Original Author: Hemsley, Sid
Date of Material: 02/20/2004
Contracts--Laws and regulations
Reviewed Date: 04/22/2021
MTAS was asked whether the city was liable on a contract to contribute to the national guard armory.
FROM: Sid Hemsley, Senior Law Consultant
DATE: February 20, 2004
RE: Contract to Contribute to National Guard Armory
The Town has the following question: Is it bound by a contract it entered into with the State of Tennessee, Military Department in 1990, to pay $10,000 toward the construction of a national guard armory, which has not yet been built, but which is apparently scheduled for construction shortly?
The answer depends upon whether the armory is near enough to the point of construction that it would be bad faith and unfair on the part of the city to repudiate its contact to pay $10,000 toward the construction of the armory. If the armory is anywhere reasonably near that point, the city probably is locked into its contribution.
I provide an answer to that question with some reluctance. That reluctance stems from the fact that I may not have all of the documents that pertain to the question. For that reason, I have had to make an assumption, which is something that I do not like to do with respect to legal questions. The most important document I do not have is the actual contract at issue (if it exists), which would have been signed somewhere after August 2, 1993. But I have made an assumption that the contract at issue is the one into which the city entered on August 22, 1990, and that no later contract exists. There are three reasons for my assumption:
First, the Town has no such contract in its records.
Second, apparently no other city in the County has a contract with the Tennessee Military Department later than the 1990 contract.
Third, based on a letter from the Tennessee Military Department to the Mayor, dated November 15, 2003, the military department is relying on the contract entered into between the City and the State Building Commission on August 22, 1990.
I have some correspondence between the Tennessee State Military Department and the Town, but I may not have it all.
The Tennessee Adjutant General is authorized by Tennessee Code Annotated, § 58-1-501, to construct armories within the state. Under Tennessee Code Annotated, § 58-1-506, he can enter into cooperative agreements and contracts with the federal and local governments. Tennessee Code Annotated, §§ 58-1-508–510 authorize the adjutant general to accept aid from local government for armories, and authorize local governments to procure land for, and appropriate money, for the construction of armories.
On August 22, 1990, the Town entered into a “Standard Form Of State/Local Agreement For Construction Of A National Guard Armory” with the Tennessee Military Department. Under that agreement, the town agreed to pay $10,000 for its share of the construction of a national guard armory to be constructed in the County. Actually, the June 4, 1990, minutes of the City Council reflect that the $10,000 was to be a loan, to be paid back in rent during the next four years. The August 6, 1990, minutes of the Council indicate that a letter was read “for” (from?) the Mayor regarding the national guard “loan,” and that there was a “new agreement with minor changes (none of which could be found).” The Mayor was authorized to sign the agreement. Presumably, that is the agreement that the Mayor signed on August 22, 1990. However, it contains no mention of a loan; it plainly speaks of the $10,000 as a contribution.
The August 2, 1993, minutes of the City Council, indicate that the Mayor said that:
a resolution had been passed about a year ago to loan the armory $10,000 to be paid back like rent. He said that they want a new resolution passed because they are still working on it. There was a discussion. The Mayor said to pass it.
On August 2, 1993, the Town did pass a resolution, which authorized the mayor to sign an agreement for the construction of a national guard armory in the County, “the city’s percentage contribution of pro rata share of construction not to exceed $10,000 plus (15%) contingency.” The Mayor signed that resolution. However, it does not appear that any such contract reflected in the resolution was ever signed or even existed.
The contract the town authorized the Mayor to sign in the August 2, 1993 resolution differs from the contract he signed on August 22, 1990. That resolution calls for a pro rata share of the cost of the armory up to $10,000, plus a 15% contingency fee, while the 1990 contract was for precisely $10,000. But as I have indicated above, my assumption is that the 1990 contract is actually the only one in existence. But the 1993 resolution is probably important from the perspective that it does reflect the intention of the city–three years after it entered into the 1990 contract–that it contribute up to $10,000 for the construction of the armory.
I am not sure why references in the above minutes of the town refer to the payback of the $10,000 contribution by way of rent. Tennessee Code Annotated, § 58-1-512(c), appears to require money derived from the use of armories to be spent on maintenance, repair, upkeep, etc. But if there was to be some kind of contribution payback by way of rent, the language in the 1990 contract (and of the 1993 resolution) speaking of the $10,000 as a contribution, and the language of the minutes of the city’s meetings speaking of the $10,000 as a “loan,” may not have been inconsistent. The parties may have contemplated (and may still contemplate) a rental agreement that would have allowed the Town to recover its contribution in rent. In all events, nothing alters the fact that under the August 22, 1990, contract, the $10,000 is a “contribution.”
But over 13 years have passed since the city signed the August 22, 1990 contract, and no construction of the armory has yet occurred. There is no durational term in the contract, and there is no time expressed in the contract for the building of the armory. Indeed, the only provision that pertains to time is Article V, which provides that, “The Local Government share will be paid to the state, upon demand of the state and immediately subsequent to the execution of a bona fide contact with the successful bidder.”
It is said in a number of Tennessee cases, and at least two U.S. Sixth Circuit Court of Appeals cases (Tennessee is in the U.S. Sixth Circuit) that where a contract has no durational term, it is terminable at the will of either party, with reasonable notice. [See Apco Amusement Co. v. Wilkins Family Restaurants of America, Inc., 673 S.W.2d 523 (Tenn. Ct. App. 1984); Cates v. Electric Power Board of the Metro. Gvt. Of Nashville and Davidson County, 655 S.W.2d 166, Tenn. Ct. App. 1983); First Flight Associates, Inc. v. Professional Golf Co., 527 F.2d 931 (6th Cir. 1975); Misco, Inc. v. United States Steel Corp., 784 F.2d 198 (6th Cir. 1986)].
In Misco, Inc. v. United States Steel Corp., above, the Court said that, “Reasonable notice of termination flows from and must be determined in accordance with the standards of good faith and fair dealing implied in every contract.” That there is a covenant of good faith and fair dealing implied in every contract (except employment contracts) in Tennessee is supported by abundant case law. [See, for example, Wallace v. National Bank of Commerce, 938 S.W.2d 684 (Tenn. 1997); Covington v. Robinson, 723 S.W.2d 648 (Tenn. Ct. App. 1986); TSC Industries, Inc. v. Tomlin, 743 S.W.2d 169 (Tenn. App. 1987).]
With respect to the application of that covenant to what constitutes reasonable notice, Misco, Inc. v. United States Steel Corp., above says that:
The determination of what constitutes reasonable notice, however, is a fact-specific inquiry dependent upon the length of the contractual relationship between the parties, the reliance which either party has placed upon the continuing vitality of the contractual relationship, the particular business involved, and the practices and customs of the industry. [At 203]
In the case of the contract between the Tennessee Military Department and the Town of Cumberland Gap, the contractual relationship has lasted for over 13 years. Because there was no durational term in the contract, it seems clear that the town could have backed out of the contract sometime during that period by giving the Tennessee Military Department notice of that fact. The only record of the town having taken any official action with respect to the contract, is the August 2, 1993 resolution that, while it is not a carbon copy of the August 22, 1990 contract, indicates that the city still intended to contribute up to $10,000 for the armory. [The County IDB appears to have taken some action sometime in 1999 or 2002 that put a time limit on the time it would continue to make land available for an armory. I do not know the ultimate outcome of that action.] But as I understand the facts, the city never gave the Tennessee Military Department notice that it did not intend to continue its $10,000 commitment to the armory, even though the delay in the armory’s construction was, at least from time to time, a well-publicized local issue.
I am far from an expert on the process by which the state builds armories, but understand that the process does rely a great deal on local financial support, including the provision of land and financial contributions. It is also apparently a fact of that process that long delays can be expected before an armory might actually be build because the availability of funds at the federal and state levels for such projects can be an uncertain prospect. The city was bound to know that such a delay might occur when it entered into the contact in 1990. As noted above, as the years went by and no armory was forthcoming, it could have withdrawn its financial commitment by giving the Military Department notice of its withdrawal.
But if the construction of the armory is imminent, or is even a reasonable prospect on the near horizon, I doubt the town can repudiate the contract. The reason is that if either of those two conditions exist, the town’s withdrawal of its $10,000 from the project would probably violate the covenant of good faith and fair-dealing implied in the contract. Under Article V of that contract, the $10,000 is not due until “immediately subsequent to the execution of a bona fide
contract with the successful bidder.” But the Military Department probably has a right under that covenant to expect that the money local governments have promised to pay in support of the project will not be withdrawn during some reasonable period before those bids are let.