Corbello v. Iowa Production and the Implications of Restoration Damages in Louisiana: Drilling Holes in Deep Pockets for Thirty-Three Million Dollars

• Author: Mary Beth Balhoff
• Position: Recipient of the Association Henri Capitant
• Pages: 271-302

Recipient of the Association Henri Capitant, Louisiana Chapter Award for best paper on a civil law topic or a comparative law topic with an emphasis in the civil law. J.D./B.C.L. Candidate, May 2005, Paul M. Hebert Law Center, Louisiana State University. I wish to thank Mr. William Jarman for generously providing me with the numerous briefs filed in the Corbello case, as well as other materials that were invaluable in the development of this article. Special thanks is also due to Professor Patrick H. Martin for his guidance, support, and suggestions during the compilation of this article. Finally, I would also like to thank my family for the love and support they have shown me throughout my entire life. An earlier draft of this comment received first place in the Fifteenth Annual Louisiana State Bar Association Environmental Law Essay Contest sponsored by the Association's Section on Environmental Law.

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Introduction

In 2003, the Louisiana Supreme Court issued a decision that sent shock waves throughout the legal profession and the oil and gas community-both in Louisiana and the surrounding states. That landmark decision was Corbello v. Iowa Production.¹ Before the Corbello decision, the oil and gas industry believed that the remedy for damage to property would be similar to the remedy in a tort claim. Therefore, damages would equal the value of the thing, not the cost to rebuild or restore the thing. Such a proposition was thought to be supported by Roman Catholic Church of the Archdiocese of New Orleans v. Louisiana Gas Service, Company,² where the Louisiana Supreme Court held that the remedy for damage to property in tort claims should be limited to the fair market value of the property, with certain exceptions. Louisiana landowners, on the other hand, believed that the remedy for damage to property was determined by the language in the contract and that the actual value of the property had absolutely no bearing on the amount of damages to be paid. So, if a contract called for restoration of the property, then the property must be restored-no matter what the costs associated with the restoration.

In Corbello v. Iowa Production, Shell Oil Company breached a contract provision in a lease to "reasonably restore the land to its original condition."³ The Court had to determine whether the remedy for breach of the contract should be measured in terms of: 1) the cost to repair; 2) the diminution in value; or 3) the replacement cost minus depreciation.⁴ The Corbello Court ultimately upheld an award for "cost to repair" the surface of the plaintiff's land and the potential contamination of an aquifer damaged by saltwater injections.⁵ The damages amounted to $33 million, a value 300 times greater than the fair market value of the land.⁶ Included in the $33 million award, $28 million was awarded for the potential contamination of the aquifer-a public injury.⁷ The Louisiana Supreme Court's decision contradicts years of prior jurisprudence and legal commentary concerning notPage 272 only the amount of allowable damages, but also the very raison d'etre of damages.⁸

The Corbello decision is likely to be regarded as momentous, in part, because the ruling implicates multiple areas of law and policy, including the law regarding breach of contract, environmental law, measurement of damages, and the appropriateness of compensating a private party for a public injury. The Corbello Court was faced with several opposing policy considerations. A damage award limited to the fair market value or diminution in value of the land might encourage the flagrant breach of contractual "restoration" provisions if such a breach is considered efficient from an economic standpoint. Conversely, an award exceeding the market value and diminution in value of the land would translate into a windfall for the plaintiffs. Furthermore, awarding damages for the speculative nature of the injury might lead oil and gas companies to reconsider doing business in the state due to the increased risk of adverse judgments against them. However, not awarding damages for the possible contamination could lead to under-compensation if the aquifer was actually contaminated. Finally, the allocation of damages to a private party for the aquifer may be more likely to lead to restoration since the regulatory agencies charged with that duty are "understaffed and underfunded . . . to oppose the oil companies."⁹ On the other hand, the plaintiffs have no duty to restore the property or the aquifer with the award, unlike the state agencies who have a duty and interest in the public health and the environmental safeness of the property in the state.

This comment addresses the issues set forth in Corbello, examining the Court's reasoning in light of civil law doctrine, prior Louisiana case law, and common law approaches. Particular attention is devoted to the appropriate measurement and allocation of damages.¹⁰ Section I presents a comparative analysis of damages awarded under contract and tort theories in Louisiana and common law jurisdictions. In section II, the comment reviews the facts and analysis from the Corbello decision and its implications, examining the costs and benefits resulting from the decision. Section III discusses the implications that the Corbello decision carries with it, examining the costs and benefits resulting from the decision. It further addresses whether an alternative remedy, such as specific performance, would increase the efficiency and effectiveness from anPage 273 economic standpoint, thereby enhancing the social wealth and needs of Louisiana. It also suggests that compensating a private party for a public injury, with the mere hope that the party will clean the property, is an insufficient and unreliable method of: 1) protecting the public from the possible harm, 2) compensating the public for its injury, and 3) restoring contaminated land to an acceptable condition. Section IV then reviews both the positive aspects and the underlying flaws of the "Ground Water Remediation" statute,¹¹ which was passed by the legislature in response to the Corbello decision.

Ultimately, this comment recommends that the courts perform a flexible balancing test, weighing the economic and social benefits and disadvantages against each other when determining restoration costs for damage to the surface of land. If the injured landowner may be sufficiently compensated through monetary damages and substitutes are available in the market, then the court should limit damages to the fair market value of the land. Alternatively, where permanent and dangerous environmental damage and potential injury to the public is involved, such as contamination of groundwater, a different approach is warranted. It is the task of the environmental agencies of the state to ensure the safety and well-being of the state and those agencies should be the first to remediate the contamination caused by lessors. However, when the landowners do not seek appropriate relief from the agencies or the agencies fail to adequately remedy the situation, the courts should award specific performance (overseen by the supervision of an appropriate regulatory agency) thereby enforcing the obligation to restore the land and requiring the breaching party to clean up its own mess.¹²

I Basic Contract Law and Restoration Damages: Diminution in Value, Cost to Restore, and Fair Market Value

Determining the proper measure of damages has been a recurring issue when an obligor breaches an obligation or defectively performs. While Louisiana law was previously in accord with the laws of her common-law-sister-states with respect to the assessment of damages for breach of contract and tortious conduct, the Corbello decision threatens to disrupt that harmony. The following sections provide a brief overview of the historical development of damages and their measurement.

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A The Purpose of Remedies: An Overview of the Common and Civil Law Approaches

In the common and civil law traditions, remedies indemnify an obligee for both breach of contract and tortious conduct.¹³ In contract law, remedies encourage the promisee to enter contracts by ensuring that he will be placed in a position similar to the position he would have been in had the contract been performed.¹⁴ Similarly, remedies are awarded to tort victims as compensation for injuries caused to them by the fault of another and operate to restore the plaintiff to the position he occupied before the tort was committed.¹⁵ Whether reading jurisprudence, statutes, or legal commentary, the same language repeatedly appears when discussing damages for both tort and contract law: the plaintiff should be placed in as good of a position as he would have been in had the tort or breach not occurred. In contract terms, this is...