Court Rules on Goldfields Parties’ Definition of “Groundwater”

Food and Agriculture Law  

October 2012

On June 21, 2012, Judge Cadei issued a final decision in Western Water Co. v. Yuba County Water Agency, Case No. 34-2010-00070834 (Sac. Superior Ct. June 21, 2012), a breach of contract action turning on the parties’ definition of “groundwater.” The case, which is now on appeal, serves as an informative example of parties to a water transaction attempting to define their respective rights to subsurface water by contract rather than relying on the sometimes elusive definition of “groundwater” under California water law.

Factual Background
The setting for this contract dispute was the Yuba Goldfields, a remnant of dredging that occurred in connection with historic mining activities during the 19th century. These mining operations disturbed the soil near the Yuba River to a depth that, in some places, reached 100 to 125 feet. As a result, today the Goldfields consist of a series of substantial pits that have filled with water to create numerous ponds near the Yuba River. During the 1980s, water districts in Yuba County created a canal and entered into agreements with Western Water’s predecessor-in-interest to move water accumulating in the Goldfields ponds south to the water districts’ members for agricultural uses.  These same parties later installed a system (Water System) for the direct diversion of Yuba River flows through the Goldfields and into the canal for delivery to the agricultural users.

A 1991 agreement (Agreement) between Western Water and Yuba County Water Agency (YCWA) classified the water subject to the Agreement as either “surface water” or “groundwater.” The Agreement defined “groundwater” as water “underlying the Goldfiends that can be pumped from under the Goldfields by wells, pumps, or other facilities.”  “Surface water,” by contrast, was defined as water “in the ponds on the Goldfields or otherwise on the surface of the Goldfields.” In addition to the regular conveyance fee, the Agreement required YCWA to pay a charge for each acre foot of “groundwater” delivered.  Approximately two-thirds of the water being conveyed via the Water System reached the Goldfields ponds as “underflow” or “subsurface flow” from the Yuba River through the porous mounds of rock and debris that formed the Goldfields.  The court termed this water “excess water,” because it was water distinct from flows being directly diverted from the Yuba River. Where this “excess water” eventually reached the surface, it did so through natural flows without any human or mechanical intervention. The question for the court was whether this “excess water” was properly classified as “groundwater” under the Agreement, which would make it subject to the additional charge per acre foot.

Western Water brought ten counts against YCWA, which the court divided into two essential claims. First, Western Water’s “primary breach of contract claim” was that YCWA breached its agreement to pay for groundwater it took from the area covered by the contract. Second, Western Water alleged that YCWA breached its agreement to pay a conveyance fee for the transportation of water through the Water System (the “secondary” claim). The court devoted the bulk of its analysis to the primary breach of contract claim, which centered on how to classify the “excess water” under the Agreement.

The Superior Court’s Ruling
The unique hydrology of the Goldfields meant that the “excess water” did not fit neatly into either of the two classifications enumerated in the Agreement. “Excess water” was not always “in the ponds on the Goldfields or otherwise on the surface of the Goldfields,” so it did not qualify as “surface water.” Nor was it always water “underlying the Goldfields that [could] be pumped from under the Goldfields by wells, pumps, or other facilities,” meaning it was not “groundwater,” either.  This ambiguity in the Agreement left the court no choice but to open the door to parol evidence about the contract negotiations in order to infer whether the parties intended the “excess water” to count as groundwater subject to an additional charge per acre foot.

Among the parol evidence that the court reviewed were testimony by the parties and by their counsel regarding contract negotiations, as well as proposed draft agreements exchanged by the parties. The court ultimately found that the parties intended that the term “groundwater” would apply only to water that was actually pumped from below the Goldfields, and not to subsurface flow from the Yuba River moving through the disturbed gravel layer of the Goldfields without the use of pumping facilities. Accordingly, the court held that the additional charge per acre foot of groundwater did not apply to the “excess water.”

Conclusions and Implications
Western Water Co. v. Yuba County Water Agency highlights some of the issues that can arise when defining water rights by contract, particularly when groundwater is involved.  Despite attempts by the courts and the State Water Resources Control Board to formulate bright-line definitions distinguishing groundwater and surface water, which are subject to different regimes in California, uncertainty persists. The parties in Western Water Co. v. Yuba County Water Agency attempted to minimize some of this uncertainty by defining water in the Yuba Goldfields according to their own terms.  But the definitions in the Agreement did not fully account for the unique hydrology of the Goldfields area, effectively leaving a large quantity of the water at issue undefined.

One impact of the parties’ decision to define “groundwater” by contract was that YCWA was able to take advantage of the standard contractual attorneys fees provision agreed to by the parties.  Western Water will be obligated to pay YCWA’s attorneys fees and costs in the case, which YCWA claims amount to $1,317,883.97.

As noted above, Western Water has appealed Judge Cadei’s decision.

Andrew Deeringer is an associate in both the Water Law Group and the Food and Ag Group at Downey Brand LLP. Downey Brand has served agricultural clients throughout California since the 1920s.