Puerto Rico v. Russell & Co.

Background

A government irrigation project required a dam that would interfere with preexisting water rights held by Fortuna Estates and its successor. Puerto Rico’s 1913 law let a Commissioner agree with owners to provide a reasonable equivalent amount of water. In 1914 contracts, the government agreed to deliver specified quantities of water to Fortuna’s intakes. After litigation over surplus water sales, the legislature passed a 1921 law imposing a special assessment on lands outside the irrigation district that received contracted water.

Reasoning

The central question was whether the 1921 assessment violated the island rule forbidding laws that impair contracts. The Court examined the contracts and emphasized repeated promises to “deliver” water at specified places without charging maintenance costs. The majority concluded the act was not a general tax but a targeted attempt to recoup maintenance revenue from contract beneficiaries. Because the statute imposed a special exaction that conflicted with the delivery and payment terms in the contracts, the Court held the law impaired the contracts and could not be enforced.

Real world impact

The ruling prevents Puerto Rico from collecting the special assessment against the contract holders and upholds contractual delivery promises for water without those targeted fees. Governments must honor explicit delivery and payment terms in similar water agreements and cannot use a specially aimed levy to undo those bargains.

Dissents or concurrances

Justice Douglas (joined by Justices Black, Murphy, and Byrnes) dissented, arguing the contracts were ambiguous, contained no clear tax exemption, and that the assessed lands benefited from the system so an assessment could be valid.