The question for decision is whether a statute of Puerto Rico impairs the obligation of certain contracts in violation of the Island's organic law.
The respondent's predecessor in title, Fortuna Estates, as owner or lessee of lands adjacent to the Jacaguas River, enjoyed under Spanish law, and respondent, as successor, still enjoys, rights appurtenant to the lands to draw from the river 12,612.1 acre feet of water per year for irrigation.
Puerto Rico adopted a law in 1908 which authorized an irrigation system, as part of which a dam was to be erected in Jacaguas River above Fortuna's intakes. Fortuna's lands were not within or a part of the irrigation district. Although the operation of the system would interfere with Fortuna's water rights they were not condemned, as the statute permitted, nor were they voluntarily surrendered.
By an amendatory law adopted in 1913 it was provided: 'In the case of any land carrying a water right or concession of which the source of supply is destroyed or impaired by the construction or operation of the irrigation system, which shall not have been relinquished or surrendered to the People of Porto Rico, such land shall be entitled to receive from the irrigation system an amount of water which is the reasonable equivalent in value of the said water right or concession.' This Act empowered the Commissioner of the Interior to make agreements with holders of such rights fixing the amount and the time, place, and conditions of delivery, of water to be received as the equivalent of the rights suspended.
In the exercise of this authority the Commissioner executed contracts with Fortuna which called for the suspension of its rights appurtenant to two large tracts during the life of the contracts and assured delivery of a specified amount of water at Fortuna's intakes as the fair equivalent of the rights suspended.
Each contract enmerated the rights to take water appurtenant to a described tract of land which would be impaired or interrupted by the operation of the irrigation system; recited that the amount of water taken by Fortuna under its rights varied throughout the year, due to differences in rainfall, so that it was impossible to determine in advance the amount of water to which it would be entitled in any given period; and that Porto Rico was willing to deliver from the Jacaguas River the water to which Fortuna was entitled, but, in order to make the operation of the system more certain, desired to agree upon a fixed and regular amount which should be received by Fortuna as the fair equivalent in value for irrigation purposes of the water it would ordinarily take and use under its existing rights.
The contract then stated the agreement of the parties as to the quantities of water which, delivered in equal daily instalments, were to be considered such fair equivalents and the petitioner covenanted to deliver these quantities to Fortuna. It was also agreed that Fortuna might exercise its preexisting rights for ten days in each year to prevent their loss by nonuser.
Under the Irrigation Law, lands in a district were subjected to a uniform annual assessment per acre to discharge the cost of construction, maintenance, and operation of the system. Sales were also made of surplus waters and the proceeds used for maintenance.
Shortly after the contracts were made, a controversy arose between petitioner and respondent with respect to Puerto Rico's right to sell surplus waters. Litigation ensued which terminated in a decree restraining the insular government from diverting certain surplus waters to which the respondent was held to be entitled under the contracts. The decision also upheld the validity of the contracts.