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Local Government’s Multi-Year Contract Held Valid in Supreme Court Opinion

In a previous AHC Construction Law Update, we discussed a Court of Appeals opinion that held a school district’s construction contract was not void because it did not violate constitutional or statutory prohibitions against multi-year contracts.  The Supreme Court of Georgia recently vacated the part of that opinion that has created confusion among public owners’ counsel. 

Background of the Case

The case involved a contract between a school district and a contractor for construction management services for construction of the school district’s facilities.  County voters approved the project funding through an Educational Local Option Sales Tax (ELOST).  Eventually, the school district terminated the contract after eleven months, and the contractor filed suit.

 The school district moved to dismiss the lawsuit, arguing that the contract was void as a matter of law because it did not comply with O.C.G.A. § 20-2-506 (the “Multi-Year Contracting Statute”).   The contract was unquestionably an open-ended, multi-year contract.  Furthermore, it did not contain the provisions required by the Multi-Year Contract Statute to be incorporated into multi-year contracts.

 Background on Multi-Year Contracts

 Multi-year contracts implicate the constitutional limitation on new indebtedness by local governments (the “Constitutional Debt Limitation”), which requires voter approval for new debt.  Georgia courts have ruled that a contractual obligation which extends beyond a fiscal year constitutes a debt of the local government.

 The Multi-Year Contracting Statute, however, provides that as long as the multi-year contract contains certain provisions (e.g., an annual renewal provision), the contract will not be considered a debt of the local government.  As a result, to be constitutionally valid, multi-year contracts must either (i) receive voter approval or (ii) comply with the Multi-Year Contracting Statute.

 The Court of Appeal’s Opinion

 A more detailed analysis of the Court of Appeal’s opinion is found here.

 Though the parties agreed that the contract at issue did not comply with the Multi-Year Contracting Statute, the Court of Appeals ruled for the contractor because the contract’s funding source was approved by the county’s ELOST vote.   As an alternative basis for its ruling, the Court relied on an exception contained in the Multi-Year Contracting Statute — the Proprietary-Function Exception.

 The Proprietary-Function Exception provides that “reasonable contracts arising out of [local governments’] proprietary functions” are not subject to the Multi-Year Contracting Statute.  In other words, if the contract is a proprietary-function contract, it need not contain the provisions of the Multi-Year Contracting Statute.  The Court of Appeals ruled that the contract at issue fit within the Proprietary-Function Exception and was, therefore, enforceable even without the provisions of the Multi-Year Contracting Statute.

 The Supreme Court granted a writ of certiorari to determine whether the alternative holding — based on the Proprietary-Function Exception — was erroneous.

 The Supreme Court’s Opinion

 The Supreme Court summarily ruled that the Proprietary-Function Exception was not pertinent because the multi-year contract’s funding source was approved by the voters.  In other words, where the voters approve a multi-year contract, it need not contain the provisions of the Multi-Year Contracting Statute, nor did it need to fit within the Proprietary-Function Exception.  Accordingly, the Court of Appeal’s alternative ruling was unnecessary and, therefore, vacated.

Further Analysis of the Opinions

 The Supreme Court opted not to address the correctness of the Court of Appeal’s underlying analysis.  But one might question whether a statutory exception (the Proprietary-Function Exception) to another statutory provision (Multi-Year Contracting Statute) could ever relieve a local government from compliance with a constitutional provision (the Constitutional Debt Limitation).  In other words, if the constitution requires voter approval for multi-year contracts, it is hard to imagine how the statutory Proprietary-Function Exception could bypass the constitutional requirement.

 Another consideration is whether the Multi-Year Contracting Statute violates the same principle — whether it improperly bypasses the Constitutional Debt Limitation.  Arguably, it does not because it merely interprets what the constitution means by “debt.”  Specifically, the statute interprets “debt” to exclude those multi-year contracts that contain certain provisions, many of which limit the local government’s obligations to annually renewable obligations.  Thus, the statutory provision is perhaps consistent with the constitutional mandate.

 Finally, the Supreme Court ruled that the contract at issue was valid because it complied with the constitutional requirement of voter approval.  Upon reaching this conclusion, it held that the Multi-Year Contracting Statute was irrelevant.  Theoretically, however, the General Assembly may have intended the Multi-Year Contracting Statute as an additional requirement on multi-year contracts – beyond and in addition to the constitutional voting requirement.  In fact, based on a literal reading of the statute, it appears that no multi-year contract is valid unless it contains the necessary provisions, even with voter approval.

 To reconcile the statutory language with the Supreme Court’s opinion, the underling intent of the statute must be considered.  The statute’s purpose is illustrated by another provision, which provides that contracts which contain the required provisions will not be considered debts of the local government.  It would appear, then, that the purpose of the statute is to provide a means by which local governments can enter into multi-year contracts without voter approval, and thus avoid running afoul of the Constitutional Debt Limitation.  With the statute’s purpose in mind, the Supreme Court’s sole reliance on voter approval — and disregard of the Multi-Year Contracting Statute — seems more appropriate.  Stated another way, courts have implicitly concluded that the Multi-Year Contracting Statute does not impose additional requirements for multi-year contracts beyond the constitutional requirement of voter approval.

 Implications

Local governments that are considering multi-year contracts should review the Constitutional Debt Limitation, Multi-Year Contracting Statute, Proprietary-Function Exception, and their treatment under the Greene County Schools case.  Multi-year contracts funded by sources that have not received voter approval must contain provisions of the Multi-Year Contracting Statute.  Finally, even if voters approve funding for multi-year contracts, local governments may consider incorporating language from the Multi-Year Contracting Statute as a precaution.  This is especially true now that the Proprietary-Function Exception has uncertain effect after the Supreme Court opinion.

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