June 16, 1995
Your question is: What is the term of the contract between the City
and County for the distribution of the city's share of the sales tax? Unfortunately, I cannot give
you a definite answer. The best I can do is point to some of the law in Tennessee and in other
jurisdictions bearing on the question.
The mayor was empowered by a resolution of the city council on
October 8, 1974 to relinquish its share of a sales tax increase to the County for the contract in
question was first entered into on May 10, 1967. In the absence of the contract, one-half of
the sales tax collected by the county under Tennessee Code Annotated, section 67-6-712(a)(2)
would be allocated to the city and to the county, based upon where it was collected. But
under section 2 of the contract, the City surrendered to the County a portion of its share of the
It is clear that the city and the county had the statutory authority to
enter into the contract. Tennessee Code Annotated, section 67-6-712(a)(2)(C) provides "that
a county and city or town may by contract provide for other distribution of the one half (1/2)
not allocated to school purposes." Unfortunately, the statute does not provide for a term
limit upon the contract. Regrettably, the same thing is true of the contract itself. The only
question that remains is whether the city could have entered into such a contract beyond
the term of the board or in perpetuity. The contract obviously fits the first category, and may fall
into the second category.
Unfortunately, the law from other jurisdictions can be confidently
cited on both sides of that question. But if the question is looked at down the rifle barrel
of Tennessee law, the answer may not be encouraging to the city.
Because it is probably not readily available to you, I am enclosing
10A McQuillen, Municipal Corporations, §§ 29.100--102 on the subject, and Lawrence, David M.,
"Contracts the Bind the Discretion of Governing Boards," Popular Government, Summer, 1990.
Although the latter publication is related to North Carolina law, it is a good but brief treatment of
the subject useful in any jurisdiction. In addition, I cite for your consideration the following from
sources that should be generally available to you:
- 56 Am.Jur.2d, §§ 154 and 499.
- 63 C.J.S., Municipal Corporations, § 987
- Washington County Board of Education v. Marketamerica,
693 S.W.2d 344 (1985).
- City of Shelbyville v. State ex re. Bedford County, 415 S.W.2d 139
- 70 A.L.R. 794 (Power of Board to Appoint Officer of Make Contract
Extending Beyond Its Own Term).
- 149 A.L.R. 336 (Power of Board to Make Appointment to
Office or Contract Extending Beyond Its Own Term-Supplementary).
Many of the above citations distinguish between contracts made
in the municipality's proprietary, and in its governmental, capacity, usually declaring that with
respect to the latter the present board cannot bind future boards. The contract in this case
was undoubtedly made in the city's governmental capacity. However, the significance of that
distinction in Tennessee is open to question. The Tennessee Supreme Court in Marketamerica
rejected it as not particularly helpful in analyzing contracts extending beyond the term of the
present board. [Also see State ex rel. Association For the Preservation of Tennessee Antiquities
v. City of Jackson, 573 S.W.2d 750 (1978)].
In Marketamerica the Court upheld such a contract between a private
business and a school board. However, the contract had a definite term, and is set apart from
the contract between the city and Bradley County in other respects. Standing by itself, that
case does not give one a solid feel for how well the contract between the City and County would
But among the cases cited with approval in Marketamerica was
Hamblen County et al. v. City of Morristown et al., 584 S.W.2d 673 (1979). There Hamblen
County sought to invalidate a contact between the county and the City of Morristown for the latter's
operation of two high schools. Hamblen's County, seeking restoration of its right to operate
one of the high schools, challenged the contract on several grounds, two of which were that it
extended beyond the term of the present board, and that it was "in perpetuity."
The Court of Appeals, Eastern Section, rejected both challenges
with the observation that the contract for the operation of the school beyond the life of the present
board was authorized by statute, and the declaration that
Furthermore, the statement that the contract is "binding and irrevocable" does not render the
contract perpetual. The intentions of the parties in entering into this contract are manifested
within the language of the agreement. The agreement calls for extensive expenditures and
long term commitments. Both parties needed protection from arbitrary rescission. This Court
interprets irrevocable to man that the contract could not be revoked at will by one of the parties
over the objection of the other. [Citation omitted.] The contract is and was clearly revocable for
material breach by either party or by mutual agreement.
While the Court did not put its imprimatur upon perpetual contracts,
the general flavor of Hamblen County is not encouraging to the City. The contract between city
and county apparently contemplated "long term commitment." That seems to me visible in
Section 3 wherein the formula for the distribution of the sales tax changes when the ADA in the
two school systems reach 50%. I have no knowledge of what kinds of population shifts were
occurring in 1967, but I suspect the balance was not anticipated for at least several years.
But section 3 of the contract also suggests that even after the balance was achieved, the
formula for distribution of the sales tax would change, and the contract would continue. Neither
Hamblen County nor Marketamerica give us an idea of how long a "long term commitment"
can extend before the courts frown on it. The contract in the former case (in which no calendar
term was expressed) had gone on for 11 years, in the latter case the term of the contract was for
seven years. The contract between the City and the County has gone on for 25 years!
Hamblen County also appears to have drawn a very narrow definition
of a perpetual contract: if it could be revoked by material breach or by agreement of the parties,
it was not perpetual. Undoubtedly, the contract between the City of Cleveland and Bradley County
can be changed by mutual agreement of the parties. Is that enough to remove the contract from
the perpetual category? I cannot answer that question.
Another troubling aspect of Hamblen County is the Court's one
sentence curt declaration at the conclusion of the case that, "This Court also finds the County
equitably estopped from denying the validity of the contract." The doctrine of equitable
estoppel is dealer's choice law. Boiled down with respect to the contract between the City and
the County, the doctrine simply means that if the court thinks the result would be unfair, it will
not let the city get out of the contract even if it has legal grounds for doing so. In other words,
the city could win the legal battle, and still lose the equitable war.
But as discouraging as this letter has been, I still believe that there
is a good possibility a court would end the contract between the city and county on the ground
that 25 years is a reasonable term, that it is illogical that it extend into the lives of several
generations of children. There is law in the above citations to support that outcome if a court
If I can help you further in this or any other matter, please let me know.
Sidney D. Hemsley
Senior Law Consultant