Effect of Municipalities’ Ultra Vires Contracts

In several prior blog posts, we discussed the effectiveness of implied-contract claims against public owners, such as counties, school boards, and municipalities.  For instance, prior posts have addressed:

This post will cover the success of a quantum-meruit claim against a municipality based on ultra vires contracts — or contracts that were executed without formal authority.

The illustrative case involves a dispute between a city and an engineering firm.  Pursuant to a written contract, the firm was hired to perform engineering and design services for the city’s water system (“original services”).  It also provided engineering documents to support the city’s application for governmental stimulus funds to improve the city’s wastewater treatment plant (“stimulus services”).  The stimulus services were offered pursuant to a separate proposal for $210,000, which the city’s mayor signed.

When the city refused to pay the engineering firm’s invoice for stimulus services, the firm filed suit based on the proposal signed by the mayor.  The city defended on the grounds that the mayor had no authority to sign the proposal, because it was not approved by a quorum of the city council.  Accordingly, the mayor’s signature was ultra vires and the signed proposal was not binding.

As a rebuttal, the firm argued that the proposal was indirectly agreed to in the original services contract, which states the engineering firm will:

 provide the supporting engineering documents … in order to convert this project from ‘fundable’ to ‘funded’ for a Lump Sum fee of $5,000…. Under separate covers [the engineering firm] will be preparing a scope, budget and schedule for the actual design work for the Headwords (sic) and associated improvements (including the Design Development Report for the overall plant) and also will submit a grant application to Rural Development to fund the development of a capital master plan for the water and wastewater systems. Additional engineering fees will only be contracted once funding has been committed.

At trial, a jury found for the engineering firm in the amount of $203,000.  The city appealed the verdict.

Quantum Meruit Against a Municipality?

The city appealed the verdict because, it argued, quantum-meruit claims are not permitted against municipalities.  As noted in prior posts listed above, such a defense is generally valid when raised by counties, school boards, and other governmental bodies.  In fact the court recognized that “quantum meruit is not available when a county is the defendant.”  However, as against a municipality, the court found that the quantum-meruit claim was proper.

While the city failed to object to the verdict form and waived the objection on appeal, the court nevertheless found the claim was permissible.  The court held where an agreement exists to perform lawful services for a municipality but is not otherwise enforceable as a valid express contract — such as an ultra vires contract — the claimant is permitted to recover to the extent of the value of the benefit provided to the municipality.

So why treat counties and municipalities so differently?  The court focused on the statutory basis for contracting with counties.  These requirements are statutory and are given greater weight than an ordinance.  In contrast, the court found no statutory requirements for establishing a contract with a municipality.  To the court, this distinction justified allowing a quantum-meruit claim against municipalities, and precluding against counties.  Since the city could have legally contracted for the services provided, an implied contract (or quantum-meruit claim) exists.

Implication

In light of the courts’ willingness to permit implied-contract claims against municipalities, it is perhaps more important now for municipalities to focus on procurement risk.  They should not allow any work to occur without a valid, written contract that has been executed and authorized by proper persons.

The contracts themselves should attempt to limit implied-contract claims.  It should clearly address the scope of services to be provided, and municipalities should actively prohibit deviation from that scope.  (See Batson-Cook case).  The contract should have strong change-order provisions to address additions, deletions, changes, and unexpected conditions.

By including solid contract provisions, municipalities can more convincingly argue that all work performed by the contractor or engineer was embodied in the written contract.  As a result, non-contract claims, such as implied-contract and quantum-meruit claims, can be defeated by the written contract.

2 thoughts on “Effect of Municipalities’ Ultra Vires Contracts

  1. Update by David Cook, May 21, 2013: On May 20, 2013, the Georgia Supreme Court reversed the Court of Appeals’ ruling discussed above. I will discuss the Supreme Court’s ruling in a separate blog post.