Knowledgebase-City Liability for Liquidated Damages on a Terminated Contract


Information Product

Title:City Liability for Liquidated Damages on a Terminated Contract
Summary:MTAS was asked whether the Town is required to pay $10,000 in liquidated damages
when it terminated a contract with a company.
Original Author:Shechter, Leslie
Co-Author:
Product Create Date:07/17/91
Last Reviewed on::06/26/2017
Subject:Contracts; Purchasing--Professional services
Type:Legal Opinion
Legal Opinion:

Reference Documents:

Text of Document: July 17, 1991

You have asked whether the Town is required to pay $10,000 in liquidated damages to _________ when it terminated a contract with his company in November of 1990. In my opinion the city probably has no liability under this contract, but may want to offer to reimburse the contractor for expenses/time he can document having spent in preparation of the contract and from September to November of 1990.

There are several reasons why the contractor may not be allowed to recover liquidated damages under this contract, the first being that the contract was not authorized by an ordinance or resolution as required under the municipal charter. Private Act, Chapter 664, Section 18 spells out the powers of the Town, and provides:

Said town shall have the power by ordinance or resolution...
2. To appropriate money and to provide for the payment of the debts and liabilities of the town....
4. To open, establish,...sewers...

The contract between the Town and ____ calls for ____ to provide: "...project administration services necessary during the planning, design, construction, and start-up phases of the Wastewater Treatment Facility Plan...". The contract was executed September 4, 1990, but there is no resolution or ordinance that authorizes its execution. The minutes from the Town meeting, held that same day, reflect that the contract was accepted after a motion by Alderman ____ , and an affirmative vote of the Aldermen.

The language of the Town charter is mandatory and municipal acts not undertaken consistent with mandatory charter provisions are ultra vires. Without a resolution, the Aldermen could not bind the Town in any agreement to finance the planning and initial construction of a sewer system. In Tennessee such contractual authority, because it involves a significant expenditure of public funds is:

equivalent in character to the power to levy taxes.... The power to make such a contract, being equivalent in general to the power to levy...taxes, must be exercised in the same manner and by the same authority, that is by a corporate act. [ Mayor and city Council of Nashville v. Hagan, 68 Tenn. 495,500-501 (1876).]

In City of Lebanon v. Baird, 766 S.W.2d 236 (Tenn. 1988), the Tennessee Supreme Court discusses the purpose behind the requirement that a city only undertake certain official action after a formal resolution or ordinance. The Court stated such a rule:

assure[s] that the citizens of the municipality are adequately aware of the proposed action, its particular nature and costs, and are given an opportunity to voice their support or their opposition to the action in advance of the city's commitment to it. In many instances, the formal requirements ...are imposed to protect the taxpayers and because the type of action involved has substantial consequences for the rights and interest of the citizens.

However, under certain circumstances, a municipality may be estopped from denying the validity of its actions, even though ultra vires, where such denial would be wholly inequitable, as where the city has accepted benefits from or induced another to perform their part of the agreement. Lawrence County v. White, 200 Tenn. 1, 288 S.W. 2d 735 (1956); Brown v. City of Manchester, 722 S.W. 2d 394 (Tenn.App. 1968). This does not mean that the act is not ultra vires, but only, that a municipality may still be obligated to pay damages if equity so requires.

Whether this doctrine of equitable estoppel applies depends on 1.) the particular facts and the equities of the case; and 2.) whether the contract is executory or partially or fully performed. The rule is that where the contract is executory (yet to be performed) the municipality will not be estopped from denying the validity of the contract. Mayor and City Council of Nashville v. Hagan, supra, 68 Tenn. at 507. The Court, essentially, implies an obligation to pay.

In looking at the equities of the particular case, the Court also looks to the relative positions of the parties. "For estoppel to arise, the act must have been done with the knowledge that it would be relied upon and the other party has acted in reliance without either knowledge of the true state of affairs or the means of learning the true state of affairs." Baird, at 244. Where both parties are aware of the "true state of affairs" the court will not interfere to protect one of the parties who has "unreasonably" performed.

Looking at the facts involved in your situation it seems clear that ___ unreasonably performed, to the extent it did perform any of the provisions of this contract. The contract was completely executory when the Town voted to terminate in November of 1990. Specifically, the Town's obligation to pay ____was totally contingent on the State's approval of a grant or loan, a contingency that had not occurred. ____ was aware, because it attended and spoke at the Town meeting of September 4, 1990, that the City was concerned about the high rates that would result from establishing a sewer system and was only agreeing to the contract because it "would not cost the Town" unless a loan or grant were obtained. The minutes from that meeting reflect that: "[i]f the Town decides not to pursue the sewage system at anytime _________would not receive payment."

Despite the "liquidated" damages language of the contract, no payment was due the contractor until the Town entered into a contract with the State of Tennessee Department of Health and Environment. The contract provides: "It is the intention of the parties that the grants and/or loan funds be the source of money for payment of these services." (Agreement between ________ and the Town, page 3). Thus the Town's obligations were executory and the doctrine of equitable estoppel would not apply. Further, the Town terminated the contract in a timely fashion (only two months after it was signed) when it learned of the County's plans to establish a county-wide system.

Because the Town has an ongoing working relationship with ____, as its municipal planner, and to the extent ____ can adequately document its time and expenses incurred in preparing the contract and pursuing initial contact with the State, it would be my recommendation to offer to reimburse any such reasonable expenses. However, I would make it clear that the Town has no intention of paying $10,000 "liquidated damages" and that any reimbursement is being offered as a gesture of good faith.

I hope this answers your question. If you have any further questions or wish to discuss this matter further please do not hesitate to contact me.

Sincerely,

Leslie Shechter
Legal Consultant

Please remember that these legal opinions were written based on the facts of a given city at a certain time. The laws referenced in any opinion may have changed or may not be applicable to your city or circumstances.

Always consult with your city attorney or an MTAS consultant before taking any action based on information contained in this database.