when the accounting
profession designed the purchase account-
856
Opinion of SOUTER, J.
every reason for concern as to the continued availability of the
RAP in effect at the time of these transactions.
C
Although the results of the forbearance policy, including the
departures from GAAP, appear to have been mixed, see GAO,
Forbearance for Troubled Institutions 4, it is relatively clear
that the overall regulatory response of the early and mid-1980's
was unsuccessful in resolving the crisis in the thrift industry.
See,
e. g., Transohio Savings Bank, 967 F. 2d, at 602
(concluding that regulatory measures "actually aggravat[ed] the
decline"). As a result, Congress enacted the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 (FIRREA), Pub. L.
101-73, 103 Stat. 183, with the objects of preventing the collapse
of the industry, attacking the root causes of the crisis, and
restoring public confidence.
FIRREA made enormous changes in the structure of federal thrift
regulation by (1) abolishing FSLIC and transferring its functions
to other agencies; (2) creating a new thrift deposit insurance fund
under the Federal Deposit Insurance Corporation; (3) replacing the
Bank Board with the Office of Thrift Supervision (OTS), a Treasury
Department office with responsibility for the regulation of all
federally insured savings associations; and (4) establishing the
Resolution Trust Corporation to liquidate or otherwise dispose of
certain closed thrifts and their assets. See note following 12 U.
S. C. § 1437, §§ 1441a, 1821. More importantly for the present
case, FIRREA also obligated OTS to "prescribe and maintain
uniformly applicable capital standards for savings associations" in
accord with strict statutory re-
ing rules in the early 1970s, they didn't anticipate the case of
insolvent thrift institutions .... The rules for that situation
were simply unclear until September 1982," when the SFAS 72 rules
were first aired. Lowy 39-40.
857
quirements. §
1464(t)(1)(A)Y In particular, the statute
required thrifts to "maintain core capital in an amount not less
than 3 percent of the savings association's total assets," §
1464(t)(2)(A), and defined "core capital" to exclude
"unidentifiable intangible assets," § 1464(t)(9)(A), such as
goodwill. Although the reform provided a "transition rule"
permitting thrifts to count "qualifying supervisory goodwill"
toward half the core capital requirement, this allowance was phased
out by 1995. § 1464(t)(3)(A). According to the House Report, these
tougher capital requirements reflected a congressional judgment
that "[t]o a considerable extent, the size of the thrift crisis
resulted from the utilization of capital gimmicks that masked the
inadequate capitalization of thrifts." House Report, at 310.
The impact of FIR REA's new capital requirements upon
institutions that had acquired failed thrifts in exchange for
supervisory goodwill was swift and severe. OTS promptly issued
regulations implementing the new capital standards along with a
bulletin noting that FIRREA "eliminates [capital and accounting]
forbearances" previously granted to certain thrifts. Office of
Thrift Supervision, Capital Adequacy:
Guidance on the Status of Capital and Accounting Forbearances
and Capital Instruments held by a Deposit Insurance Fund, Thrift
Bulletin No. 38-2, Jan. 9, 1990. OTS accordingly directed that
"[a]ll savings associations presently operating with these
forbearances ... should eliminate them in determining whether or
not they comply with the new minimum regulatory capital standards."
Ibid. Despite the statute's limited exception intended to
moderate transitional
11 See 135 Congo Rec. 18863 (1989) (remarks of Sen. Riegle)
(emphasizing that these capital requirements were at the "heart" of
the legislative reform);
id., at 18860 (remarks of Sen.
Chafee) (describing capital standards as FIRREA's "strongest and
most critical requirement" and "the backbone of the legislation");
id., at 18853 (remarks of Sen. Dole) (describing the
"[t]ough new capital standards [as] perhaps the most important
provisions in this bill").
858
Opinion of SOUTER, J.
pains, many institutions immediately fell out of compliance with
regulatory capital requirements, making them subject to seizure by
thrift regulators. See Black, 2 Stan. L. & Policy Rev., at 107
("FIRREA's new capital mandates have caused over 500 S&Ls ...
to report that they have failed one or more of the three capital
requirements").
D
This case is about the impact of FIRREA's tightened capital
requirements on three thrift institutions created by way of
supervisory mergers. Respondents Glendale Federal Bank, FSB,
Winstar Corporation, and The Statesman Group, Inc., acquired failed
thrifts in 1981, 1984, and 1988, respectively. After the passage of
FIRREA, federal regulators seized and liquidated the Winstar and
Statesman thrifts for failure to meet the new capital requirements.
Although the Glendale thrift also fell out of regulatory capital
compliance as a result of the new rules, it managed to avoid
seizure through a massive private recapitalization. Believing that
the Bank Board and FSLIC had promised them that the supervisory
goodwill created in their merger transactions could be counted
toward regulatory capital requirements, respondents each filed suit
against the United States in the Court of Federal Claims, seeking
monetary damages on both contractual and constitutional theories.
That court granted respondents' motions for partial summary
judgment on contract liability, finding in each case that the
Government had breached contractual obligations to permit
respondents to count supervisory goodwill and capital credits
toward their regulatory capital requirements. See
Winstar
Corp. v.
United States, 21 Cl. Ct. 112 (1990)
(Winstar I) (finding an implied-in-fact contract but
requesting further briefing on contract issues); 25 Cl. Ct. 541
(1992)
(Winstar II) (finding contract breached and entering
summary judgment on liability);
Statesman Savings Holding
Corp. v.
United States, 26 Cl. Ct. 904 (1992) (granting
summary judgment on liability
859
to Statesman and Glendale). In so holding, the Court of Federal
Claims rejected two central defenses asserted by the Government:
that the Government could not be held to a promise to refrain from
exercising its regulatory authority in the future unless that
promise was unmistakably clear in the contract,
Winstar I,
supra, at 116;
Winstar II, supra, at 544-549;
Statesman, supra, at 919-920, and that the Government's
alteration of the capital reserve requirements in FIRREA was a
sovereign act that could not trigger contractualliability,
Winstar II, supra, at 550-553;
Statesman, supra, at
915-916. The Court of Federal Claims consolidated the three cases
and certified its decisions for interlocutory appeal.
A divided panel of the Federal Circuit reversed, holding that
the parties did not allocate to the Government, in an unmistakably
clear manner, the risk of a subsequent change in the regulatory
capital requirements.
Winstar Corp. v.
United States,
994 F.2d
797, 811-813 (1993). The full court, however, vacated this
decision and agreed to rehear the case en bane. After rebriefing
and reargument, the en bane court reversed the panel decision and
affirmed the Court of Federal Claims' rulings on liability.
Winstar Corp. v.
United States, 64
F.3d 1531 (1995). The Federal Circuit found that FSLIC had made
express contracts with respondents, including a promise that
supervisory goodwill and capital credits could be counted toward
satisfaction of the regulatory capital requirements.
Id., at
1540, 1542-1543. The court rejected the Government's
unmistakability argument, agreeing with the Court of Federal Claims
that that doctrine had no application in a suit for money damages.
Id., at 1545-1548. Finally, the en bane majority found that
FIRREA's new capital requirements "single[d] out supervisory
goodwill for special treatment" and therefore could not be said to
be a "public" and "general act" within the meaning of the sovereign
acts doctrine.
Id., at 1548-1551. Judge Nies dissented,
essentially repeating the arguments in her
860
Opinion of SOUTER, J.
prior opinion for the panel majority,
id., at 1551-1552,
and Judge Lourie also dissented on the ground that FIRREA was a
public and general act,
id., at 1552-1553. We granted
certiorari, 516 U. S. 1087 (1996), and now affirm.
II
We took this case to consider the extent to which special rules,
not generally applicable to private contracts, govern enforcement
of the governmental contracts at issue here. We decide whether the
Government may assert four special defenses to respondents' claims
for breach: the canon of contract construction that surrenders of
sovereign authority must appear in unmistakable terms,
Bowen
v.
Public Agencies Opposed to Social Security Entrapment,
477 U. S. 41, 52
(1986); the rule that an agent's authority to make such surrenders
must be delegated in express terms,
Home Telephone &
Telegraph Co. v.
Los Angeles, 211 U. S. 265 (1908); the
doctrine that a government may not, in any event, contract to
surrender certain reserved powers,
Stone v.
Mississippi, 101 U. S. 814 (1880);
and, finally, the principle that a Government's sovereign acts do
not give rise to a claim for breach of contract,
Horowitz v.
United States, 267 U. S. 458, 460
(1925).
The anterior question whether there were contracts at all
between the Government and respondents dealing with regulatory
treatment of supervisory goodwill and capital credits, although
briefed and argued by the parties in this Court, is not strictly
before us. See
Yee v.
Escondido, 503 U. S. 519, 535 (1992)
(noting that "we ordinarily do not consider questions outside those
presented in the petition for certiorari"); this Court's Rule
14.1(a). And although we may review the Court of Federal Claims'
grant of summary judgment
de novo, Eastman Kodak Co. v.
Image Technical Services, Inc., 504 U. S. 451, 465, n. 10
(1992), we are in no better position than the Federal Circuit and
the Court of Federal Claims to evaluate the documentary records
of
861
the transactions at issue. Our resolution of the legal issues
raised by the petition for certiorari, however, does require some
consideration of the nature of the underlying transactions.
A
The Federal Circuit found that "[t]he three plaintiff thrifts
negotiated contracts with the bank regulatory agencies that allowed
them to include supervisory goodwill (and capital credits) as
assets for regulatory capital purposes and to amortize that
supervisory goodwill over extended periods of time." 64 F. 3d, at
1545. Although each of these transactions was fundamentally
similar, the relevant circumstances and documents vary somewhat
from case to case.
1
In September 1981, Glendale was approached about a possible
merger by the First Federal Savings and Loan Association of Broward
County, which then had liabilities exceeding the fair value of its
assets by over $734 million. At the time, Glendale's accountants
estimated that FSLIC would have needed approximately $1.8 billion
to liquidate Broward, only about $1 billion of which could be
recouped through the sale of Broward's assets. Glendale, on the
other hand, was both profitable and well capitalized, with a net
worth of $277 million.12 After some preliminary negotiations with
the regulators, Glendale submitted a merger proposal to the Bank
Board, which had to approve all mergers involving savings and loan
associations, see 12 U. S. C. §§ 1467a(e)(1)(A) and (B); §
1817(j)(1); that proposal assumed the use of the purchase method of
accounting to record supervisory goodwill arising from the
transaction, with an amortization period of 40 years. The Bank
Board ratified the merger, or "Supervisory Action Agreement" (SAA),
on November 19, 1981.
12 Glendale's premerger net worth amounted to 5.45 percent of
its total assets, which comfortably exceeded the 4 percent
capital/asset ratio, or net worth requirement, then in effect. See
12 CFR § 563.13(a)(2) (1981).
862
Opinion of SOUTER, J.
The SAA itself said nothing about supervisory goodwill,
but did contain the following integration clause:
"This Agreement ... constitutes the entire agreement between the
parties thereto and supersedes all prior agreements and
understandings of the parties in connection herewith, excepting
only the Agreement of Merger and any resolutions or letters issued
contemporaneously herewith." App. 598-599.
The SAA thereby incorporated Bank Board Resolution No. 81-710,
by which the Board had ratified the SAA. That resolution referred
to two additional documents: a letter to be furnished by Glendale's
independent accountant identifying and supporting the use of any
goodwill to be recorded on Glendale's books, as well as the
resulting amortization periods; and "a stipulation that any
goodwill arising from this transaction shall be determined and
amortized in accordance with [Bank Board] Memorandum R-31b."
Id., at 607. Memorandum R-31b, finally, permitted Glendale
to use the purchase method of accounting and to recognize goodwill
as an asset subject to amortization. See
id., at
571-574.
The Government does not seriously contest this evidence that the
parties understood that goodwill arising from these transactions
would be treated as satisfying regulatory requirements; it insists,
however, that these documents simply reflect statements of
then-current federal regulatory policy rather than contractual
undertakings. Neither the Court of Federal Claims nor the Federal
Circuit so read the record, however, and we agree with those courts
that the Government's interpretation of the relevant documents is
fundamentally implausible. The integration clause in Glendale's SAA
with FSLIC, which is similar in all relevant respects to the
analogous provisions in the Winstar and Statesman contracts,
provides that the SAA supersedes "all prior agreements and
understandings ... excepting only ... any resolutions or letters
issued contemporaneously" by the Board,
id.,
863
at 598-599; in other words, the SAA characterizes the Board's
resolutions and letters not as statements of background rules, but
as part of the "agreements and understandings" between the
parties.
To the extent that the integration clause leaves any ambiguity,
the other courts that construed the documents found that the
realities of the transaction favored reading those documents as
contractual commitments, not mere statements of policy, see
Restatement (Second) of Contracts § 202(1) (1981) ("Words and other
conduct are interpreted in the light of all the circumstances, and
if the principal purpose of the parties is ascertainable it is
given great weight"), and we see no reason to disagree. As the
Federal Circuit noted, "[i]t is not disputed that if supervisory
goodwill had not been available for purposes of meeting regulatory
capital requirements, the merged thrift would have been subject to
regulatory noncompliance and penalties from the moment of its
creation." 64 F. 3d, at 1542. Indeed, the assumption of Broward's
liabilities would have rendered Glendale immediately insolvent by
approximately $460 million, but for Glendale's right to count
goodwill as regulatory capital. Although one can imagine cases in
which the potential gain might induce a party to assume a
substantial risk that the gain might be wiped out by a change in
the law, it would have been irrational in this case for Glendale to
stake its very existence upon continuation of current policies
without seeking to embody those policies in some sort of
contractual commitment. This conclusion is obvious from both the
dollar amounts at stake and the regulators' proven propensity to
make changes in the relevant requirements. See Brief for United
States 26 ("[I]n light of the frequency with which federal capital
requirements had changed in the past ... , it would have been
unreasonable for Glendale, FSLIC, or the Bank Board to expect or
rely upon the fact that those requirements would remain
unchanged"); see also
infra, at 909-910. Under the
circumstances, we have no doubt that
864
Opinion of SOUTER, J.
the parties intended to settle regulatory treatment of these
transactions as a condition of their agreement. See,
e.
g., The Binghamton Bridge, 3 Wall. 51, 78 (1866)
(refusing to construe charter in such a way that it would have been
"madness" for private party to enter into it)P We accordingly have
no reason to question the Court of Appeals's conclusion that "the
government had an express contractual obligation to permit Glendale
to count the supervisory goodwill generated as a result of its
merger with Broward as a capital asset for regulatory capital
purposes." 64 F. 3d, at 1540.
2
In 1983, FSLIC solicited bids for the acquisition of Windom
Federal Savings and Loan Association, a Minnesotabased thrift in
danger of failing. At that time, the estimated cost to the
Government of liquidating Windom was approximately $12 million. A
group of private investors formed Winstar Corporation for the
purpose of acquiring Windom and submitted a merger plan to FSLIC;
it called for capital contributions of $2.8 million from Winstar
and $5.6 million from FSLIC, as well as for recognition of
supervisory goodwill to be amortized over a period of 35 years.
The Bank Board accepted the Winstar proposal and made an
Assistance Agreement that incorporated, by an integration clause
much like Glendale's, both the Board's resolution approving the
merger and a forbearance letter issued on the date of the
agreement. See App. 112. The forbearance letter provided that
"[f]or purposes of reporting to the Board, the value of any
intangible assets resulting from accounting for the merger in
accordance with the purchase method may be amortized by [Winstar]
over a period not to exceed 35
13 See also
Appleby v.
Delaney, 271 U. S. 403, 413 (1926)
("It is not reasonable to suppose that the grantees would pay
$12,000 ... and leave to the city authorities the absolute right
completely to nullify the chief consideration for seeking this
property, ... or that the parties then took that view of the
transaction").
865
years by the straight-line method."
Id., at 123.
Moreover, the Assistance Agreement itself contained an "Accounting
Principles" section with the following provisions:
"Except as otherwise provided, any computations made for the
purposes of this Agreement shall be governed by generally accepted
accounting principles as applied on a going concern basis in the
savings and loan industry, except that where such principles
conflict with the terms of this Agreement, applicable regulations
of the Bank Board or the [FSLICJ, or any resolution or action of
the Bank Board approving or adopted concurrently with this
Agreement, then this Agreement, such regulations, or such
resolution or action shall govern .... If there is a conflict
between such regulations and the Bank Board's resolution or action,
the Bank Board's resolution or action shall govern. For purposes of
this section, the governing regulations and the accounting
principles shall be those in effect on the Effective Date or as
subsequently clarified, interpreted, or amended by the Bank Board
or the Financial Accounting Standards Board ("FASB"), respectively,
or any successor organization to either." Id., at
108-109.
The Government emphasizes the last sentence of this clause,
which provides that the relevant accounting principles may be
"subsequently clarified ... or amended," as barring any inference
that the Government assumed the risk of regulatory change. Its
argument, however, ignores the preceding sentence providing that
the Bank Board's resolutions and actions in connection with the
merger must prevail over contrary regulations. If anything, then,
the accounting principles clause tilts in favor of interpreting the
contract to lock in the then-current regulatory treatment of
supervisory goodwill.
In any event, we do not doubt the soundness of the Federal
Circuit's finding that the overall "documentation in the Win-
866
Opinion of SOUTER, J.
star transaction establishes an express agreement allowing
Winstar to proceed with the merger plan approved by the Bank Board,
including the recording of supervisory goodwill as a capital asset
for regulatory capital purposes to be amortized over 35 years." 64
F. 3d, at 1544. As in the Glendale transaction, the circumstances
of the merger powerfully support this conclusion: The tangible net
worth of the acquired institution was a negative $6.7 million, and
the new Winstar thrift would have been out of compliance with
regulatory capital standards from its very inception, without
including goodwill in the relevant calculations. We thus accept the
Court of Appeals's conclusion that "it was the intention of the
parties to be bound by the accounting treatment for goodwill
arising in the merger."
Ibid.
3
Statesman, another nonthrift entity, approached FSLIC in 1987
about acquiring a subsidiary of First Federated Savings Bank, an
insolvent Florida thrift. FSLIC responded that if Statesman wanted
Government assistance in the acquisition it would have to acquire
all of First Federated as well as three shaky thrifts in Iowa.
Statesman and FSLIC ultimately agreed on a complex plan for
acquiring the four thrifts; the agreement involved application of
the purchase method of accounting, a $21 million cash contribution
from Statesman to be accompanied by $60 million from FSLIC, and
(unlike the Glendale and Winstar plans) treatment of $26 million of
FSLIC's contribution as a permanent capital credit to Statesman's
regulatory capital.
The Assistance Agreement between Statesman and FSLIC included an
"accounting principles" clause virtually identical to Winstar's,
see App. 402-403, as well as a specific provision for the capital
credit:
"For the purposes of reports to the Bank Board ... , $26 million
of the contribution [made by FSLIC] shall be credited to
[Statesman's] regulatory capital account
867
and shall constitute regulatory capital (as defined in § 561.13
of the Insurance Regulations)." Id., at 362a.
As with Glendale and Winstar, the agreement had an integration
clause incorporating contemporaneous resolutions and letters issued
by the Board.
Id., at 407-408. The Board's resolution
explicitly acknowledged both the capital credits and the creation
of supervisory goodwill to be amortized over 25 years,
id.,
at 458-459, and the Forbearance Letter likewise recognized the
capital credit provided for in the agreement.
Id., at 476.
Finally, the parties executed a separate Regulatory Capital
Maintenance Agreement stating that, "[i]n consideration of the
mutual promises contained [t]herein,"
id., at 418, Statesman
would be obligated to maintain the regulatory capital of the
acquired thrifts "at the level ... required by § 563.13(b) of the
Insurance Regulations ... or any successor regulation .... " The
agreement further provided, however, that "[nor purposes of this
Agreement, any determination of [Statesman's] Required Regulatory
Capital ... shall include ... amounts permitted by the FSLIC in the
Assistance Agreement and in the forbearances issued in connection
with the transactions discussed herein."
Id., at 418-419.
Absent those forbearances, Statesman's thrift would have remained
insolvent by almost $9 million despite the cash infusions provided
by the parties to the transaction.
For the same reasons set out above with respect to the Glendale
and Winstar transactions, we accept the Federal Circuit's
conclusion that "the government was contractually obligated to
recognize the capital credits and the supervisory goodwill
generated by the merger as part of the Statesman's regulatory
capital requirement and to permit such goodwill to be amortized on
a straight line basis over 25 years." 64 F. 3d, at 1543. Indeed,
the Government's position is even weaker in Statesman's case
because the capital credits portion of the agreement contains an
express commitment to include those credits in the calculation of
regulatory capital.
868
Opinion of SOUTER, J.
The Government asserts that the reference to § 563.13 of FSLIC
regulations, which at the time defined regulatory capital for
thrift institutions, indicates that the Government's obligations
could change along with the relevant regulations. But, just as in
Winstar's case, the Government would have us overlook the specific
incorporation of the then-current regulations as part of the
agreement.14 The Government also cites a provision requiring
Statesman to "comply in all material respects with all applicable
statutes, regulations, orders of, and restrictions imposed by the
United States or ... by any agency of [the United States]," App.
407, but this simply meant that Statesman was required to observe
FIRREA's new capital requirements once they were promulgated. The
clause was hardly necessary to oblige Statesman to obey the law,
and nothing in it barred Statesman from asserting that passage of
that law required the Government to take action itself or be in
breach of its contract.
B
It is important to be clear about what these contracts did and
did not require of the Government. Nothing in the documentation or
the circumstances of these transactions purported to bar the
Government from changing the way in which it regulated the thrift
industry. Rather, what the Federal Circuit said of the Glendale
transaction is true of the Winstar and Statesman deals as well:
"the Bank Board and the FSLIC were contractually bound to recognize
the supervisory goodwill and the amortization periods reflected" in
the agreements between the parties. 64 F. 3d, at 1541-1542. We read
this promise as the law of contracts has always treated promises to
provide something beyond the promi-
14 As part of the contract, the Government's promise to count
supervisory goodwill and capital credits toward regulatory capital
was alterable only by written agreement of the parties. See App.
408. This was also true of the Glendale and Winstar transactions.
See
id., at 112, 600.
869
sor's absolute control, that is, as a promise to insure the
promisee against loss arising from the promised condition's
nonoccurrence.15 Holmes's example is famous: "[i]n the case of a
binding promise that it shall rain to-morrow, the immediate legal
effect of what the promisor does is, that he takes the risk of the
event, within certain defined limits, as between himself and the
promisee." Holmes, The Common Law (1881), in 3 The Collected Works
of Justice Holmes 268 (S. Novick ed. 1995).16 Contracts like this
are especially appropriate in the world of regulated industries,
where the risk that legal change will prevent the bargained-for
performance is always lurking in the shadows. The drafters of the
Restatement attested to this when they explained that, "[w]ith the
trend toward greater governmental regulation ... parties are
increasingly aware of such risks, and a party may undertake a duty
that is not discharged by such supervening governmental actions
.... " Restatement (Second) of Contracts § 264, Comment
a.
"Such an agreement," according to the Restatement, "is usually
interpreted as one to pay
15 To be sure, each side could have eliminated any serious
contest about the correctness of their interpretive positions by
using clearer language. See,
e. g., Guaranty
Financial Services, Inc. v.
Ryan, 928
F.2d 994, 9991000 (CAll 1991) (finding, based on very different
contract language, that the Government had expressly reserved the
right to change the capital requirements without any responsibility
to the acquiring thrift). The failure to be even more explicit is
perhaps more surprising here, given the size and complexity of
these transactions. But few contract cases would be in court if
contract language had articulated the parties' postbreach positions
as clearly as might have been done, and the failure to specify
remedies in the contract is no reason to find that the parties
intended no remedy at all. The Court of Claims and Federal Circuit
were thus left with the familiar task of determining which party's
interpretation was more nearly supported by the evidence.
16 See also
Day v.
United States, 245 U. S. 159, 161 (1917)
(Holmes, J.) ("One who makes a contract never can be absolutely
certain that he will be able to perform it when the time comes, and
the very essence of it is that he takes the risk within the limits
of his undertaking").
870
Opinion of SOUTER, J.
damages if performance is prevented rather than one to render a
performance in violation oflaw."
Ibid.17
When the law as to capital requirements changed in the present
instance, the Government was unable to perform its promise and,
therefore, became liable for breach. We accept the Federal
Circuit's conclusion that the Government breached these contracts
when, pursuant to the new regulatory capital requirements imposed
by FIRREA, 12 U. S. C. § 1464(t), the federal regulatory agencies
limited the use of supervisory goodwill and capital credits in
calculating respondents' net worth. 64 F. 3d, at 1545. In the case
of Winstar and Statesman, the Government exacerbated its breach
when it seized and liquidated respondents' thrifts for regulatory
noncompliance.
Ibid.
In evaluating the relevant documents and circumstances, we have,
of course, followed the Federal Circuit in applying
17 See,
e. g., Hughes Communications Galaxy, Inc. v.
United States, 998 F. 2d 953, 957-959
(CA Fed. 1993)
(interpreting contractual incorporation of then-current Government
policy on space shuttle launches not as a promise not to change
that policy, but as a promise "to bear the cost of changes in
launch priority and scheduling resulting from the revised policy");
Hills Materials Co. v.
Rice, 982
F.2d 514, 516-517
(CA Fed. 1992) (interpreting contract
to incorporate safety regulations extant when contract was signed
and to shift responsibility for costs incurred as a result of new
safety regulations to the Government); see generally 18 W. Jaeger,
Williston on Contracts § 1934, pp. 19-21 (3d ed. 1978) ("Although a
warranty in effect is a promise to pay damages if the facts are not
as warranted, in terms it is an undertaking that the facts exist.
And in spite of occasional statements that an agreement impossible
in law is void there seems no greater difficulty in warranting the
legal possibility of a performance than its possibility in fact
.... [T]here seems no reason of policy forbidding a contract to
perform a certain act legal at the time of the contract if it
remains legal at the time of performance, and if not legal, to
indemnify the promisee for non-performance" (footnotes omitted));
5A A. Corbin, Corbin on Contracts § 1170, p. 254 (1964) (noting
that in some cases where subsequent legal change renders contract
performance illegal, "damages are still available as a remedy,
either because the promisor assumed the risk or for other reasons,"
but specific performance will not be required).
871
ordinary principles of contract construction and breach that
would be applicable to any contract action between private parties.
The Government's case, however, is that the Federal Circuit's
decision to apply ordinary principles was error for a variety of
reasons, each of which we consider, and reject, in the sections
ahead.
III
The Government argues for reversal, first, on the principle that
"contracts that limit the government's future exercises of
regulatory authority are strongly disfavored; such contracts will
be recognized only rarely, and then only when the limitation on
future regulatory authority is expressed in unmistakable terms."
Brief for United States 16. Hence, the Government says, the
agreements between the Bank Board, FSLIC, and respondents should
not be construed to waive Congress's authority to enact a
subsequent bar to using supervisory goodwill and capital credits to
meet regulatory capital requirements.
The argument mistakes the scope of the unmistakability doctrine.
The thrifts do not claim that the Bank Board and FSLIC purported to
bind Congress to ossify the law in conformity to the contracts;
they seek no injunction against application of FIRREA's new capital
requirements to them and no exemption from FIRREA's terms. They
simply claim that the Government assumed the risk that subsequent
changes in the law might prevent it from performing, and agreed to
pay damages in the event that such failure to perform caused
financial injury. The question, then, is not whether Congress could
be constrained but whether the doctrine of unmistakability is
applicable to any contract claim against the Government for breach
occasioned by a subsequent Act of Congress. The answer to this
question is no.
A
The unmistakability doctrine invoked by the Government was
stated in
Bowen v.
Public Agencies Opposed to
Social
872
Opinion of SOUTER, J.
Security Entrapment: "'[SJovereign power ... governs all
contracts subject to the sovereign's jurisdiction, and will remain
intact unless surrendered in unmistakable terms.'" 477 U. S., at 52
(quoting
Merrion v.
Jicarilla Apache Tribe, 455 U. S. 130, 148
(1982)). This doctrine marks the point of intersection between two
fundamental constitutional concepts, the one traceable to the
theory of parliamentary sovereignty made familiar by Blackstone,
the other to the theory that legislative power may be limited,
which became familiar to Americans through their experience under
the colonial charters, see G. Wood, Creation of the American
Republic 1776-1787, pp. 268-271 (1969).
In his Commentaries, Blackstone stated the centuries-old concept
that one legislature may not bind the legislative authority of its
successors:
"Acts of parliament derogatory from the power of subsequent
parliaments bind not .... Because the legislature, being in truth
the sovereign power, is always of equal, always of absolute
authority: it acknowledges no superior upon earth, which the prior
legislature must have been, if it's [sic] ordinances could
bind the present parliament." 1 W. Blackstone, Commentaries on the
Laws of England 90 (1765).18
In England, of course, Parliament was historically supreme in
the sense that no "higher law" limited the scope of legislative
action or provided mechanisms for placing legally enforceable
limits upon it in specific instances; the power of American
legislative bodies, by contrast, is subject to the overriding
dictates of the Constitution and the obligations that it
authorizes. See Eule, Temporal Limits on the Legislative Mandate:
Entrenchment and Retroactivity, 1987 Am.
18 See also H. Hart, The Concept of Law 145 (1961) (recognizing
that Parliament is "sovereign, in the sense that it is free, at
every moment of its existence as a continuing body, not only from
legal limitations imposed
ab extra, but also from its own
prior legislation").
873
Bar Found. Research J. 379, 392-393 (observing that the English
rationale for precluding a legislature from binding its successors
does not apply in America). Hence, although we have recognized that
"a general law ... may be repealed, amended or disregarded by the
legislature which enacted it," and "is not binding upon any
subsequent legislature,"
Manigault v.
Springs,
199 U. S. 473,
487 (1905),19 on this side of the Atlantic the principle has always
lived in some tension with the constitutionally created potential
for a legislature, under certain circumstances, to place effective
limits on its successors, or to authorize executive action
resulting in such a limitation.
The development of this latter, American doctrine in
federallitigation began in cases applying limits on state
sovereignty imposed by the National Constitution. Thus Chief
Justice Marshall's exposition in
Fletcher v.
Peck, 6
Cranch 87 (1810), where the Court held that the Contract Clause, U.
S. Const., Art. I, § 10, cl. 1, barred the State of Georgia's
effort to rescind land grants made by a prior state legislature.
Marshall acknowledged "that one legislature is competent to repeal
any act which a former legislature was competent to pass; and that
one legislature cannot abridge the powers of a succeeding
legislature." 6 Cranch, at 135. "The correctness of this principle,
so far as respects general legislation," he said, "can never be
controverted."
Ibid. Marshall went on to qualify the
principle, however, noting that "if an act be done under a law, a
succeeding legislature cannot undo it. The past cannot be recalled
by the most absolute power."
Ibid. For Marshall, this was
true for the two distinct reasons that the intrusion on vested
rights by the Georgia Legislature's Act of repeal might well have
gone beyond the limits of "the
19 See also
Reichelderfer v.
Quinn, 287 U. S. 315, 318 (1932)
("[T]he will of a particular Congress ... does not impose itself
upon those to follow in succeeding years"); Black, Amending the
Constitution: A Letter to a Congressman, 82 Yale L. J. 189, 191
(1972) (characterizing this "most familiar and fundamental
principl[e]" as "so obvious as rarely to be stated").
874
Opinion of SOUTER, J.
legislative power," and that Georgia's legislative sovereignty
was limited by the Federal Constitution's bar against laws
impairing the obligation of contracts.
Id., at 135-136.
The impetus for the modern unmistakability doctrine was thus
Chief Justice Marshall's application of the Contract Clause to
public contracts. Although that Clause made it possible for state
legislatures to bind their successors by entering into contracts,
it soon became apparent that such contracts could become a threat
to the sovereign responsibilities of state governments. Later
decisions were accordingly less willing to recognize contractual
restraints upon legislative freedom of action, and two distinct
limitations developed to protect state regulatory powers. One came
to be known as the "reserved powers" doctrine, which held that
certain substantive powers of sovereignty could not be contracted
away. See
West River Bridge Co. v.
Dix, 6 How. 507
(1848) (holding that a State's contracts do not surrender its
eminent domain power).20 The other, which surfaced somewhat earlier
in
Providence Bank v.
Billings, 4 Pet. 514 (1830),
and
Proprietors of Charles River Bridge v.
Proprietors of
Warren Bridge, 11 Pet. 420 (1837), was a canon of construction
disfavoring implied governmental obligations in public contracts.
Under this rule that "[a]ll public grants are strictly construed,"
The Delaware Railroad Tax, 18 Wall. 206, 225 (1874), we have
insisted that "[n]othing can be taken against the State by
presumption or inference,"
ibid., and that "neither the
right of taxation, nor any other power of sovereignty, will be held
... to have been surrendered, unless
20 See also
Stone v.
Mississippi, 101 U. S. 814 (1880)
(State may not contract away its police power);
Butchers' Union
Slaughter-House &
LiveStock Landing Co. v.
Crescent City Live-Stock Landing &
SlaughterHouse
Co., 111 U. S.
746 (1884) (same); see generally Griffith, Local Government
Contracts: Escaping from the Governmental/Proprietary Maze, 75 Iowa
L. Rev. 277, 290-299 (1990) (recounting the early development of
the reserved powers doctrine). We discuss the application of the
reserved powers doctrine to this case
infra, at 888-889.
875
such surrender has been expressed in terms too plain to be
mistaken."
Jefferson Branch Bank v.
Skelly, 1 Black
436, 446 (1862).
The posture of the government in these early unmistakability
cases is important. In each, a state or local government entity had
made a contract granting a private party some concession (such as a
tax exemption or a monopoly), and a subsequent governmental action
had abrogated the contractual commitment. In each case, the private
party was suing to invalidate the abrogating legislation under the
Contract Clause. A requirement that the government's obligation
unmistakably appear thus served the dual purposes of limiting
contractual incursions on a State's sovereign powers and of
avoiding difficult constitutional questions about the extent of
state authority to limit the subsequent exercise of legislative
power. Cf.
Edward J. DeBartolo Corp. v.
Florida Gulf Coast Building &
Constr. Trades
Council, 485 U.
S. 568, 575 (1988) ("[W]here an otherwise acceptable
construction of a statute would raise serious constitutional
problems, the Court will construe the statute to avoid such
problems unless such construction is plainly contrary to the intent
of Congress");
Ashwander v.
TV A, 297 U. S. 288, 348 (1936)
(Brandeis, J., concurring) (same).
The same function of constitutional avoidance has marked the
expansion of the unmistakability doctrine from its Contract Clause
origins dealing with state grants and contracts to those of other
governmental sovereigns, including the United States. See
Merrion v.
Jicarilla Apache Tribe, 455 U. S., at 148
(deriving the unmistakability principle from
St. Louis v.
United Railways Co., 210 U. S. 266 (1908), a
Contract Clause suit against a state government).21 Although
21 United Railways is in the line of cases stretching
back to
Providence Bank v.
Billings, 4 Pet. 514
(1830), and
Proprietors of Charles River Bridge v.
Proprietors of Warren Bridge, 11 Pet. 420 (1837). Justice
Day's opinion in
United Railways relied heavily upon
New
Orleans City &
Lake R. Co. v.
New Orleans,
143 U. S. 192
(1892), which in turn relied upon
876
Opinion of SOUTER, J.
the Contract Clause has no application to acts of the United
States,
Pension Benefit Guaranty Corporation v.
R. A.
Gray &
Co., 467 U. S. 717, 732, n. 9
(1984), it is clear that the National Government has some capacity
to make agreements binding future Congresses by creating vested
rights, see,
e. g., Perry v.
United States, 294 U. S. 330 (1935);
Lynch v.
United States, 292 U. S. 571 (1934). The
extent of that capacity, to be sure, remains somewhat obscure.
Compare,
e. g., United States Trust Co. of N.
Y. v.
New Jersey, 431
U. S. 1, 26 (1977) (heightened Contract Clause scrutiny when
States abrogate their own contractual obligations), with
Pension
Benefit Guaranty Corporation, supra, at 733 (contrasting less
exacting due process standards governing federal economic
legislation affecting private contracts). But the want of more
developed law on limitations independent of the Contract Clause is
in part the result of applying the unmistakability canon of
construction to avoid this doctrinal thicket, as we have done in
several cases involving alleged surrenders of sovereign
prerogatives by the National Government and Indian tribes.
First, we applied the doctrine to protect a tribal sovereign in
Merrion v.
Jicarilla Apache Tribe, supra, which held
that long-term oil and gas leases to private parties from an Indian
Tribe, providing for specific royalties to be paid to the Tribe,
did not limit the Tribe's sovereign prerogative to tax the proceeds
from the lessees' drilling activities.
Id., at 148.
classic Contract Clause unmistakability cases like
Vicksburg S. &
P. R. Co. v.
Dennis,
116 U. S. 665
(1886),
Memphis Gas Light Co. v.
Taxing Dist. of Shelby
Cty., 109 U. S.
398 (1883), and
Piqua Branch of State Bank of Ohio v.
Knoop, 16 How. 369 (1854). And
Home Building &
Loan Assn. v.
Blaisdell, 290 U. S. 398 (1934),
upon which
Merrion also relied, cites
Charles River
Bridge directly. See 290 U. S., at 435; see also Note,
Forbearance Agreements: Invalid Contracts for the Surrender of
Sovereignty, 92 Colum. L. Rev. 426, 453 (1992) (linking the
unmistakability principle applied in
Bowen v.
Public
Agencies Opposed to Social Security Entrapment, 477 U. S. 41 (1986), to
the
Charles River Bridge/Providence Bank line of cases).
877
Because the lease made no reference to the Tribe's taxing power,
we held simply that a waiver of that power could not be "inferred
... from silence,"
ibid., since the taxing power of any
government remains "unless it is has been specifically surrendered
in terms which admit of no other reasonable interpretation."
Ibid. (internal quotation marks and citation omitted).
In
Bowen v.
Public Agencies Opposed to Social Security
Entrapment, 477 U.
S. 41 (1986), this Court confronted a state claim that § 103 of
the Social Security Amendments Act of 1983, 97 Stat. 71, 42 U. S.
C. § 418(g) (1982 ed., Supp. II), was unenforceable to the extent
it was inconsistent with the terms of a prior agreement with the
National Government. Under the law before 1983, a State could agree
with the Secretary of Health and Human Services to cover the
State's employees under the Social Security scheme subject to a
right to withdraw them from coverage later. When the 1983 Act
eliminated the right of withdrawal, the State of California and
related plaintiffs sought to enjoin application of the new law to
them, or to obtain just compensation for loss of the withdrawal
right (a remedy which the District Court interpreted as tantamount
to the injunction, since it would mandate return of all otherwise
required contributions, see 477 U. S., at 51). Although we were
able to resolve the case by reading the terms of a state-federal
coverage agreement to reserve the Government's right to modify its
terms by subsequent legislation, in the alternative we rested the
decision on the more general principle that, absent an
"unmistakable" provision to the contrary, "contractual
arrangements, including those to which a sovereign itself is a
party, 'remain subject to subsequent legislation' by the
sovereign."
Id., at 52 (quoting
Merrion, supra, at
147). We thus rejected the proposal "to find that a 'sovereign
forever waives the right to exercise one of its sovereign powers
unless it expressly reserves the right to exercise that power in'
the contract,"
Bowen, supra, at 52 (quoting
Merrion,
supra, at 148), and
878
Opinion of SOUTER, J.
held instead that unmistakability was needed for waiver, not
reservation.
Most recently, in
United States v.
Cherokee Nation of
Okla., 480 U. S.
700 (1987), we refused to infer a waiver of federal sovereign
power from silence. There, an Indian Tribe with property rights in
a riverbed derived from a Government treaty sued for just
compensation for damage to its interests caused by the Government's
navigational improvements to the Arkansas River. The claim for
compensation presupposed, and was understood to presuppose, that
the Government had conveyed to the Tribe its easement to control
navigation; absent that conveyance, the Tribe's property included
no right to be free from the Government's riverbed improvements.
Id., at 704. We found, however, that the treaty said nothing
about conveying the Government's navigational easement, see
id., at 706, which we saw as an aspect of sovereignty. This,
we said, could be "'surrendered [only] in unmistakable terms,'"
id., at 707 (quoting
Bowen, supra, at 52), if indeed
it could be waived at all.
Merrion, Bowen, and
Cherokee Nation thus announce
no new rule distinct from the canon of construction adopted in
Providence Bank and
Charles River Bridge; their
collective holding is that a contract with a sovereign government
will not be read to include an unstated term exempting the other
contracting party from the application of a subsequent sovereign
act (including an Act of Congress), nor will an ambiguous term of a
grant or contract be construed as a conveyance or surrender of
sovereign power. The cases extending back into the 19th century
thus stand for a rule that applies when the Government is subject
either to a claim that its contract has surrendered a sovereign
power22
(e. g., to tax or
22 "Sovereign power" as used here must be understood as a power
that could otherwise affect the Government's obligation under the
contract. The Government could not, for example, abrogate one of
its contracts by a statute abrogating the legal enforceability of
that contract, Government contracts of a class including that one,
or simply all Government con-
879
control navigation), or to a claim that cannot be recognized
without creating an exemption from the exercise of such a power
(e. g., the equivalent of exemption from Social Security
obligations). The application of the doctrine thus turns on whether
enforcement of the contractual obligation alleged would block the
exercise of a sovereign power of the Government.
Since the criterion looks to the effect of a contract's
enforcement, the particular remedy sought is not dispositive and
the doctrine is not rendered inapplicable by a request for damages,
as distinct from specific performance. The respondents in
Cherokee Nation sought nothing beyond damages, but the case
still turned on the unmistakability doctrine because there could be
no claim to harm unless the right to be free of the sovereign power
to control navigation had been conveyed away by the Government.23
So, too, in
Bowen: the sole relief sought was dollars and
cents, but the award of damages as requested would have been
the
tracts. No such legislation would provide the Government with a
defense under the sovereign acts doctrine, see
infra, at
891-899.
23 The Government's right to take the Tribe's property upon
payment of compensation, of course, did not depend upon the
navigational servitude; where it applies, however, the navigational
easement generally obviates the obligation to pay compensation at
all. See,
e. g., United States v.
Kansas
City Life Ins. Co., 339 U. S. 799, 808 (1950)
("When the Government exercises [the navigational] servitude, it is
exercising its paramount power in the interest of navigation,
rather than taking the private property of anyone");
Scranton v.
Wheeler, 179 U. S. 141, 163 (1900)
("Whatever the nature of the interest of a riparian owner in the
submerged lands in front of his upland bordering on a public
navigable water, his title is not as full and complete as his title
to fast land which has no direct connection with the navigation of
such water. It is a qualified title ... to be held at all times
subordinate to such use of the submerged lands and of the waters
flowing over them as may be consistent with or demanded by the
public right of navigation"). Because an order to pay compensation
would have placed the Government in the same position as if the
navigational easement had been surrendered altogether, the holding
of
Cherokee Nation is on all fours with the approach we
describe today.
880
Opinion of SOUTER, J.
equivalent of exemption from the terms of the subsequent
statute.
The application of the doctrine will therefore differ according
to the different kinds of obligations the Government may assume and
the consequences of enforcing them. At one end of the wide spectrum
are claims for enforcement of contractual obligations that could
not be recognized without effectively limiting sovereign authority,
such as a claim for rebate under an agreement for a tax exemption.
Granting a rebate, like enjoining enforcement, would simply block
the exercise of the taxing power, cf.
Bowen, 477 U. S., at
51, and the unmistakability doctrine would have to be satisfied.24
At the other end are contracts, say, to buy food for the army; no
sovereign power is limited by the Government's promise to purchase
and a claim for damages implies no such limitation. That is why no
one would seriously contend that enforcement of humdrum supply
contracts might be subject to the unmistakability doctrine. Between
these extremes lies an enormous variety of contracts including
those under which performance will require exercise (or not) of a
power peculiar to the Government. So long as such a contract is
reasonably construed to include a risk-shifting component that may
be enforced without effectively barring the exercise of that power,
the enforcement of the risk allocation raises nothing for the
unmistakability doctrine to guard against, and there is no reason
to apply it.
24 The dissent is mistaken in suggesting there is question
begging in speaking of what a Government contract provides without
first applying the unmistakability doctrine, see
post, at
929. A contract may reasonably be read under normal rules of
construction to contain a provision that does not satisfy the more
demanding standard of unmistakable clarity. If an alleged term
could not be discovered under normal standards, there would be no
need for an unmistakability doctrine. It would, of course, make
good sense to apply the unmistakability rule if it was clear from
the start that a contract plaintiff could not obtain the relief
sought without effectively barring exercise of a sovereign power,
as in the example of the promisee of the tax exemption who claims a
rebate.
881
The Government argues that enforcement of the contracts in this
case would implicate the unmistakability principle, with the
consequence that
Merrion, Bowen, and
Cherokee Nation
are good authorities for rejecting respondents' claims. The
Government's position is mistaken, however, for the complementary
reasons that the contracts have not been construed as binding the
Government's exercise of authority to modify banking regulation or
of any other sovereign power, and there has been no demonstration
that awarding damages for breach would be tantamount to any such
limitation.
As construed by each of the courts that considered these
contracts before they reached us, the agreements do not purport to
bind the Congress from enacting regulatory measures, and
respondents do not ask the courts to infer from silence any such
limit on sovereign power as would violate the holdings of
Merrion and
Cherokee Nation. The contracts have been
read as solely risk-shifting agreements and respondents seek
nothing more than the benefit of promises by the Government to
insure them against any losses arising from future regulatory
change. They seek no injunction against application of the law to
them, as the plaintiffs did in
Bowen and
Merrion, cf.
Reichelderfer v.
Quinn, 287 U. S. 315 (1932), and
they acknowledge that the Bank Board and FSLIC could not bind
Congress (and possibly could not even bind their future selves) not
to change regulatory policy.
Nor do the damages respondents seek amount to exemption from the
new law, in the manner of the compensation sought in
Bowen,
see 477 U. S., at 51. Once general jurisdiction to make an award
against the Government is conceded, a requirement to pay money
supposes no surrender of sovereign power by a sovereign with the
power to contract. See,
e. g., Amino Bros. Co.
v.
United States, 178 Ct. Cl. 515, 525,
372 F.2d
485, 491 ("The Government cannot make a binding contract that
it will not exercise a sovereign power, but it can agree in a
contract that if it does so, it will pay the other
882
Opinion of SOUTER, J.
contracting party the amount by which its costs are increased by
the Government's sovereign act"), cert. denied, 389 U. S. 846
(1967).25 Even if respondents were asking that the Government be
required to make up any capital deficiency arising from the
exclusion of goodwill and capital credits from the relevant
calculations, such relief would hardly amount to an exemption from
the capital requirements of FIRREA; after all, Glendale (the only
respondent thrift still in operation) would still be required to
maintain adequate tangible capital reserves under FIRREA, and the
purpose of the statute, the protection of the insurance fund, would
be served. Nor would such a damages award deprive the Government of
money it would otherwise be entitled to receive (as a tax rebate
would), since the capital require-
25 See also
Hughes Communications Galaxy, Inc. v.
United States, 998 F. 2d, at 958 (finding the
unmistakability doctrine inapplicable to "the question of how
liability for certain contingencies was allocated by the
contract");
Sunswick Corp. v.
United States, 109 Ct.
Cl. 772, 798, 75 F. Supp. 221, 228 ("We know of no reason why the
Government may not by the terms of its contract bind itself for the
consequences of some act on its behalf which, but for the contract,
would be nonactionable as an act of the sovereign. As shown in
United States v.
Bostwick, 94 U. S. 53, 69 [(1877)],
the liability of the Government in such circumstances rests upon
the contract and not upon the act of the Government in its
sovereign capacity"), cert. denied, 334 U. S. 827 (1948); see
generally Eule, Temporal Limits on the Legislative Mandate:
Entrenchment and Retroactivity, 1987 Am. Bar Found. Research J.
379, 424 (observing that limiting the Government's obligation to
"compensating for the financial losses its repudiations engender
... affords the current legislature the freedom to respond to
constituents' needs, while at the same time protecting those whose
contractual interests are impaired"); Note, A Procedural Approach
to the Contract Clause, 93 Yale L. J. 918, 928-929 (1984) ("A
damage remedy is superior to an injunction because damages provide
the states with the flexibility to impair contracts retroactively
when the benefits exceed the costs. So long as the victims of
contract impairments are made whole through compensation, there is
little reason to grant those victims an injunctive remedy").
883
ments of FIRREA govern only the allocation of resources to a
thrift and require no payments to the Government at all.26
We recognize, of course, that while agreements to insure private
parties against the costs of subsequent regulatory change do not
directly impede the exercise of sovereign power, they may
indirectly deter needed governmental regulation by raising its
costs. But all regulations have their costs, and Congress itself
expressed a willingness to bear the costs at issue here when it
authorized FSLIC to "guarantee [acquiring thrifts] against loss"
that might occur as a result of a supervisory merger. 12 U. S. C. §
1729(f)(2) (1988 ed.) (repealed 1989). Just as we have long
recognized that the Constitution "'bar[s] Government from forcing
some people alone to bear public burdens which, in all fairness and
justice, should be borne by the public as a whole,'"
Dolan
v.
City of Tigard, 512 U. S. 374, 384 (1994)
(quoting
Armstrong v.
United States, 364 U. S. 40, 49 (1960)),
so we must reject the suggestion that the Government may simply
shift costs of legislation onto its contractual partners who are
adversely affected by the change in the law, when the Government
has assumed the risk of such change.
The Government's position would not only thus represent a
conceptual expansion of the unmistakability doctrine beyond its
historical and practical warrant, but would place the doctrine at
odds with the Government's own long-run interest as a reliable
contracting partner in the myriad workaday transaction of its
agencies. Consider the procurement con-
26 This point underscores the likelihood that damages awards
will have the same effect as an injunction only in cases, like
Bowen, where a private party seeks the return of payments to
the Government. The classic examples, of course, are tax cases like
St. Louis v.
United Railways Co., 210 U. S. 266
(1908). Because a request for rebate damages in that case would
effectively have exempted the plaintiffs from the law by forcing
the reimbursement of their tax payments, the dissent is quite wrong
to suggest, see
post, at 928-929, that the plaintiffs could
have altered the outcome by pleading their case differently.
884
Opinion of SOUTER, J.
tracts that can be affected by congressional or executive scale
backs in federal regulatory or welfare activity; or contracts to
substitute private service providers for the Government, which
could be affected by a change in the official philosophy on
privatization; or all the contracts to dispose of federal property,
surplus or otherwise. If these contracts are made in reliance on
the law of contract and without specific provision for default
mechanisms,27 should all the private contractors be denied a remedy
in damages unless they satisfy the unmistakability doctrine? The
answer is obviously no because neither constitutional avoidance nor
any apparent need to protect the Government from the consequences
of standard operations could conceivably justify applying the
doctrine. Injecting the opportunity for unmistakability litigation
into every common contract action would, however, produce the
untoward result of compromising the Government's practical capacity
to make contracts, which we have held to be "of the essence of
sovereignty" itself.
United States v.
Bekins,
304 U. S. 27,
51-52 (1938).28 From a practical standpoint, it would make an
inroad on this power, by expanding the Government's opportunities
for contractual abrogation, with the certain result of undermining
the Government's credibility at the bargaining table and increasing
the cost of its engagements. As Justice Brandeis
27 See Posner & Rosenfield, Impossibility and Related
Doctrines in Contract Law: An Economic Analysis, 6 J. Legal Studies
83, 88-89 (1977) (noting that parties generally rely on contract
law "to reduce the costs of contract negotiation by supplying
contract terms that the parties would probably have adopted
explicitly had they negotiated over them").
28 See also
Bowen v.
Public Agencies Opposed to Social
Security Entrapment, 477 U. S., at 52 ("[T]he Federal
Government, as sovereign, has the power to enter contracts that
confer vested rights, and the concomitant duty to honor those
rights ... ");
Perry v.
United States, 294 U. S. 330, 353 (1935)
("[T]he right to make binding obligations is a competence attaching
to sovereignty"); cf. Hart, The Concept of Law, at 145-146 (noting
that the ability to limit a body's future authority is itself one
aspect of sovereignty).
885
recognized, "[p]unctilious fulfillment of contractual
obligations is essential to the maintenance of the credit of public
as well as private debtors."
Lynch v.
United States,
292 U. S., at 580.29
The dissent's only answer to our concern is to recognize that
"Congress may not simply abrogate a statutory provision obligating
performance without breaching the contract and rendering itself
liable for damages."
Post, at 929 (citing
Lynch,
supra, at 580). Yet the only grounds that statement suggests
for distinguishing
Lynch from the present case is that there
the contractual obligation was embodied in a statute. Putting aside
the question why this distinction should make any difference, we
note that the dissent seemingly does not deny that its view would
apply the unmistakability doctrine to the vast majority of
governmental contracts, which would be subject to abrogation
arguments based on subsequent sovereign acts. Indeed, the dissent
goes so far as to argue that our conclusion that damages are
available for breach even where the parties did not specify a
remedy in the contract depends upon "reading of additional terms
into the contract."
Post, at 930. That, of course, is not
the law; damages are always the default remedy for breach of
contract.30 And we suspect that most Government contractors would
be quite surprised by the dissent's conclusion that, where they
have failed to require an express provision that
29 See also Logue, Tax Transitions, Opportunistic Retroactivity,
and the Benefits of Government Precommitment, 94 Mich. L. Rev.
1129, 1146 (1996) ("If we allowed the government to break its
contractual promises without having to pay compensation, such a
policy would come at a high cost in terms of increased default
premiums in future government contracts and increased
disenchantment with the government generally").
30 See,
e. g., Restatement (Second) of Contracts §
346, Comment
a (1981) ("Every breach of contract
gives the injured party a right to damages against the party in
breach" unless "[t]he parties ... by agreement vary the rules"); 3
E. Farnsworth, Contracts § 12.8, p. 185 (1990) ("The award of
damages is the common form of relief for breach of contract.
Virtually any breach gives the injured party a claim for
damages").
886
Opinion of SOUTER, J.
damages will be available for breach, that remedy must be
"implied in law" and therefore unavailable under the Tucker Act,
ibid.
Nor can the dissenting view be confined to those contracts that
are "regulatory" in nature. Such a distinction would raise enormous
analytical difficulties; one could ask in this case whether the
Government as contractor was regulating or insuring. The dissent
understandably does not advocate such a distinction, but its
failure to advance any limiting principle at all would effectively
compromise the Government's capacity as a reliable, straightforward
contractor whenever the subject matter of a contract might be
subject to subsequent regulation, which is most if not all of the
time.31 Since the facts of the present case demonstrate that the
Government may wish to further its regulatory goals through
contract, we are unwilling to adopt any rule of construction that
would weaken the Government's capacity to do business by converting
every contract it makes into an arena for unmistakability
litigation.
In any event, we think the dissent goes fundamentally wrong when
it concludes that "the issue of remedy for ... breach" can arise
only "[i]f the sovereign did surrender its power unequivocally."
Post, at 929. This view ignores the
31 The dissent justifies its all-devouring view of
unmistakability not by articulating any limit, but simply by
reminding us that" '[m]en must turn square corners when they deal
with the Government.'''
Post, at 937 (quoting
Rock
Island, A. &
L. R. Co. v.
United States,
254 U. S. 141,
143 (1920) (Holmes, J.)). We have also recognized, however, that"
'[i]t is no less good morals and good law that the Government
should turn square corners in dealing with the people than that the
people should turn square corners in dealing with their
government.'''
Heckler v.
Community Health Services of
Crawford Cty., Inc., 467 U. S. 51, 61, n. 13
(1984) (quoting
St. Regis Paper Co. v.
United States,
368 U. S. 208,
229 (1961) (Black, J., dissenting). See also
Federal Crop Ins.
Corp. v.
Merrill, 332 U. S. 380, 387-388
(1947) (Jackson, J., dissenting) ("It is very well to say that
those who deal with the Government should turn square corners. But
there is no reason why the square corners should constitute a
one-way street").
887
other, less remarkable possibility actually found by both courts
that construed these contracts: that the Government agreed to do
something that did not implicate its sovereign powers at all, that
is, to indemnify its contracting partners against tinanciallosses
arising from regulatory change. We accordingly hold that the
Federal Circuit correctly refused to apply the unmistakability
doctrine here. See 64 F. 3d, at 1548. There being no need for an
unmistakably clear "second promise" not to change the capital
requirements, it is sufficient that the Government undertook an
obligation that it subsequently found itself unable to perform.
This conclusion does not, of course, foreclose the assertion of a
defense that the contracts were ultra vires or that the
Government's obligation should be discharged under the common-law
doctrine of impossibility, see
infra, at 888-891, 904-910,
but nothing in the nature of the contracts themselves raises a bar
to respondents' claims for breach.32
32JUSTICE SCALIA offers his own theory of unmistakability, see
post, at 919-922, which would apply in a wide range of cases
and so create some tension with the general principle that the
Government is ordinarily treated just like a private party in its
contractual dealings, see,
e. g., Perry v.
United
States, 294 U. S., at 352, but which would be satisfied by an
inference of fact and therefore offer a only a low barrier to
litigation of constitutional issues if a party should, in fact,
prove a governmental promise not to change the law. JUSTICE SCALIA
seeks to minimize the latter concern by quoting Holmes's
pronouncement on damages as the exclusive remedy at law for breach
of contract, see
post, at 919-920, but this ignores the
availability of specific performance in a nontrivial number of
cases, see,
e. g., Restatement (Second) of Contracts
§§ 357-359, including the Contract Clause cases in which the
unmistakability doctrine itself originated. See,
e. g.,
Carter v.
Greenhow, 114 U. S. 317, 322 (1885)
(stating that "the only right secured" by the Contract Clause is
"to have a judicial determination, declaring the nullity of the
attempt to impair [the contract's] obligation"); Note, Takings Law
and the Contract Clause: A Takings Law Approach to Legislative
Modifications of Public Contracts, 36 Stan. L. Rev. 1447, 1462
(1984) (suggesting that "analysis under the contract clause is
limited to declaring the statute unconstitutional. The provision
does not authorize the courts to award damages in lieu of requiring
the state to adhere to the original terms of the contract"); cf. C.
Fried, Contract as Promise 117-
888
Opinion of SOUTER, J.
B
The answer to the Government's unmistakability argument also
meets its two related contentions on the score of ultra vires: that
the Bank Board and FSLIC had no authority to bargain away
Congress's power to change the law in the future, and that we
should in any event find no such authority conferred without an
express delegation to that effect. The first of these positions
rests on the reserved powers doctrine, developed in the course of
litigating claims that States had violated the Contract Clause. See
supra, at 874. It holds that a state government may not
contract away "an essential attribute of its sovereignty,"
United States Trust, 431 U. S., at 23, with the classic
example of its limitation on the scope of the Contract Clause being
found in
Stone v.
Mississippi, 101 U. S. 814 (1880).
There a corporation bargained for and received a state legislative
charter to conduct lotteries, only to have them outlawed by statute
a year later. This Court rejected the argument that the charter
immunized the corporation from the operation of the statute,
holding that "the legislature cannot bargain away the police power
of a State."
Id., at 817.33
The Government says that "[t]he logic of the doctrine ...
applies equally to contracts alleged to have been made by the
federal government." Brief for United States 38. This
118 (1981) (arguing that "Holmes's celebrated dictum ... goes
too far, is too simple"). Finally, we have no need to consider the
close relationship that JUSTICE SCALIA sees between the
unmistakability and sovereign acts doctrines, see
post, at
923-924, because, even considered separately, neither one favors
the Government in this case.
33 See also
Atlantic Coast Line R. Co. v.
Goldsboro, 232
U. S. 548, 558 (1914) ("[T]he power of the State to establish
all regulations that are reasonably necessary to secure the health,
safety, good order, comfort, or general welfare of the community
... can neither be abdicated nor bargained away, and is inalienable
even by express grant");
West River Bridge Co. v.
Dix, 6 How. 507 (1848) (State's contracts do not relinquish
its eminent domain power).
889
may be so but is also beside the point, for the reason that the
Government's ability to set capital requirements is not limited by
the Bank Board's and FSLIC's promises to make good any losses
arising from subsequent regulatory changes. See
supra, at
882-883. The answer to the Government's contention that the State
cannot barter away certain elements of its sovereign power is that
a contract to adjust the risk of subsequent legislative change does
not strip the Government of its legislative sovereignty.34
The same response answers the Government's demand for express
delegation of any purported authority to fetter the exercise of
sovereign power. It is true, of course, that in
Home
Telephone &
Telegraph Co. v.
Los Angeles, 211
U. S., at 273, we said that "[t]he surrender, by contract, of a
power of government, though in certain well-defined cases it may be
made by legislative authority, is a very grave act, and the
surrender itself, as well as the authority to make it, must be
closely scrutinized." Hence, where "a contract has the effect of
extinguishing
pro tanto an undoubted power of government,"
we have insisted that "both [the contract's] existence and the
authority to make it must clearly and unmistakably appear, and all
doubts must be resolved in favor of the continuance of the power."
Ibid. But
Home Telephone &
Telegraph
simply has no application to the pres-
34 To the extent that JUSTICE SCALIA finds the reserved powers
doctrine inapplicable because "the private party to the contract
does not seek to stay the exercise of sovereign authority, but
merely requests damages for breach of contract,"
post, at
923, he appears to adopt a distinction between contracts of
indemnity and contracts not to change the law similar to the
unmistakability analysis he rejects. He also suggests that the
present case falls outside the "core governmental powers" that
cannot be surrendered under the reserved powers doctrine, but this
suggestion is inconsistent with our precedents. See
Stone v.
Mississippi, 101 U. S. 814, 817 (1880)
("[T]he legislature cannot bargain away the police power of a
State");
Veix v.
Sixth Ward Building &
Loan
Assn. of Newark, 310 U. S. 32,38 (1940)
(recognizing that thrift regulation is within the police
power).
890
Opinion of SOUTER, J.
ent case, because there were no contracts to surrender the
Government's sovereign power to regulate.35
There is no question, conversely, that the Bank Board and FSLIC
had ample statutory authority to do what the Court of Federal
Claims and the Federal Circuit found they did do, that is, promise
to permit respondents to count supervisory goodwill and capital
credits toward regulatory capital and to pay respondents' damages
if that performance became impossible. The organic statute creating
FSLIC as an arm of the Bank Board, 12 U. S. C. § 1725(c) (1988 ed.)
(repealed 1989), generally empowered it "[t]o make contracts,"36
and § 1729(f)(2), enacted in 1978, delegated more specific powers
in the context of supervisory mergers:
"Whenever an insured institution is in default or, in the
judgment of the Corporation, is in danger of default, the
Corporation may, in order to facilitate a merger or consolidation
of such insured institution with another insured institution ...
guarantee such other insured institution against loss by reason of
its merging or consolidating with or assuming the liabilities and
purchasing the assets of such insured institution in or in danger
of default." 12 U. S. C. § 1729(f)(2) (1976 ed., Supp. V) (repealed
1989).
Nor is there any reason to suppose that the breadth of this
authority was not meant to extend to contracts governing treatment
of regulatory capital. Congress specifically rec-
35 See Speidel, Implied Duties of Cooperation and the Defense of
Sovereign Acts in Government Contracts, 51 Geo. L. J. 516, 542
(1963) ("[W]hile the contracting officers of Agency X cannot
guarantee that the United States will not perform future acts of
effective government, they can agree to compensate the contractor
for damages resulting from justifiable acts of the United States in
its 'sovereign capacity'" (footnotes omitted)).
36 See also 1 R. Nash & J. Cibinic, Federal Procurement Law
5 (3d ed. 1977) ("The authority of the executive to use contracts
in carrying out authorized programs is ... generally assumed in the
absence of express statutory prohibitions or limitations").
891
ognized FSLIC's authority to permit thrifts to count goodwill
toward capital requirements when it modified the N ational Housing
Act in 1987:
"No provision of this section shall affect the authority of the
[FSLIC] to authorize insured institutions to utilize subordinated
debt and goodwill in meeting reserve and other regulatory
requirements." 12 U. S. C. § 1730h(d) (1988 ed.) (repealed
1989).
See also S. Rep. No. 100-19, p. 55 (1987) ("It is expected ...
that the [Bank Board] will retain its own authority to determine
... the components and level of capital to be required of
FSLIC-insured institutions");
NLRB v.
Bell Aerospace
Co., 416 U. S.
267, 275 (1974) ("[S]ubsequent legislation declaring the intent
of an earlier statute is entitled to significant weight"). There is
no serious question that FSLIC (and the Bank Board acting through
it) was authorized to make the contracts in issue.
IV
The Government's final line of defense is the sovereign acts
doctrine, to the effect that" '[w]hatever acts the government may
do, be they legislative or executive, so long as they be public and
general, cannot be deemed specially to alter, modify, obstruct or
violate the particular contracts into which it enters with private
persons.'"
Horowitz v.
United States, 267 U. S., at
461 (quoting
Jones v.
United States, 1 Ct. Cl. 383,
384 (1865)). Because FIRREA's alteration of the regulatory capital
requirements was a "public and general act," the Government says,
that act could not amount to a breach of the Government's contract
with respondents.
The Government's position cannot prevail, however, for two
independent reasons. The facts of this case do not warrant
application of the doctrine, and even if that were otherwise the
doctrine would not suffice to excuse liability under this
governmental contract allocating risks of regulatory change in a
highly regulated industry.
892
Opinion of SOUTER, J.
In
Horowitz, the plaintiff sued to recover damages for
breach of a contract to purchase silk from the Ordnance Department.
The agreement included a promise by the Department to ship the silk
within a certain time, although the manner of shipment does not
appear to have been a subject of the contract. Shipment was delayed
because the United States Railroad Administration placed an embargo
on shipments of silk by freight, and by the time the silk reached
Horowitz the price had fallen, rendering the deal unprofitable.
This Court barred any damages award for the delay, noting that
"[i]t has long been held by the Court of Claims that the United
States when sued as a contractor cannot be held liable for an
obstruction to the performance of the particular contract resulting
from its public and general acts as a sovereign." 267 U. S., at
461. This statement was not, however, meant to be read as broadly
as the Government urges, and the key to its proper scope is found
in that portion of our opinion explaining that the essential point
was to put the Government in the same position that it would have
enjoyed as a private contractor:
"'The two characters which the government possesses as a
contractor and as a sovereign cannot be thus fused; nor can the
United States while sued in the one character be made liable in
damages for their acts done in the other. Whatever acts the
government may do, be they legislative or executive, so long as
they be public and general, cannot be deemed specially to alter,
modify, obstruct or violate the particular contracts into which it
enters with private persons .... In this court the United States
appear simply as contractors; and they are to be held liable only
within the same limits that any other defendant would be in any
other court. Though their sovereign acts performed for the general
good may work injury to some private contractors, such parties gain
nothing by having the United States as their defend-
893
ants.'" Ibid. (quoting Jones v. United States, supra, at
384).
The early Court of Claims cases upon which
Horowitz
relied anticipated the Court's emphasis on the Government's dual
and distinguishable capacities and on the need to treat the
Government-as-contractor the same as a private party. In
Deming v.
United States, 1 Ct. Cl. 190 (1865), the
Court of Claims rejected a suit by a supplier of army rations whose
costs increased as a result of Congress's passage of the Legal
Tender Act. The
Deming court thought it "grave error" to
suppose that "general enactments of Congress are to be construed as
evasions of [the plaintiff's] particular contract."
Id., at
191. "The United States as a contractor are not responsible for the
United States as a lawgiver," the court said. "In this court the
United States can be held to no greater liability than other
contractors in other courts."
Ibid. Similarly,
Jones
v.
United States, supra, refused a suit by surveyors
employed by the Commissioner of Indian Affairs, whose performance
had been hindered by the United States's withdrawal of troops from
Indian country. "The United States as a contractor," the Claims
Court concluded, "cannot be held liable directly or indirectly for
the public acts of the United States as a sovereign."
Id.,
at 385.
The Government argues that "[t]he relevant question [under these
cases] is whether the impact [of governmental action] ... is caused
by a law enacted to govern regulatory policy and to advance the
general welfare." Brief for United States 45. This understanding
assumes that the dual characters of Government as contractor and
legislator are never "fused" (within the meaning of
Horowitz) so long as the object of the statute is regulatory
and meant to accomplish some public good. That is, on the
Government's reading, a regulatory object is proof against treating
the legislature as having acted to avoid the Government's
contractual obligations, in which event the sovereign acts defense
would
894
Opinion of SOUTER, J.
not be applicable. But the Government's position is open to
serious objection.
As an initial matter, we have already expressed our doubt that a
workable line can be drawn between the Government's "regulatory"
and "nonregulatory" capacities. In the present case, the Government
chose to regulate capital reserves to protect FSLIC's insurance
fund, much as any insurer might impose restrictions on an insured
as a condition of the policy. The regulation thus protected the
Government in its capacity analogous to a private insurer, the same
capacity in which it entered into supervisory merger agreements to
convert some of its financial insurance obligations into
responsibilities of private entrepreneurs. In this respect, the
supervisory mergers bear some analogy to private contracts for
reinsurance.37 On the other hand, there is no question that thrift
regulation is, in fact, regulation, and that both the supervisory
mergers of the 1980's and the subsequent passage of FIRREA were
meant to advance a broader public interest. The inescapable
conclusion from all of this is that the Government's "regulatory"
and "nonregulatory" capacities were fused in the instances under
consideration, and we suspect that such fusion will be so common in
the modern regulatory state as to leave a criterion of "regulation"
without much use in defining the scope of the sovereign acts
doctrine.38
37 Nor is there any substance to the claim that these were
contracts that only the Government could make. The regulatory
capital or net worth requirements at issue applied only to thrifts
choosing to carry federal deposit insurance, see Federal Home Loan
Bank System, A Guide to the Federal Home Loan Bank System 69 (5th
ed. 1987), and institutions choosing to self-insure or to seek
private insurance elsewhere would have been free to make similar
agreements with private insurers.
38 Moreover, if the dissent were correct that the sovereign acts
doctrine permits the Government to abrogate its contractual
commitments in "regulatory" cases even where it simply sought to
avoid contracts it had come to regret, then the Government's
sovereign contracting power would be of very little use in this
broad sphere of public activity. We rejected a
895
An even more serious objection is that allowing the Government
to avoid contractual liability merely by passing any "regulatory
statute" would flout the general principle that, "[w]hen the United
States enters into contract relations, its rights and duties
therein are governed generally by the law applicable to contracts
between private individuals."
Lynch v.
United States,
292 U. S., at 579.39 Careful attention to the cases shows that the
sovereign acts doctrine was meant to serve this principle, not
undermine it. In
Horowitz, for example, if the defendant had
been a private shipper, it would have been entitled to assert the
common-law defense of impossibility of performance against
Horowitz's claim for breach. Although that defense is traditionally
unavailable where the barrier to performance arises from the act of
the party seeking discharge, see Restatement (Second) of Contracts
§ 261; 2 E. Farnsworth, Contracts § 9.6, p. 551 (1990); cf.
W R.
Grace &
Co. v.
Rubber Workers, 461 U. S. 757, 767-768,
n. 10 (1983),
Horowitz held that the "public and general"
acts of the sovereign are not
virtually identical argument in
Perry v.
United
States, 294 U. S.
330 (1935), in which Congress had passed a resolution
regulating the payment of obligations in gold. We held that the law
could not be applied to the Government's own obligations, noting
that "the right to make binding obligations is a competence
attaching to sovereignty."
Id., at 353.
39 See also
Clearfield Trust Co. v.
United States,
318 U. S. 363,
369 (1943) (" 'The United States does business on business
terms''') (quoting
United States v.
National Exchange
Bank of Baltimore, 270 U. S. 527, 534
(1926));
Perry v.
United States, supra, at 352 (1935)
("When the United States, with constitutional authority, makes
contracts, it has rights and incurs responsibilities similar to
those of individuals who are parties to such instruments. There is
no difference except that the United States cannot be sued without
its consent" (citation omitted));
United States v.
Bostwick, 94 U.
S. 53, 66 (1877) ("The United States, when they contract with
their citizens, are controlled by the same laws that govern the
citizen in that behalf");
Cooke v.
United States,
91 U. S. 389, 398
(1875) (explaining that when the United States "comes down from its
position of sovereignty, and enters the domain of commerce, it
submits itself to the same laws that govern individuals
there").
896
Opinion of SOUTER, J.
attributable to the Government as contractor so as to bar the
Government's right to discharge. The sovereign acts doctrine thus
balances the Government's need for freedom to legislate with its
obligation to honor its contracts by asking whether the sovereign
act is properly attributable to the Government as contractor. If
the answer is no, the Government's defense to liability depends on
the answer to the further question, whether that act would
otherwise release the Government from liability under ordinary
principles of contract law.40 Neither question can be answered in
the Government's favor here.
A
If the Government is to be treated like other contractors, some
line has to be drawn in situations like the one before us between
regulatory legislation that is relatively free of Government
self-interest and therefore cognizable for the purpose of a legal
impossibility defense and, on the other hand, statutes tainted by a
governmental object of self-relief. Such an object is not
necessarily inconsistent with a public purpose, of course, and when
we speak of governmental "self-interest," we simply mean to
identify instances in which the Government seeks to shift the costs
of meeting its legitimate public responsibilities to private
parties. Cf.
Armstrong v.
United States, 364 U. S.,
at 49 (The Government may not "forc[e] some people alone to bear
public burdens
40 See
Jones v.
United States, 1 Ct. Cl. 383, 385
(1865) (''Wherever the public and private acts of the government
seem to commingle, a citizen or corporate body must by supposition
be substituted in its place, and then the question be determined
whether the action will lie against the supposed defendant");
O'Neill v.
United States, 231 Ct. Cl. 823, 826 (1982)
(sovereign acts doctrine applies where, "[w]ere [the] contracts
exclusively between private parties, the party hurt by such
governing action could not claim compensation from the other party
for the governing action"). The dissent ignores these statements
(including the statement from
Jones, from which case
Horowitz drew its reasoning literally verbatim), when it
says,
post, at 931, that the sovereign acts cases do not
emphasize the need to treat the government-as-contractor the same
as a private party.
897
which ... should be borne by the public as a whole"). Hence,
while the Government might legitimately conclude that a given
contractual commitment was no longer in the public interest, a
government seeking relief from such commitments through legislation
would obviously not be in a position comparable to that of the
private contractor who willy-nilly was barred by law from
performance. There would be, then, good reason in such circumstance
to find the regulatory and contractual characters of the Government
fused together, in
Horowitz's terms, so that the Government
should not have the benefit of the defense.41
Horowitz's criterion of "public and general act" thus
reflects the traditional "rule of law" assumption that generality
in the terms by which the use of power is authorized will tend to
guard against its misuse to burden or benefit the few
unjustifiably.42 See,
e. g., Hurtado v.
California, 110 U. S. 516, 535-536
(1884) ("Law ... must be not a special rule for a particular person
or a particular case, but ... '[t]he general law ... ' so 'that
every citizen shall hold his life, liberty, property and immunities
under the protection of the general
41 Our Contract Clause cases have demonstrated a similar concern
with governmental self-interest by recognizing that "complete
deference to a legislative assessment of reasonableness and
necessity is not appropriate because the State's self-interest is
at stake."
United States Trust Co. of N Y. v.
New
Jersey, 431 U. S.
1, 26 (1977); see also
Energy Reserves Group, Inc. v.
Kansas Power &
Light Co., 459 U. S. 400, 412-413,
and n. 14 (1983) (noting that a stricter level of scrutiny applies
under the Contract Clause when a State alters its own contractual
obligations); cf.
Perry, supra, at 350-351 (drawing a "clear
distinction" between Congress's power over private contracts and
"the power of the Congress to alter or repudiate the substance of
its own engagements").
42 The generality requirement will almost always be met where,
as in
Deming, the governmental action "bears upon [the
Government's contract] as it bears upon all similar contracts
between citizens."
Deming v.
United States, 1 Ct. Cl.
190, 191 (1865).
Deming is less helpful, however, in cases
where, as here, the public contracts at issue have no obvious
private analogs.
898
Opinion of SOUTER, J.
rules which govern society'" (citation omitted)).43 Hence,
governmental action will not be held against the Government for
purposes of the impossibility defense so long as the action's
impact upon public contracts is, as in
Horowitz, merely
incidental to the accomplishment of a broader governmental
objective. See
O'Neill v.
United States, 231 Ct. Cl.
823, 826 (1982) (noting that the sovereign acts doctrine recognizes
that "the Government's actions, otherwise legal, will occasionally
incidentally impair the performance of contracts").44 The greater
the Government's self-interest, however, the more suspect becomes
the claim that its private contracting partners ought to bear the
financial burden of the Government's own improvidence, and where a
substantial part of the impact of the Government's action rendering
performance impossible falls on its own contractual obligations,
the defense will be unavailable. Cf.
Sun Oil Co. v.
United States, 215 Ct. Cl. 716, 768,
572
F.2d 786, 817 (1978) (rejecting sovereign acts defense where
the Secretary of the Interior's actions were "'directed principally
and primarily at plaintiffs' contractual right' ").45
43 The dissent accuses us of transplanting this due process
principle into alien soil, see
post, at 931-932. But this
Court did not even wait until the Term following
Hurtado
before applying its principle of generality to a case that, like
this one, involved the deprivation of property rights. See
Hagar v.
Reclamation Dist. No. 108, 111 U. S. 701, 708
(1884). More importantly, it would be surprising indeed if the
sovereign acts doctrine, resting on the inherent nature of
sovereignty, were not shaped by fundamental principles about how
sovereigns ought to behave.
44 See also Speidel, 51 Geo. L. J., at 539-540 (observing that
"the commonly expressed conditions to the availability of the
sovereign acts defense" are not only that "the act ... must have
been 'public and general,'" but also that "the damage to the
contractor must have been caused indirectly"); cf.
Exxon
Corp. v.
Eagerton, 462 U. S. 176, 191-192
(1983) (distinguishing between direct and incidental impairments
under the Contract Clause).
45 Cf. also
Resolution Trust Corporation v.
Federal
Savings and Loan Insurance Corporation, 25
F.3d 1493, 1501 (CAlO 1994) ("The limits of this immunity [for
sovereign acts] are defined by the extent to which the
899
The dissent would adopt a different rule that the Government's
dual roles of contractor and sovereign may never be treated as
fused, relying upon
Deming's pronouncement that "'[t]he
United States as a contractor are not responsible for the United
States as a lawgiver.'"
Post, at 931 (quoting 1 Ct. Cl., at
191). But that view would simply eliminate the "public and general"
requirement, which presupposes that the Government's capacities
must be treated as fused when the Government acts in a nongeneral
way.
Deming itself twice refers to the "general" quality of
the enactment at issue, 1 Ct. Cl., at 191, and notes that "[t]he
statute bears upon [the governmental contract] as it bears upon all
similar contracts between citizens, and affects it in no other
way."
Ibid. At the other extreme, of course, it is clear
that any benefit at all to the Government will not disqualify an
act as "public and general"; the silk embargo in
Horowitz,
for example, had the incidental effect of releasing the Government
from its contractual obligation to transport Mr. Horowitz's
shipment. Our holding that a governmental act will not be public
and general if it has the substantial effect of releasing the
Government from its contractual obligations strikes a middle course
between these two extremes.46
government's failure to perform is the result of legislation
targeting a class of contracts to which it is a party");
South
Louisiana Grain Services, Inc. v.
United States, 1 Cl.
Ct. 281, 287, n. 6 (1982) (rejecting sovereign acts defense where
the Government agency's actions "were directed specifically at
plaintiff's alleged contract performance"). Despite the dissent's
predictions, the sun is not, in fact, likely to set on the
sovereign acts doctrine. While an increase in regulation by
contract will produce examples of the "fusion" that bars the
defense, we may expect that other sovereign activity will continue
to occasion the sovereign acts defense in cases of incidental
effect.
46 A different intermediate position would be possible, at least
in theory.
One might say that a governmental action was not "public and
general" under
Horowitz if its predominant purpose or effect
was avoidance of the Government's contractual commitments. The
difficulty, however, of ascertaining the relative intended or
resulting impacts on governmental and
900
Opinion of SOUTER, J.
B
In the present case, it is impossible to attribute the
exculpatory "public and general" character to FIRREA. Although we
have not been told the dollar value of the relief the Government
would obtain if insulated from liability under contracts such as
these, the attention given to the regulatory contracts prior to
passage of FIRREA shows that a substantial effect on governmental
contracts is certain. The statute not only had the purpose of
eliminating the very accounting gimmicks that acquiring thrifts had
been promised, but the specific object of abrogating enough of the
acquisition contracts as to make that consequence of the
legislation a focal point of the congressional debate.47 Opponents
of FIRREA's new capital requirements complained that "[i]n its
present form, [FIRREA] would abrogate written agree-
purely private contracts persuades us that this test would prove
very difficult to apply.
47We note that whether or not Congress intended to abrogate
supervisory merger agreements providing that supervisory goodwill
would count toward regulatory capital requirements has been the
subject of extensive litigation in the Courts of Appeals, and that
every Circuit to consider the issue has concluded that Congress did
so intend. See
Transohio Sav. Bank v.
Director, Office of
Thrift Supervision, 967 F.2d
598, 617 (CADC
1992); Carteret Sav. Bank v.
Office of
Thrift Supervision, 963 F.2d
567,
581-582 (CA3 1992);
Security Sav. &
Loan v.
Director, Office of Thrift Supervision,
960 F.2d
1318, 1322
(CA5 1992);
Far West Federal Bank v.
Director, Office of Thrift Supervision, 951 F.2d
1093, 1098
(CA9 1991); Guaranty Financial Services, Inc.
v.
Ryan, 928 F.2d
994, 1006 (CAll
1991); Franklin Federal Sav. Bank v.
Director, Office of Thrift Supervision, 927 F.2d
1332, 1341
(CA6), cert. denied, 502 U. S. 937 (1991);
cf.
Resolution Trust Corporation, supra, at 1502 (observing
that "FIRREA's structure leaves little doubt that Congress well
knew the crippling effects strengthened capital requirements would
have on mergers that relied on supervisory goodwill," but
concluding that Congress sought to mitigate the impact by giving
OTS authority to exempt thrifts until 1991);
Charter Federal
Sav. Bank v.
Office of Thrift Supervision, 976 F.2d
203, 210
(CA4 1992) (accepting the conclusions of the
other Circuits in dictum), cert. denied, 507 U. S. 1004 (1993).
901
ments made by the U. S. government to thrifts that acquired
failing institutions by changing the rules in the middle of the
game." 135 Congo Rec. 12145 (1989) (statement of Rep. Ackerman).
Several Congressmen observed that, "[s]imply put, [Congress] has
reneged on the agreements that the government entered into
concerning supervisory goodwill." House Report, at 498 (additional
views of Reps. Annunzio, Kanjorski, and Flake).48 A similar focus
on the supervisory merger contracts is evident among proponents of
the legislation; Representative Rostenkowski, for example, insisted
that "the Federal Government should be able to change requirements
when they have proven to be disastrous and con-
48 See also House Report, at 534 (additional views of Reps.
Hiler, Ridge, Bartlett, Dreier, McCandless, Saiki, Baker, and
Paxon) ("For the institutions with substantial supervisory
goodwill, the bill radically changes the terms of previously
negotiated transactions");
id., at 507-508 (additional views
of Rep. LaFalce) ("Those institutions which carry intangible assets
on their books do so generally under written agreements they have
entered into with the U. S. government, agreements which generally
state that they cannot be superseded by subsequent regulations");
id., pt. 5, at 27 (additional views of Rep. Hyde)
("[Thrifts] were told that they would be able to carry this
goodwill on their books as capital for substantial periods of time
.... The courts could well construe these agreements as formal
contracts. Now, ... Congress is telling these same thrifts that
they cannot count this goodwill toward meeting the new capital
standards"); 135 Congo Rec. 12063 (1989) (statement of Rep. Crane)
(FIR REA "would require these S&Ls to write off this goodwill
in a scant 5 years. This legislation violates the present
agreements that these institutions made with the Federal
Government"). Although there was less of a focus on the impact of
FIRREA on supervisory goodwill in the Senate, at least two Senators
noted that the new capital requirements would have the effect of
abrogating government contracts. See
id., at 9563 (statement
of Sen. Hatfield) ("The new tangible capital standards in the
legislation specifically exclude supervisory goodwill, and in doing
so effectively abrogate agreements made between the Federal Home
Loan Bank Board, on behalf of the U. S. Government, and certain
healthy thrift institutions");
id., at 18874 (statement of
Sen. D'Amato) (asking "whether any future transactions involving
failed or failing institutions will be possible after this bill
sanctions a wholesale reneging of Federal agency agreements").
902
Opinion of SOUTER, J.
trary to the public interest. The contracts between the savings
and loan owners when they acquired failing institutions in the
early 1980's are not contracts written in stone." 135 Congo Rec.,
at 12077.49
This evidence of intense concern with contracts like the ones
before us suffices to show that FIRREA had the substantial effect
of releasing the Government from its own contractual obligations.
Congress obviously expected FIRREA to have such an effect, and in
the absence of any evidence to the contrary we accept its factual
judgment that this would be so. 50 Nor is Congress's own judgment
neutralized by the fact, emphasized by the Government, that FIRREA
did not formally target particular transactions. Legislation can
almost always be written in a formally gen-
49 See also House Report, at 545 (Supplemental Views of Reps.
Schumer, Morrison, Roukema, Gonzalez, Vento, McMillen, and
Hoagland) ("[A]n overriding public policy would be jeopardized by
the continued adherence to arrangements which were blithely entered
into by the FSLIC"); 135 Congo Rec., at 12062 (statement of Rep.
Gonzalez) ("[I]n blunt terms, the Bank Board and FSLIC insurance
fund managers entered into bad dealsI might even call them
steals");
id., at 11789 (statement of Rep. Saxton) ("In
short[,] goodwill agreements were a mistake and as the saying goes
... 'Two wrongs don't make a right' "). These proponents defeated
two amendments to FIRREA, proposed by Reps. Quillen and Hyde, which
would have given thrifts that had received capital forbearances
from thrift regulators varying degrees of protection from the new
rules. See
Transohio Sav. Bank V.
Director, Office of
Thrift Supervision, supra, at 616617; see also 135 Congo Rec.
12068 (1989) (statement of Rep. Price) ("[T]he proponents of [the
Hyde] amendment say a 'Deal is a Deal' ... But to claim that
Congress can never change a regulator's decision ... in the future
is simply not tenable");
Franklin Federal Sav. Bank V.
Director, Office of Thrift Supervision, supra, at 1340-1341
(reviewing the House debate and concluding that
"[nJobody
expressed the view that FIRREA did not abrogate forbearance
agreements regarding supervisory goodwill" (emphasis in
original)).
50 Despite the claims of the dissent, our test does not turn
upon "some sort of legislative intent,"
post, at 933.
Rather, we view Congress's expectation that the Government's own
obligations would be heavily affected simply as good evidence that
this was, indeed, the case.
903
eral way, and the want of an identified target is not much
security when a measure's impact nonetheless falls substantially
upon the Government's contracting partners. For like reason, it
does not answer the legislative record to insist, as the Government
does, that the congressional focus is irrelevant because the broad
purpose of FIRREA was to "advance the general welfare." Brief for
United States 45. We assume nothing less of all congressional
action, with the result that an intent to benefit the public can no
more serve as a criterion of a "public and general" sovereign act
than its regulatory character can.51 While our limited enquiry into
the background and evolution of the thrift crisis leaves us with
the understanding that Congress acted to protect the public in the
FIRREA legislation, the extent to which this reform relieved the
Government of its own contractual obligations precludes a finding
that the statute is a "public and general" act for purposes of the
sovereign acts defense.52
51 We have, indeed, had to reject a variant of this argument
before. See
Lynch v.
United States, 292 U. S. 571, 580 (1934)
(acknowledging a public need for governmental economy, but holding
that "[t]o abrogate contracts, in the attempt to lessen
governmental expenditure, would be not the practice of economy, but
an act of repudiation"); see also Speidel, 51 Geo. L. J., at 522
(noting that even when "the Government's acts are motivated or
required by public necessity ... [t]he few decisions on point seem
to reject public convenience or necessity as a defense,
particularly where [the Government's action] directly alters the
terms of the contract").
52 The dissent contends that FIR REA must be a "public and
general" act because it "occupies 372 pages in the Statutes at
Large, and under 12 substantive titles contains more than 150
numbered sections."
Post, at 934. But any act of repudiation
can be buried in a larger piece of legislation, and if that is
enough to save it then the Government's contracting power will not
count for much. To the extent that THE CHIEF JUSTICE relies on the
fact that FIRREA's core capital requirements applied to all thrift
institutions, we note that neither he nor the Government has
provided any indication of the relative incidence of the new
statute in requiring capital increases for thrifts subject to
regulatory agreements affecting capital and those not so
subject.
904
Opinion of SOUTER, J.
C
Even if FIRREA were to qualify as "public and general," however,
other fundamental reasons would leave the sovereign acts doctrine
inadequate to excuse the Government's breach of these contracts. As
Horowitz makes clear, that defense simply relieves the
Government as contractor from the traditional blanket rule that a
contracting party may not obtain discharge if its own act rendered
performance impossible. But even if the Government stands in the
place of a private party with respect to "public and general"
sovereign acts, it does not follow that discharge will always be
available, for the common-law doctrine of impossibility imposes
additional requirements before a party may avoid liability for
breach. As the Restatement puts it,
"[w]here, after a contract is made, a party's performance is
made impracticable without his fault by the occurrence of an event
the non-occurrence of which was a basic assumption on which the
contract was made, his duty to render that performance is
discharged, unless the language or the circumstances indicate the
contrary." Restatement (Second) of Contracts § 261.
See also 2 Farnsworth on Contracts § 9.6, at 543-544 (listing
four elements of the impossibility defense). Thus, since the object
of the sovereign acts defense is to place the Government as
contractor on par with a private contractor in the same
circumstances,
Horowitz, 267 U. S., at 461, the Government,
like any other defending party in a contract action, must show that
the passage of the statute rendering its performance impossible was
an event contrary to the basic assumptions on which the parties
agreed, and must ultimately show that the language or circumstances
do not indicate that the Government should be liable in any case.
While we do not say that these conditions can never be satisfied
when the Government contracts with participants in a regulated
industry for particular regulatory treatment, we find that
905
the Government as such a contractor has not satisfied the
conditions for discharge in the present case.
1
For a successful impossibility defense the Government would have
to show that the nonoccurrence of regulatory amendment was a basic
assumption of these contracts. See,
e. g.,
Restatement (Second) of Contracts § 261; 2 Farnsworth,
supra, § 9.6, at 549-550. The premise of this requirement is
that the parties will have bargained with respect to any risks that
are both within their contemplation and central to the substance of
the contract; as Justice Traynor said, "[i]f [the risk] was
foreseeable there should have been provision for it in the
contract, and the absence of such a provision gives rise to the
inference that the risk was assumed."
Lloyd v.
Murphy, 25 Cal. 2d 48, 54, 153 P. 2d 47, 50 (1944).53
That
53 See also
Transatlantic Financing Corp. v.
United
States, 363 F.2d
312, 315 (CADC 1966) (requiring that the contingency rendering
performance impossible be "'something' unexpected");
Companhia
de Navegacao Lloyd Brasiliero v. C. G.
Blake Co., 34
F.2d 616, 619
(CA2 1929) (L. Hand, J.) (asking "how
unexpected at the time [the contract was made] was the event which
prevented performance"); see also
Kel Kim Corp. v.
Central Markets, Inc., 70 N. Y. 2d 900, 902, 524 N. E. 2d
295, 296 (1987) ("[T]he impossibility must be produced by an
unanticipated event that could not have been foreseen or guarded
against in the contract");
Barbarossa & Sons,
Inc. v.
Iten Chevrolet, Inc., 265 N. W. 2d 655, 659
(Minn. 1978) (asking "whether the risk of the given contingency was
so unusual or unforeseen and would have such severe consequences
that to require performance would be to grant the promisee an
advantage for which he could not be said to have bargained in
making the contract");
Mishara Construction Co. v.
Transit-Mixed Concrete Corp., 365 Mass. 122, 129, 310 N. E.
2d 363, 367 (1974) ("The question is ... [w]as the contingency
which developed one which the parties could reasonably be thought
to have foreseen as a real possibility which could affect
performance?");
Krell v.
Henry, 2 K. B. 740,752
(1903) ("The test seems to be whether the event which causes the
impossibility was or might have been anticipated and guarded
against"); 18 W. Jaeger, Williston on Contracts § 1931, p. 8 (3d
ed. 1978) ("The important question is whether an unanticipated
circumstance has made performance of the promise vitally different
from what should reasonably have been
906
Opinion of SOUTER, J.
inference is particularly compelling, where, as here, the
contract provides for particular regulatory treatment (and,
a
fortiori, allocates the risk of regulatory change). Such an
agreement reflects the inescapable recognition that regulated
industries in the modern world do not live under the law of the
Medes and the Persians, and the very fact that such a contract is
made at all is at odds with any assumption of regulatory stasis. In
this particular case, whether or not the reach of the FIRREA
reforms was anticipated by the parties, there is no doubt that some
changes in the regulatory structure governing thrift capital
reserves were both foreseeable and likely when these parties
contracted with the Government, as even the Government agrees. It
says in its brief to this Court that "in light of the frequency
with which federal capital requirements had changed in the past ...
, it would have been unreasonable for Glendale, FSLIC, or the Bank
Board to expect or rely upon the fact that those requirements would
remain unchanged." Brief for United States 26; see also
id.,
at 3, n. 1 (listing the changes).54 The Federal Circuit panel in
this case likewise found that the regulatory capital requirements
"have been the subject of
within the contemplation of both parties when they entered into
the contract. If so, the risk should not fairly be thrown upon the
promisor"). Although foreseeability is generally a relevant, but
not dispositive, factor, see 2 E. Farnsworth, Contracts § 9.6, at
555-556;
Opera Company of Boston, Inc. v.
Wolf Trap
Foundation for the Performing Arts, 817 F.2d
1094, 1101
(CA4 1987), there is no reason to look
further where, as here, the risk was foreseen to be more than
minimally likely, went to the central purpose of the contract, and
could easily have been allocated in a different manner had the
parties chosen to do so, see
id., at 1099-1102; 18 Williston
on Contracts,
supra, § 1953, at 119.
54 The Government confirmed this point at oral argument. When
asked whether FIR REA's tightening of the regulatory capital
standards was "exactly the event that the parties assumed might
happen when they made their contracts," the Government responded,
"Exactly. Congress had changed capital standards many times over
the years." Tr. of Oral Arg. 9.
907
numerous statutory and regulatory changes over the years," and
"changed three times in 1982 alone." 994 F. 2d, at 801.55 Given
these fluctuations, and given the fact that a single modification
of the applicable regulations could, and ultimately did, eliminate
virtually all of the consideration provided by the Government in
these transactions, it would be absurd to say that the
nonoccurrence of a change in the regulatory capital rules was a
basic assumption upon which these contracts were made. See,
e.
g., Moncrief v.
Williston Basin Interstate Pipeline Co.,
880 F. Supp. 1495, 1508 (Wyo.
1995); Vollmar v.
CSX
Transportation, Inc., 705 F. Supp. 1154, 1176 (ED Va. 1989),
aff'd,
898 F.2d
413 (CA4 1990).
2
Finally, any governmental contract that not only deals with
regulatory change but allocates the risk of its occurrence will, by
definition, fail the further condition of a successful
impossibility defense, for it will indeed indicate that the
parties' agreement was not meant to be rendered nugatory by a
change in the regulatory law. See Restatement
55 See,
e. g., Garn-St Germain Depository
Institutions Act of 1982, Pub.
L. 97-320, 96 Stat. 1469 (eliminating any fixed limits to Bank
Board discretion in setting reserve requirements); Depository
Institutions Deregulation and Monetary Control Act of 1980, Pub. L.
96-221, 94 Stat. 132, 160 (conferring discretionary authority on
the Bank Board to set reserve requirements between 3 and 6
percent); 47 Fed. Reg. 3543 (lowering the reserve ratio from 4 to 3
percent);
id., at 31859 (excluding certain "contraasset"
accounts from reserve calculations);
id., at 52961
(permitting thrifts to count appraised equity capital toward
reserves); see also
Charter Federal Sav. Bank v.
Office
of Thrift Supervision, 976 F. 2d, at 212 (noting that because
"[c]apital requirements have been an evolving part of the
regulatory scheme since its inception," the Bank Board "would have
expected changes in statutory requirements, including capital
requirements");
Carteret Sav. Bank v.
Office of Thrift
Supervision, 963 F. 2d, at 581 (observing that "[i]n the
massively regulated banking industry, ... the rules of the game
change with some regularity").
908
Opinion of SOUTER, J.
(Second) of Contracts § 261 (no impossibility defense where the
"language or the circumstances" indicate allocation of the risk to
the party seeking discharge).56 The mere fact that the Government's
contracting agencies (like the Bank Board and FSLIC) could not
themselves preclude Congress from changing the regulatory rules
does not, of course, stand in the way of concluding that those
agencies assumed the risk of such change, for determining the
consequences of legal change was the point of the agreements. It
is, after all, not uncommon for a contracting party to assume the
risk of an event he cannot control, 57 even when that party is an
agent of the Government. As the Federal Circuit has recognized,
"[Government] contracts routinely include provisions shifting
financial responsibility to the Government for events which might
occur in the future. That some of these events may be triggered by
sovereign government action does not render the relevant
contractual provisions any less binding than those which
contemplate third party acts, inclement weather
56 See also
Hughes Communications Galaxy, Inc. v.
United States, 998 F. 2d, at 957-959 (rejecting sovereign
acts defense where contract was interpreted as expressly allocating
the risk of change in governmental policy); Posner &
Rosenfield, 6 J. Legal Studies, at 98 (noting that, subject to
certain constraints, "[t]he contracting parties' chosen allocation
of risk" should always be honored as the most efficient one
possible).
57 See,
e. g., Chicago, M. &
St. P. R. Co. v.
Hoyt, 149 U. S.
1, 14-15 (1893) ("There can be no question that a party may by
an absolute contract bind himself or itself to perform things which
subsequently become impossible, or to pay damages for the
nonperformance"). This is no less true where the event that renders
performance impossible is a change in the governing law. See,
e. g., 4 R. Anderson, Anderson on the Uniform
Commercial Code § 2-615:34, p. 286 (3d ed. 1983) ("Often in regard
to impossibility due to change of law ... there would be no
difficulty in a promisor's assuming the risk of the legal
possibility of his promise"); 6 A. Corbin, Corbin on Contracts §
1346, p. 432 (1962) ("Just as in other cases of alleged
impossibility, the risk of prevention by courts and administrative
officers can be thrown upon a contractor by a provision in the
contract itself or by reason of established custom and general
understanding").
909
and other force majeure." Hughes Communications Galaxy, Inc. v.
United States,
998 F.2d
953, 958-959 (CA Fed. 1993).58
As to each of the contracts before us, our agreement with the
conclusions of the Court of Federal Claims and the Federal Circuit
forecloses any defense of legal impossibility, for those courts
found that the Bank Board resolutions, Forbearance Letters, and
other documents setting forth the accounting treatment to be
accorded supervisory goodwill generated by the transactions were
not mere statements of thencurrent regulatory policy, but in each
instance were terms in an allocation of risk of regulatory change
that was essential to the contract between the parties. See
supra, at 861-864. Given that the parties went to
considerable lengths in procuring necessary documents and drafting
broad integration clauses to incorporate their terms into the
contract itself, the Government's suggestion that the parties meant
to say only that the regulatory treatment laid out in these
documents
58 See generally
Hills Materials Co. v.
Rice,
982 F.2d
514, 516, n. 2
(CA Fed. 1992) ("[T]he [sovereign acts]
doctrine certainly does not prevent the government as contractor
from affirmatively assuming responsibility for specific sovereign
acts");
D &
L Construction Co. v.
United
States, 185 Ct. Cl. 736, 752,
402 F.2d
990, 999 (1968) ("It has long been established that while the
United States cannot be held liable directly or indirectly for
public acts which it performs as a sovereign, the Government can
agree in a contract that if it does exercise a sovereign power, it
will pay the other contracting party the amount by which its costs
are increased by the Government's sovereign act, and that this
agreement can be implied as well as expressed");
Amino Brothers
Co. v.
United States, 178 Ct. Cl. 515,525,
372 F.2d
485, 491 (same), cert. denied, 389 U. S. 846 (1967);
Gerhardt F.
Meyne Co. v.
United States, 110
Ct. Cl. 527, 550, 76 F. Supp. 811, 815 (1948) (same). A common
example of such an agreement is mandated by Federal Acquisition
Regulation 52.222-43, which requires Government entities entering
into certain fixed price service contracts to include a price
adjustment clause shifting to the Government responsibility for
cost increases resulting from compliance with Department of Labor
wage and fringe benefit determinations. 48 CFR § 52.222-43
(1995).
910
would apply as an initial matter, subject to later change at the
Government's election, is unconvincing. See
ibid. It would,
indeed, have been madness for respondents to have engaged in these
transactions with no more protection than the Government's reading
would have given them, for the very existence of their institutions
would then have been in jeopardy from the moment their agreements
were signed.
***
We affirm the Federal Circuit's ruling that the United States is
liable to respondents for breach of contract. Because the Court of
Federal Claims has not yet determined the appropriate measure or
amount of damages in this case, we remand for further
proceedings.
It is so ordered.
JUSTICE BREYER, concurring.
I join the principal opinion because, in my view, that opinion
is basically consistent with the following understanding of what
the dissent and the Government call the "unmistakability doctrine."
The doctrine appears in the language of earlier cases, where the
Court states that
"sovereign power, even when unexercised, is an enduring presence
that governs all contracts subject to the sovereign's jurisdiction,
and will remain intact unless surrendered in unmistakable
terms." Merrion v. Jicarilla Apache Tribe, 455 U. S. 130, 148 (1982)
(emphasis added).
See also
United States v.
Cherokee Nation of
Okla., 480 U. S.
700, 706-707 (1987);
Bowen v.
Public Agencies Opposed
to Social Security Entrapment, 477 U. S. 41, 52-53
(1986). The Government and the dissent believe that this language
normally shields the Government from contract liability where a
change in the law prevents it from carrying out its side of the
bargain. In my view, however, this language,
911
while perhaps appropriate in the circumstances of the cases in
which it appears, was not intended to displace the rules of
contract interpretation applicable to the Government as well as
private contractors in numerous ordinary cases, and in certain
unusual cases, such as this one. Primarily for reasons explained in
the principal opinion, this doctrine does not shield the Government
from liability here.
Both common sense and precedent make clear that an
"unmistakable" promise to bear the risk of a change in the law is
not required in every circumstance in which a private party seeks
contract damages from the Government. Imagine, for example, that
the General Services Administration or the Department of Defense
were to enter into a garden variety contract to sell a surplus
commodity such as oil, under circumstances where (1) the time of
shipment is critically important, (2) the parties are aware that
pending environmentallegislation could prevent the shipment, and
(3) the fair inference from the circumstances is that if the
environmental legislation occurs and prevents shipment, a private
seller would incur liability for failure to ship on time.
Under ordinary principles of contract law, one would construe
the contract in terms of the parties' intent, as revealed by
language and circumstance. See
The Binghamton Bridge, 3
Wall. 51, 74 (1866) ("All contracts are to be construed to
accomplish the intention of the parties"); Restatement (Second) of
Contracts § 202(1) (1979) ("Words and other conduct are interpreted
in the light of all the circumstances, and if the principal purpose
of the parties is ascertainable it is given great weight"). If the
language and circumstances showed that the parties intended the
seller to bear the risk of a performance-defeating change in the
law, the seller would have to pay damages. See
id., § 261
(no liability where "a party's performance is made impracticable
without his fault by the occurrence of an event [i.
e., the
new environmental regulation] the non-occurrence of which was a
basic assumption on which the contract was made ...
unless
the
912
language or the circumstances indicate the contrary" (emphasis
added)).
The Court has often said, as a general matter, that the "rights
and duties" contained in a Government contract "are governed
generally by the law applicable to contracts between private
individuals."
Lynch v.
United States, 292 U. S. 571, 579
(1934); see
Perry v.
United States, 294 U. S. 330, 352 (1935)
(same);
Sinking Fund Cases, 99 U. S. 700, 719 (1879)
("The United States are as much bound by their contracts as are
individuals. If they repudiate their obligations, it is as much
repudiation, with all the wrong and reproach that term implies, as
it would be if the repudiator had been a State or a municipality or
a citizen");
United States v.
Klein, 13 Wall. 128,
144 (1872) (same);
United States v.
Gibbons, 109 U. S. 200, 203-204
(1883) (where contract language "susceptible of two meanings,"
Government's broader obligation was "sufficiently plain" from "the
circumstances attending the transaction"); see also,
e. g.,
Russell v.
Sebastian, 233 U. S. 195, 205 (1914)
(public grants to be given a "fair and reasonable" interpretation
that gives effect to what it "satisfactorily appears" the
government intended to convey).
The Court has also indicated that similar principles apply in
certain cases where courts have had to determine whether or not a
government seller is liable involving contracts resembling the ones
before us. In
Lynch, supra, for example, the Court held that
the Federal Government must compensate holders of "war risk
insurance" contracts, the promises of which it had abrogated
through postcontract legislation. In the "gold clause" case,
Perry, supra, the Court held that subsequent legislation
could not abrogate a Government bond's promises to pay principal
and interest in gold. In neither case did the Court suggest that an
"unmistakable" promise, beyond that discernible using ordinary
principles of contract interpretation, was necessary before
liability could be imposed on the Government.
913
This approach is unsurprising, for in practical terms it ensures
that the government is able to obtain needed goods and services
from parties who might otherwise, quite rightly, be unwilling to
undertake the risk of government contracting. See,
e.
g., Detroit v.
Detroit Citizens' Street R. Co.,
184 U. S. 368, 384 (1902) (rejecting as "hardly ... credible"
the city's suggestion that the fare rate agreed on with railroad
company, which "amounted to a contract," would be "subject to
change from time to time" at the city's pleasure);
Murray v.
Charleston, 96
U. S. 432, 445 (1878) (A government contract "should be
regarded as an assurance that [a sovereign right to withhold
payment] will not be exercised. A promise to pay, with a reserved
right to deny or change the effect of the promise, is an
absurdity");
New Jersey v.
Yard, 95 U. S. 104, 116-117
(1877) (same). This is not to say that the government is always
treated just like a private party. The simple fact that it is the
government may well change the underlying circumstances, leading to
a different inference as to the parties' likely intent-say, making
it far less likely that they
intend to make a promise that
will oblige the government to hold private parties harmless in the
event of a change in the law. But to say this is to apply, not to
disregard, the ordinary rule of contract law.
This approach is also consistent with congressional intent, as
revealed in Congress' determination to permit, under the Tucker
Act, awards of damages and other relief against the United States
for "any claim ... founded ... upon any express or implied
contract." 28 U. S. C. § 1491(a)(1). The thrifts invoked this
provision in their complaints as the basis for jurisdiction to
adjudicate their claims in the lower courts, see App. 8 (Winstar),
137 (Statesman), and 546 (Glendale); and, as the principal opinion
explains,
ante, at 858-859, the lower courts held that each
proved the existence of an express promise by the Government to
grant them particular regulatory treatment for a period of years.
For my purposes, the provision is relevant only to show that
Congress
914
clearly contemplated the award of damages for breach against the
Government in some contexts where the Government's promises are far
from "unmistakable" as the Government defines that term. While in
this case, the lower courts found the promises to be "express,"
this Court has in other cases interpreted § 1491(a)(1) to permit
claims for relief based on an "implied in fact" promise, which can
be a promise "founded upon a meeting of minds, which, although not
embodied in an express contract, is inferred, as a fact, from
conduct of the parties showing, in the light of the surrounding
circumstances, their tacit understanding."
Baltimore
& Ohio R. Co. v.
United States, 261 U. S. 592, 597
(1923); see
Hercules, Inc. v.
United States, 516 U. S. 417, 424
(1996). These interpretations, as well as the statutory language,
lend further support to the view that ordinary government contracts
are typically governed by the rules applicable to contracts between
private parties.
There are, moreover, at least two good reasons to think that the
cases containing special language of "unmistakability" do not, as
the Government suggests, impose an additional "clear-statement"
rule, see Brief for United States 19, that shields the Government
from liability here. First, it is not clear that the
"unmistakability" language was determinative of the outcome in
those cases. In two of the three cases in which that language
appears (and several of the older cases from which it is derived),
the private parties claimed that the sovereign had effectively
promised not to change the law in an area of law
not
mentioned in the contract at issue. In
Merrion v.
Jicarilla Apache Tribe, 455 U. S., at 148, for example, the
contracts were leases by a sovereign Indian Tribe to private
parties of rights to extract oil and gas from tribal lands. The
private party claimed that the leases contained an implicit waiver
of the power to impose a severance tax on the oil and gas. The
Court pointed out that the leases said nothing about taxes, thereby
requiring an inference of intent from "silence."
Ibid.
Though the
915
opinion contains language of "unmistakability," the Court was
not called upon in
Merrion to decide whether a sovereign's
promise not to change the law (or to pay damages if it did) was
clear enough to justify liability, because there was no evidence of
any such promise in the "contracts" in that case. Yet, that
is the effect the Government asks us to give the "unmistakability"
language in
Merrion here.
The Court in
Merrion cited
Home Building &
Loan Assn. v.
Blaisdell, 290 U. S. 398 (1934), and
St. Louis v.
United Railways Co., 210 U. S. 266 (1908),
which in turn referred to a line of cases in which the Court held
that a government's grant of a bank charter did not carry with it a
promise not to tax the bank unless expressed "in terms too plain to
be mistaken."
Jefferson Branch Bank v.
Skelly, 1
Black 436, 446 (1862). These cases illustrate the same point made
above: Where a state-granted charter, or franchise agreement, did
not implicate a promise not to tax, the Court held that no such
promise was made. See
Providence Bank v.
Billings, 4
Pet. 514, 560, 561 (1830) (promise not to tax "ought not to be
presumed" where "deliberate purpose of the state to abandon" power
to tax "does not appear");
St. Louis, supra, at 274 (right
to tax "still exists unless there is a distinct agreement, clearly
expressed, that the sums to be paid are in lieu of all such
exactions"). But, where the sovereign had made an express promise
not to tax, the Court gave that promise its intended effect. See
Jefferson, supra, at 450;
Piqua Branch of State Bank of
Ohio v.
Knoop, 16 How. 369, 378 (1854) (same);
New
Jersey v.
Yard, supra, at 115-117 (same).
Similarly, in the second "unmistakability" case,
United
States v.
Cherokee Nation of Okla., 480 U. S., at
706-707, a Government treaty granted the Tribe title to a riverbed,
but it said nothing about the Government's pre-existing right to
navigate the river. The Court held that it was most unlikely that a
treaty silent on the matter would have conveyed the Government's
navigational rights to the Tribe, particularly
916
since "[t]he parties ... clearly understood that the
[Government's] navigational" rights were "dominant no matter how
the question of riverbed ownership was resolved."
Id., at
706.
The remaining case,
Bowen v.
Public Agencies Opposed
to Social Security Entrapment, 477 U. S. 41 (1986),
concerned an alleged promise closely related to the subject matter
of the contract. A State and several state agencies claimed that
Congress, in enacting a statute that gave States flexibility to
include or withdraw certain employees from a federal social
security program, promised
not to change that "withdrawal"
flexibility. But in
Bowen, the statute itself expressly
reserved to Congress the right to "alter, amend, or repeal" any of
the statute's provisions. See
id., at 55. Hence, it is not
surprising to find language in
Bowen to the effect that
other circumstances would have to be "unmistakable" before the
Court could find a congressional promise to the contrary.
A second reason to doubt the Government's interpretation of the
"unmistakability" language is that, in all these cases, the
language was directed at the claim that the sovereign had made a
broad promise not to legislate, or otherwise to exercise its
sovereign powers. Even in the cases in which damages were sought
(e. g., Bowen, Cherokee Nation), the Court treated the
claimed promise as a promise not to change the law, rather than as
the kind of promise more normally at issue in contract cases,
including this one-namely, a promise that obliges the government to
hold a party harmless from a change in the law that the government
remains free to make. See,
e. g., Bowen, supra, at 52 (lower
court decision "effectively ... forbid[s] Congress to amend a
provision of the Social Security Act");
Cherokee Nation,
supra, at 707 (refusing to conclude that the Tribe "gained an
exemption from the [Government's navigational] servitude simply
because it received title to the riverbed interests"). It is
difficult to believe that the Court intended its "unmistaka-
917
bility" language in these unusual cases to disable future courts
from inferring, from language and circumstance under ordinary
contract principles, a more narrow promise in more typical
cases-say, a promise not to abrogate, or to restrict severely
through legislation and without compensation, the very right that a
sovereign explicitly granted by contract
(e. g., the right
to drill for oil, or to use the riverbed).
The Government attempts to answer this objection to its reading
of the "unmistakability" language by arguing that
any award
of "substantial damages" against the government for breach of
contract through a change in the law "unquestionably carries the
danger that needed future regulatory action will be deterred," and
thus amounts to an infringement on sovereignty requiring an
"unmistakable" promise. Brief for Petitioner 21. But this rationale
has no logical stopping point. See,
e. g., United States Trust
Co. of N.
Y. v.
New Jersey, 431 U. S. 1, 24 (1977)
("Any financial obligation could be regarded in theory as a
relinquishment of the State's spending power, since money spent to
repay debts is not available for other purposes ....
Notwithstanding these effects, the Court has regularly held that
the States are bound by their debt contracts"). It is difficult to
see how the Court could, in a principled fashion, apply the
Government's rule in this case without also making it applicable to
the ordinary contract case (like the hypothetical sale of oil)
which, for the reasons explained above, are properly governed by
ordinary principles of contract law. To draw the line-i.
e.,
to apply a more stringent rule of contract interpretation-based
only on the amount of money at stake, and therefore (in the
Government's terms) the degree to which future exercises of
sovereign authority may be deterred, seems unsatisfactory. As the
Government acknowledges, see Brief for United States 41, n. 34,
this Court has previously rejected the argument that Congress has
"the power to repudiate its own debts, which constitute 'property'
to the lender, simply in order to save money."
Bowen, supra,
at
918
55 (citing
Perry, 294 U. S., at 350-351, and
Lynch, 292 U. S., at 576-577).
In sum, these two factors, along with the general principle that
the government is ordinarily treated like a private party when it
enters into contracts, means that the "unmistakability" language
might simply have underscored the special circumstances that would
have been required to convince the Court of the existence of the
claimed promise in the cases before it. At most, the language might
have grown out of unique features of sovereignty, believed present
in those cases, which, for reasons of policy, might have made
appropriate a special caution in implying the claimed promise. But,
I do not believe that language was meant to establish an
"unmistakability" rule that controls more ordinary contracts, or
that controls the outcome here.
The Government attempts to show that such special circumstances,
warranting application of an unmistakability principle, are present
in this case. To be sure, it might seem unlikely, in the abstract,
that the Government would have intended to make a binding promise
that would oblige it to hold the thrifts harmless from the effects
of future regulation (or legislation) in such a high-risk, highly
regulated context as the accounting practices of failing savings
and loans. But, as the principal opinion's careful examination of
the circumstances reveals, that is exactly what the Government did.
The thrifts demonstrate that specific promises were made to accord
them particular regulatory treatment for a period of years, which,
when abrogated by subsequent legislation, rendered the Government
liable for breach of contract. These promises affect only those
thrifts with preexisting contracts of a certain kind. They are
promises that the banks seek to infer from the explicit language of
the contracts, not ones they read into contracts silent on the
matter. And, there is no special policy reason related to
sovereignty which would justify applying an "unmistakability"
principle here. For these reasons, I join the principal
opinion.
919
JUSTICE SCALIA, with whom JUSTICE KENNEDY and JUSTICE THOMAS
join, concurring in the judgment.
I agree with the principal opinion that the contracts at issue
in this case gave rise to an obligation on the part of the
Government to afford respondents favorable accounting treatment,
and that the contracts were broken by the Government's
discontinuation of that favorable treatment, as required by FIRREA,
12 U. S. C. § 1464(t). My reasons for rejecting the Government's
defenses to this contract action are, however, quite different from
the principal opinion's, so I must write separately to state
briefly the basis for my vote.
The principal opinion dispenses with three of the four
"sovereign" defenses raised by the Government simply by
characterizing the contracts at issue as "risk-shifting agreements"
that amount to nothing more than "promises by the Government to
insure [respondents] against any losses arising from future
regulatory change."
Ante, at 881. Thus understood, the
principal opinion explains, the contracts purport, not to constrain
the exercise of sovereign power, but only to make the exercise of
that power an event resulting in liability for the Government-with
the consequence that the peculiarly sovereign defenses raised by
the Government are simply inapplicable. This approach has several
difficulties, the first being that it has no basis in our cases,
which have not made the availability of these sovereign defenses
(as opposed to their validity on the merits) depend upon the nature
of the contract at issue. But in any event, it is questionable
whether, even as a matter of normal contract law, the exercise in
contract characterization in which the principal opinion engages is
really valid. Virtually
every contract operates, not as a
guarantee of particular future conduct, but as an assumption of
liability in the event of nonperformance:
"The duty to keep a contract at common law means a prediction
that you must pay damages if you do not keep it,and nothing else."
Holmes, The Path of the Law (1897), in 3 The Collected Works of
Justice Holmes 391, 394 (S. Novick
920
SCALIA, J., concurring in judgment
ed. 1995). See
Horwitz-Matthews, Inc. v.
Chicago,
78 F.3d
1248, 1250-1251 (CA7 1996).
In this case, it was an unquestionably sovereign act of
government-enactment and implementation of provisions of FIRREA
regarding treatment of regulatory capital-that gave rise to
respondents' claims of breach of contract. Those claims were
premised on the assertion that, in the course of entering into
various agreements with respondents, the Government had undertaken
to continue certain regulatory policies with respect to
respondents' recently acquired thrifts; and the Government
countered that assertion, in classic fashion, with the primary
defense that contractual restrictions on sovereign authority will
be recognized only where unmistakably expressed. The
"unmistakability" doctrine has been applied to precisely this sort
of situationwhere a sovereign act is claimed to deprive a party of
the benefits of a prior bargain with the government. See,
e.
g., Merrion v.
Jicarilla Apache Tribe,
455 U. S. 130,
135-136, 145-148 (1982).
Like THE CHIEF JUSTICE, see
post, at 924-931, I believe
that the unmistakability doctrine applies here, but unlike him I do
not think it forecloses respondents' claims. In my view, the
doctrine has little if any independent legal force beyond what
would be dictated by normal principles of contract interpretation.
It is simply a rule of presumed (or implied-in-fact) intent.
Generally, contract law imposes upon a party to a contract
liability for any impossibility of performance that is attributable
to that party's own actions. That is a reasonable estimation of
what the parties intend. When I promise to do
x in exchange
for your doing
y, I impliedly promise not to do anything
that will disable me from doing
x, or disable you from doing
y-so that if either of our performances is rendered impossible by
such an act on my part, I am not excused from my obligation. When
the contracting party is the government, however, it is simply
not reasonable to presume an intent of that sort. To the
con-
921
trary, it is reasonable to presume
(unless the opposite
clearly appears) that the sovereign does
not promise
that none of its multifarious sovereign acts, needful for the
public good, will incidentally disable it or the other party from
performing one of the promised acts. The requirement of
unmistakability embodies this reversal of the normal reasonable
presumption. Governments do not ordinarily agree to curtail their
sovereign or legislative powers, and contracts must be interpreted
in a commonsense way against that background understanding.
Here, however, respondents contend that they have overcome this
reverse presumption that the Government remains free to make its
own performance impossible through its manner of regulation. Their
claim is that the Government quite plainly
promised to
regulate them in a particular fashion, into the future. They say
that the very
subject matter of these agreements, an
essential part of the
quid pro quo, was Government
regulation; unless the Government is bound
as to that
regulation, an aspect of the transactions that reasonably must
be viewed as a
sine qua non of their assent becomes
illusory. I think they are correct. If, as the dissent believes,
the Government committed only "to provide [certain] treatment
unless and until there is subsequent action,"
post, at 935,
then the Government in effect said "we promise to regulate in this
fashion for as long as we choose to regulate in this fashion"-which
is an absolutely classic description of an illusory promise. See 1
R. Lord, Williston on Contracts § 1:2, p. 11 (4th ed. 1990). In
these circumstances, it is unmistakably clear that the promise to
accord favorable regulatory treatment must be understood as
(unsurprisingly) a
promise to accord favorable regulatory
treatment. I do not accept that unmistakability demands that there
be a
further promise not to go back on the promise to accord
favorable regulatory treatment.
The dissent says that if the Government agreed to accord the
favorable regulatory treatment "in the short term, but
922
SCALIA, J., concurring in judgment
made no commitment about ... the long term, respondents still
received consideration."
Post, at 935. That is true enough,
but it is quite impossible to construe these contracts as providing
for only "short term" favorable treatment, with the long term up
for grabs: Either there was an undertaking to regulate respondents
as agreed for the specified amortization periods, or there was no
promise regarding the future at all-not even so much as a
peppercorn's worth.
In sum, the special role of the agencies, and the terms and
circumstances of the transactions, provide an adequate basis for
saying that the promises that the trial court and the Court of
Appeals for the Federal Circuit found to have been made in these
cases were unmistakable ones. To be sure, those courts were not
looking for "unmistakable" promises, see
post, at 936, but
unmistakability is an issue of law that we can determine here. It
was found below that the Government had plainly made promises
to
regulate in a certain fashion, into the future; I agree with
those findings, and I would conclude, for the reasons set forth
above, that the promises were unmistakable. Indeed, it is hard to
imagine what additional assurance that the course of regulation
would not change could have been demanded-other than, perhaps, the
Government's promise to keep its promise. That is not what the
doctrine of unmistakability requires. While it is true enough, as
the dissent points out, that one who deals with the Government may
need to "'turn square corners,'"
post, at 937 (quoting
Rock Island, A. &
L. R. Co. v.
United
States, 254 U. S.
141, 143 (1920)), he need not turn them twice.
The Government's remaining arguments are, I think, readily
rejected. The scope and force of the "reserved powers" and "express
delegation" defenses-which the principal opinion thinks
inapplicable based on its view of the nature of the contracts at
issue here, see
ante, at 888-890-have not been well defined
by our prior cases. The notion of "reserved powers" seems to stand
principally for the proposi-
923
tion that certain core governmental powers cannot be
surrendered, see,
e. g., Stone v.
Mississippi,
101 U. S. 814
(1880); thus understood, that doctrine would have no force where,
as here, the private party to the contract does not seek to stay
the exercise of sovereign authority, but merely requests damages
for breach of contract. To the extent this Court has suggested that
the notion of "reserved powers" contemplates, under some
circumstances, nullification of even monetary governmental
obligations pursuant to exercise of "the federal police power or
some other paramount power,"
Lynch v.
United States,
292 U. S. 571,
579 (1934), I do not believe that regulatory measures designed to
minimize what are essentially assumed commercial risks are the sort
of "police power" or "paramount power" referred to. And whatever is
required by the "express delegation" doctrine is to my mind
satisfied by the statutes which the principal opinion identifies as
conferring upon the various federal bank regulatory agencies
involved in this case authority to enter into agreements of the
sort at issue here, see
ante, at 890-891.
Finally, in my view the Government cannot escape its obligations
by appeal to the so-called "sovereign acts" doctrine. That doctrine
was first articulated in Court of Claims cases, and has apparently
been applied by this Court in only a single case, our 3-page
opinion in
Horowitz v.
United States, 267 U. S. 458, decided in
1925 and cited only once since, in a passing reference, see
Nortz v.
United States, 294 U. S. 317, 327
(1935).
Horowitz holds that "the United States when sued as
a contractor cannot be held liable for an obstruction to the
performance of [a] particular contract resulting from its public
and general acts as a sovereign." 267 U. S., at 461. In my view the
"sovereign acts" doctrine adds little, if anything at all, to the
"unmistakability" doctrine, and is avoided whenever that one would
be-i.
e., whenever it is clear from the contract in question
that the Government was committing itself not to rely upon its
sovereign acts in asserting (or defending against) the doctrine of
impossibility,
924
which is another way of saying that the Government had assumed
the risk of a change in its laws. That this is the correct
interpretation of
Horowitz is made clear, I think, by our
two principal cases of this century holding that the Government may
not simply repudiate its contractual obligations,
Lynch v.
United States, supra, and
Perry v.
United
States, 294 U. S.
330 (1935). Those cases, which are barely discussed in the
principal opinion, failed even to mention
Horowitz. In both
of them, as here, Congress specifically set out to abrogate the
essential bargain of the contracts at issue-and in both we
declared such abrogation to amount to impermissible repudiation.
See
Lynch, supra, at 578
580; Perry, supra, at
350-354.
For the foregoing reasons, I concur in the judgment.
CHIEF JUSTICE REHNQUIST, with whom JUSTICE GINSBURG joins as to
Parts I, III, and IV; dissenting.
The principal opinion works sweeping changes in two related
areas of the law dealing with government contracts. It drastically
reduces the scope of the unmistakability doctrine, shrouding the
residue with clouds of uncertainty, and it limits the sovereign
acts doctrine so that it will have virtually no future application.
I respectfully dissent.
I
The principal OpInIOn properly recognizes that the
unmistakability doctrine is a "special rule" of government
contracting which provides, in essence, a "canon of contract
construction that surrenders of sovereign authority must appear in
unmistakable terms."
Ante, at 860. Exercises of the
sovereign authority include of course the power to tax and,
relevant to this case, the authority to regulate.
The most recent opinion of this Court dealing with the
unmistakability doctrine is
United States v.
Cherokee
Nation of Okla., 480 U. S. 700 (1987).
That case quoted language from
Bowen v.
Public Agencies
Opposed to Social Security
925
Entrapment, 477 U. S. 41 (1986), which
relied on
Merrion v.
Jicarilla Apache Tribe, 455 U. S. 130, 148
(1982), and
Merrion, in turn, quoted the much earlier case
of
St. Louis v.
United Railways Co., 210 U. S. 266 (1908).
St. Louis involved an agreement by the city to grant street
railway companies use and occupancy of the streets, in exchange for
specified consideration which included an annual license fee of $25
for each car used.
Id., at 272. When the city later passed
an ordinance amending the license tax and imposing an additional
tax based on the number of passengers riding each car, the railway
companies challenged that amendment as a violation of the Contracts
Clause. The Court there said that such a governmental power to tax
resides in the city "unless this right has been specifically
surrendered in terms which admit of no other reasonable
interpretation."
Id., at 280.
Merrion, supra, was similar, but involved the sovereignty
of an Indian Tribe. The Tribe had allowed oil companies to extract
oil and natural gas deposits on the reservation land in exchange
for the usual cash bonus, royalties, and rents to the Tribe. The
Court found that, in so contracting, the Tribe had not surrendered
its power to impose subsequently a severance tax on that
production.
Merrion explains that "[w]ithout regard to its
source[-be it federal, state, local government, or
Indian-]sovereign power, even when unexercised, is an enduring
presence that governs all contracts subject to the sovereign's
jurisdiction, and will remain intact unless surrendered in
unmistakable terms." 455 U. S., at 148.
Next,
Bowen, supra, addressed Congress' repeal of a law
that had once allowed States which contracted to bring their
employees into the Federal Social Security System, to terminate
that agreement and their participation upon due notice.
Bowen, therefore, considered not the imposition of a tax as
St. Louis and
Merrion, but an amendment to a
statutory provision that existed as a background rule when and
under
926
which the contracts were formed-much like this case. The
Bowen Court repeated the quoted language from
Merrion, and reminded that "contractual arrangements,
including those to which a sovereign itself is a party, 'remain
subject to subsequent legislation' by the sovereign."
Bowen,
supra, at 52 (quoting
Merrion, supra, at 147).
Finally, we have
Cherokee Nation, supra, in which the
Court applied the unmistakability doctrine to a treaty, rather than
a typical contract. Under the treaty the United States had granted
to an Indian Tribe fee simple title to a riverbed. The Tribe
claimed that the United States had not reserved its navigational
servitude and hence that the Government's construction of a
navigational channel that destroyed the riverbed's mineral
interests was a taking under the Fifth Amendment without just
compensation. The Court ruled that the treaty had not provided the
Tribe an exemption from the navigational servitude, quoting from
Bowen and
Merrion the statement that "[s]uch a waiver
of sovereign authority will not be implied, but instead must be
'''surrendered in unmistakable terms."'"
Id., at 707.
These cases have stood until now for the well-understood
proposition just quoted above-a waiver of sovereign authority will
not be implied, but instead must be surrendered in unmistakable
terms. Today, however, the principal opinion drastically limits the
circumstances under which the doctrine will apply by drawing a
distinction never before seen in our case law. The principal
opinion tells us the unmistakability doctrine will apply where a
plaintiff either seeks injunctive relief to hold the Government to
its alleged surrender of sovereign authority (which generally means
granting the plaintiff an exemption to the changed law), or seeks a
damages award which would be "the equivalent of" such an injunction
or exemption.
Ante, at 879-880. But the doctrine will not
apply where a plaintiff seeks an award for damages caused by the
exercise of that sovereign authority. We are told that if the
alleged agreement is not one to bind the Government to
927
refrain from exercising regulatory authority, but is one to
shift the risk of a change in regulatory rules, the unmistakability
doctrine does not apply. And, perhaps more remarkable, the
principal opinion tells us that the Government will virtually
always have assumed this risk in the regulatory context, by
operation oflaw.
Ante, at 869-870, 905-906.
The first problem with the principal opinion's formulation is a
practical one. How do we know whether "the award of damages" will
be "the equivalent of [an] exemption,"
ante, at 879880,
before we assess the damages? In this case, for example, "there has
been no demonstration that awarding damages for breach would be
tantamount" to an exemption to the regulatory change,
ante,
at 881; and there has been no demonstration to the contrary either.
Thus we do not know in this very case whether the award of damages
would "amount to" an injunction,
ante, at 882. If it did,
under the principal opinion's theory, the unmistakability doctrine
would apply, and that application may preclude respondents'
claim.
But even if we could solve that problem by determining the
damages before liability, and by finding the award to be some
amount other than the cost of an exemption, we would still be left
with a wholly unsatisfactory distinction. Few, if any, of the
plaintiffs in the unmistakability-doctrine cases would have
insisted on an injunction, exemption, or their damages equivalent
if they had known they could have avoided the doctrine by claiming
the Government had agreed to assume the risk, and asking for an
award of damages for breaching that implied agreement. It is
impossible to know the monetary difference between such awards and,
as the principal opinion suggests, the award for a breach of the
risk-shifting agreement may even be more generous.
The principal opinion's newly minted distinction is not only
untenable, but is contrary to our decisions in
Cherokee
Nation and
Bowen. The Cherokee Nation sought damages and
compensation for harm resulting from the Government's navigational
servitude.
Cherokee Nation, 480 U. S., at 701.
928
Indeed, one of the Tribe's arguments, upheld by the Court of
Appeals, was that the United States could exercise its navigational
servitude under the treaty, but that the Tribe had a right to
compensation for any diminution in the value of its riverbed
property.
Likewise, some of the plaintiffs in
Bowen sought
damages.
They sought just compensation for the revocation of their
alleged contractual right to terminate the employees' participation
in the Social Security Program. The District Court in the decision
which we reviewed in fact commented, as this Court reported, that
it found that the "'only rational compensation would be
reimbursement by the United States to the State or public agencies,
of the amount of money they currently pay to the United States for
their participation.'"
Bowen, 477 U. S., at 51 (quoting
Public Agencies Opposed to Social Security Entrapment v.
Heckler, 613 F. Supp. 558, 575 (ED Cal. 1985)). It was only
because the District Court concluded that awarding this "measure of
damages" was contradictory to the will of Congress that the court
refrained from making such an award and instead simply declared the
statutory amendment unconstitutional. 477 U. S., at 51. Neither
Cherokee Nation nor
Bowen hinted that the
unmistakability doctrines applied in their case because the damages
remedy sought "amount[ed] to" an injunction.
Ante, at
882.
In
St. Louis v.
United Railways Co., 210 U. S. 266 (1908), the
plaintiff railway companies did seek to enjoin the enforcement of
the tax by the city, and perhaps that case fits neatly within the
principal opinion's scaled-down version of the unmistakability
doctrine. But sophisticated lawyers in the future, litigating a
claim exactly like the one in
St. Louis, need only claim
that the sovereign implicitly agreed not to change their tax
treatment, and request damages for breach of that agreement. There
will presumably be no unmistakability doctrine to contend with, and
they will be in the same position as if they had successfully
enjoined the tax. Such
929
a result has an Alice in Wonderland aspect to it, which suggests
the distinction upon which it is based is a fallacious one.
The principal opinion justifies its novel departure from
existing law by noting that the contracts involved in the present
case-unlike those in
Merrion, Bowen, and
Cherokee
Nation-"do not purport to bind the Congress from enacting
regulatory measures."
Ante, at 881. But that is precisely
what the unmistakability doctrine, as a canon of construction, is
designed to determine:
Did the contract surrender the
authority to enact or amend regulatory measures as to the
contracting party? If the sovereign did surrender its power
unequivocally, and the sovereign breached that agreement to
surrender, then and only then would the issue of remedy for that
breach arise.
The second reason the principal opinion advances for its
limitation on the unmistakability doctrine is that if it were
applied to all actions for damages, it would impair the
Government's ability to enter into contracts. But the law is well
established that Congress may not simply abrogate a statutory
provision obligating performance without breaching the contract and
rendering itself liable for damages. See
Lynch v.
United
States, 292 U. S.
571, 580 (1934);
Bowen, supra, at 52. Equally well
established, however, is that the sovereign does not shed its
sovereign powers just because it contracts. See
Providence
Bank v.
Billings, 4 Pet. 514, 565 (1830). The
Government's contracting authority has survived from the beginning
of the Nation with no diminution in bidders, so far as I am aware,
without the curtailment of the unmistakability doctrine announced
today.
The difficulty caused by the principal opinion's departure from
existing law is best shown by its own analysis of the contracts
presently before us. The principal opinion tells us first that
"[n]othing in the documentation or the circumstances of these
transactions purported to bar the Government from changing the way
in which it regulated the thrift industry."
Ante, at 868.
But, it agrees with the finding of
930
the Federal Circuit, that" 'the Bank Board and the FSLIC were
contractually bound to recognize the supervisory goodwill and the
amortization periods reflected' in the agreements between the
parties."
Ibid. * From this finding, the principal opinion
goes on to say that "[w]e read this promise as the law of contracts
has always treated promises to provide something beyond the
promisor's absolute control, that is, as a promise to insure the
promisee against loss arising from the promised condition's
nonoccurrence."
Ante, at 868-869. Then, in a footnote, the
opinion concedes that "[t]o be sure, each side could have
eliminated any serious contest about the correctness of their
interpretive positions by using clearer language."
Ante, at
869, n. 15.
But if there is a "serious contest" about the correctness of
their interpretive positions, surely the unmistakability doctrine-a
canon of construction-has a role to play in resolving that contest.
And the principal opinion's reading of additional terms into the
contract so that the contract contains an unstated, additional
promise to insure the promisee against loss arising from the
promised condition's nonoccurrence seems the very essence of a
promise implied in law, which is not even actionable under the
Tucker Act, rather than a promise implied in fact, which is. See
Hercules, Inc.
At any rate, the unmistakability doctrine never comes into play,
according to the principal opinion, because we cannot know whether
the damages which could be recovered in later proceedings would be
akin to a rebate of a tax, and therefore the "equivalent of" an
injunction. This approach tosses to the winds any idea of the
unmistakability doctrine as a canon of construction; if a canon of
construction cannot come into play until the contract has first
been interpreted as to liabil-
*Of course it must be remembered that the Federal Circuit had
also said that the unmistakability doctrine does not apply where
damages are being sought, an approach that even the principal
opinion cannot expressly endorse.
931
ity by an appellate court, and remanded for computation of
damages, it is no canon of construction at all.
The principal opinion's search for some unifying theme for
somewhat similar cases from
Fletcher v.
Peck, 6
Cranch 87, in 1810, to the present day is an interesting
intellectual exercise, but its practical fruit is inedible.
II
The principal opinion also makes major changes in the existing
sovereign acts doctrine which render the doctrine a shell. The
opinion formally acknowledges the classic statement of the doctrine
in
Horowitz v.
United States, 267 U. S. 458 (1925),
quoting: "'[i]t has long been held by the Court of Claims that the
United States when sued as a contractor cannot be held liable for
an obstruction of the performance of the particular contract
resulting from its public and general acts as a sovereign.'"
Ante, at 892 (quoting 267 U. S., at 461). The principal
opinion says that this statement cannot be taken at face value,
however, because it reads "the essential point" of
Horowitz
to be "to put the Government in the same position that it would
have enjoyed as a private contractor."
Ante, at 892; see
also
ante, at 893
(Horowitz emphasized "the need to
treat the Government-as-contractor the same as a private party").
But neither
Horowitz, nor the Court of Claims cases upon
which it relies, confine themselves to so narrow a rule. As the
quotations from them in the principal opinion show, the early cases
emphasized the
dual roles of Government, as contractor and
as sovereign. See,
e. g., Deming v.
United States, 1
Ct. Cl. 190, 191 (1865) ("The United States as a contractor are not
responsible for the United States as a lawgiver"). By minimizing
the role of lawgiver and expanding the role as private contractor,
the principal opinion has thus casually, but improperly, reworked
the sovereign acts doctrine.
The principal opinion further cuts into the sovereign acts
doctrine by defining the "public and general" nature of an
932
act as depending on the government's motive for enacting it. The
new test is to differentiate between "regulatory legislation that
is relatively free of Government self-interest" and "statutes
tainted by a governmental object of self-relief."
Ante, at
896. We are then elevated to a higher jurisprudentiallevel by
reference to the general philosophical principles enunciated in
Hurtado v.
California, 110 U. S. 516, 535-536
(1884), that "[l]aw ... must be not a special rule for a particular
person or a particular case, but ... 'the general law ... ' so
'that every citizen shall hold his life, liberty, property and
immunities under the protection of the general rules which govern
society.'" Surely this marks a bold, if not brash, innovation in
the heretofore somewhat mundane law of government contracts; that
law is now to be seasoned by an opinion holding that the Due
Process Clause of the Fourteenth Amendment did not make applicable
to the States the requirement that a criminal proceeding be
initiated by indictment of a grand jury.
The principal opinion does not tell us, nor do these lofty
jurisprudential principles inform us, how we are to decide whether
a particular statute is "free of governmental selfinterest," on the
one hand, or "tainted by" a government objective of "self-relief,"
on the other. In the normal sense of the word, any tax reform bill
which tightens or closes tax loopholes is directed to "government
self-relief," since it is designed to put more money into the
public coffers. Be the act ever so general in its reform of the tax
laws, it apparently would not be a "sovereign act" allowing the
Government to defend against a claim by a taxpayer that he had
received an interpretation from the Internal Revenue Service that a
particular type of income could continue to be treated in
accordance with existing statutes or regulations.
But we are told "self-relief" is not, as one might expect,
necessarily determined by whether the Government benefited
financially from the legislation. For example, in this case the
principal opinion acknowledges that we do not know
933
"the dollar value of the relief the Government would obtain" if
respondents had to comply with the modified capitalinfusion
requirements.
Ante, at 900. Rather the opinion concludes
that FIRREA, the law involved in this case, was "tainted by"
self-relief based on "the attention" that Congressmen "[gave] to
the regulatory contracts prior to passage" of the Act.
Ibid.
Indeed, judging from the principal opinion's use of comments of
individual legislators in connection with the enactment of FIRREA,
it would appear that the sky is the limit so far as judicial
inquiries into the question whether the statute was "free of
governmental self-interest" or rather "tainted" by a Government
objective of "self-relief." It is difficult to imagine a more
unsettling doctrine to insert into the law of Government contracts.
By fusing the roles of the Government as lawgiver and as
contractor-exactly what
Horowitz warned against doing-the
principal opinion makes some sort of legislative intent critical in
deciding these questions. When it enacted FIRREA was the Government
interested in saving its own money, or was it interested in
preserving the savings of those who had money invested in the
failing thrifts?
I think it preferable, rather than either importing great
natural-law principles or probing legislators' intent to modify the
sovereign acts doctrine, to leave that law where it is.
Lynch stands for the proposition that the congressional
repeal of a statute authorizing the payment of money pursuant to a
contractual agreement is a breach of that contract. But, as the
term "public and general" implies, a more general regulatory
enactment-whether it be the Legal Tender Acts involved in
Deming, supra, or the embargo on shipments of silk by
freight involved in
Horowitz-cannot by its enforcement give
rise to contractual liability on the part of the Government.
Judged by these standards, FIRREA was a general
regulatoryenactment. It is entitled "[a]n [a]ct to reform,
recapi-
934
talize, and consolidate the Federal deposit insurance system, to
enhance the regulatory and enforcement powers of federal financial
institutions regulatory agencies, and for other purposes." 103
Stat. 183. As the principal opinion itself explains, "FIRREA made
enormous changes in the structure of federal thrift
regulation by (1) abolishing FSLIC and transferring its functions
to other agencies; (2) creating a new thrift deposit insurance fund
under the Federal Deposit Insurance Corporation; (3) replacing the
Bank Board with the Office of Thrift Supervision ... ; and (4)
establishing the Resolution Trust Corporation to liquidate or
otherwise dispose of certain closed thrifts and their assets."
Ante, at 856 (emphasis added). The Act occupies 372 pages in
the Statutes at Large, and under 12 substantive titles contains
more than 150 numbered sections. Among those sections are the ones
involved in the present case. Insofar as this comprehensive
enactment regulated the use of goodwill, it did so without respect
to how closely the savings association was regulated; its
provisions dealt with the right of
any thrift association,
after the date of its enactment, to count intangible assets as
capital. See 12 U. S. C. §§ 1464(t)(1)(A), (2), (3), (9). And by
these provisions, the capital standards of thrifts were brought
into line with those applicable to national banks. See §
1464(t)(1)(C). The principal opinion does not dispute that
Congress, through this mammoth legislation, "acted to protect the
public."
Ante, at 903.
III
JUSTICE SCALIA finds that the unmistakability doctrine does
apply to the contracts before us. He explains that when the
government is a contracting party, "it is reasonable to presume ...
that the sovereign does
not promise that none of its
multifarious sovereign acts ... will incidentally disable it or the
other party from performing," under the contract,
"unless the
opposite clearly appears." Ante, at 921. In other words, the
sovereign's right to take subsequent action continues "unless thee]
right has been specifi-
935
cally surrendered in terms which admit of no other reasonable
interpretation."
St. Louis, 210 U. S., at 280. JUSTICE
SCALIA finds that the presumption has been rebutted here; he, like
JUSTICE BREYER, finds that the Government had made a promise that
its subsequent action would not frustrate the contract. JUSTICE
SCALIA, however, finds that obligation is contained implicitly
within the "promis[e] to regulate ... in a particular fashion," and
the Government's consideration.
Ante, at 921.
But that is hardly what one normally thinks to be "unmistakable
terms." Indeed, that promise plus consideration is no different
from what JUSTICE SCALIA says applies to private parties.
Ante, at 920. The Government has "promise[d] to do
x
in exchange for [respondents] doing
y," and in so doing
"impliedly promise[d] not to do anything that [would]
disable [the Government] from doing
x, or disable
[respondents] from doing y-so that if either of [the parties']
performances is rendered impossible by such an act on [the
Government's] part, [the Government is] not excused from [its]
obligation."
Ibid. (emphasis added). But more than this is
required for Government contracts, as JUSTICE SCALIA had seemed to
acknowledge.
His point about
quid pro quo adds little, for it
necessarily assumes that there has been a promise to provide a
particular regulatory treatment which cannot be affected by
subsequent action, as opposed to a promise to provide that
treatment unless and until there is subsequent action.
Ante,
at 921. But determining which promise the Government has made is
precisely what the unmistakability doctrine is designed to
determine. If the Government agreed to treat the losses acquired by
respondents as supervisory goodwill in the short term, but made no
commitment about their regulatory treatment over the long term,
respondents still received consideration. Such consideration would
be especially valuable to an unhealthy thrift because it would
provide "a number of immediate benefits to the acquiring
936
thrift" that would stave off foreclosure. Brief for United
States 27.
In addition, JUSTICE SCALIA does not himself make the findings
necessary for respondents to prevail, but relies on the findings of
the trial court and the Court of Appeals for the Federal Circuit
with respect to what the Government actually promised.
Ante,
at 922. But both the trial court and the Court of Appeals held the
unmistakability doctrine did
not apply here. Therefore, even
under JUSTICE SCALIA'S own premises, these findings are
insufficient because they were made under a mistaken view of the
applicable law.
IV
JUSTICE BREYER in his separate concurrence follows a different
route to the result reached by the principal opinion. But even
under his own view of the law, he omits a necessary step in the
reasoning required to hold the Government liable. He says that "the
lower courts held that each [respondent] proved the existence of an
express promise by the Government to grant them particular
regulatory treatment for a period of years."
Ante, at 913.
But the Government could have made that promise and
not made
the further promise to pay respondents in the event that the
regulatory regime changed. JUSTICE BREYER concludes that second
promise did exist as a matter of fact, but he never makes that
finding himself. Instead, he says that the "principal opinion's
careful examination of the circumstances reveals" that the
Government did "inten[d] to make a binding promise ... to hold the
thrifts harmless from the effects of future regulation (or
legislation)."
Ante, at 918. But the principal opinion does
not treat this as a question of fact at all, as JUSTICE BREYER
does, but instead as something which occurs by operation of
law.
JUSTICE BREYER relies on this illusory factual finding while at
the same time commenting how implausible it would be for the
Government to have intended to insure against a
937
change in the law. He notes that "it might seem unlikely" for
the Government to make such a promise,
ibid., and further
comments that because the contracting party is the Government, it
may be "far less likely that [the parties]
intend[ed] to
make a promise that will oblige the Government to hold private
parties harmless in the event of a change in the law,"
ante,
at 913.
The short of the matter is that JUSTICE BREYER and JusTICE
SCALIA cannot reach their desired result, any more than the
principal opinion can, without changing the status of the
Government to just another private party under the law of
contracts. But 75 years ago Justice Holmes, speaking for the Court
in
Rock Island, A. &
L. R. Co. v.
United
States, 254 U. S.
141, 143 (1920), said that "[m]en must turn square corners when
they deal with the Government." The statement was repeated in
Federal Crop Ins. Corp. v.
Merrill, 332 U. S. 380,
385 (1947). The wisdom of this principle arises, not from any
ancient privileges of the sovereign, but from the necessity of
protecting the federal fisc-and the taxpayers who foot the
bills-from possible improvidence on the part of the countless
Government officials who must be authorized to enter into contracts
for the Government.
V
A moment's reflection suggests that the unmistakability doctrine
and the sovereign acts doctrine are not entirely separate
principles. To the extent that the unmistakability doctrine is
faithfully applied, the cases will be rare in which close and
debatable situations under the sovereign acts doctrine are
presented. I do not believe that respondents met either of these
tests, and I would reverse the judgment of the Court of Appeals for
the Federal Circuit outright or remand the case to that court for
reconsideration in light of these tests as I have enunciated
them.
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