TO: Al Major
FROM: Sid Hemsley, Senior Law Consultant
DATE: April 28, 1997
SUBJ: Legality of utility service contract between state and City A.
You have the following question: Is the contract between the Tennessee Department of Corrections and the City A under which the latter provides the former’s prison with water, sewer and gas services invalid because the state turned over the operation of the prison to a private company.
I suspect the answer is no.
Here let me point to a threshold question to which I do not have the answer without knowing precisely the arrangement between the Tennessee Department of Corrections and the private company: Did the turning over of the operation of the prison in question by the Tennessee Department of Corrections to the private company represent a change in the contractual relationship between the Tennessee Department of Corrections and the city? It is conceivable that the turnover could have been made without changing the direct contractual relationship between the Tennessee Department of Corrections and the city.
However, let us assume that the Tennessee Department of Corrections assigned its rights under the contract to the private company, and that the city and the private company are directly dealing with one another over questions of the application of the contract.
At first I considered the possibility that the private company was a third party beneficiary of the contract. For reasons that I will not outline here, that does not appear to be the case. I then combed all of the statutes I could find governing public contracts, and could find none relating to the assignment of the benefits of contracts. However, that search led me to stumble across 48 ALR3d 1062: Electricity, Gas Or Water Furnished By Public Utility As “Goods” Within the Provisions of Uniform Commercial Code, Article 2 On Sales. That annotation indicates while few courts have considered that question, the heavy weight of authority is that such utility services are “goods” within the meaning of the UCC.
The Uniform Commercial Code--Sales is codified at Tennessee Code Annotated, section 47-2-101 et seq. Tennessee Code Annotated, section 47-2-105, defines “goods” within the meaning of the UCC--Sales as:
all things (including specially manufactured goods) which are moveable at the time of identification to the contract for sale other than the money in which the price is to be paid, investment securities (chapter 8 of this title) and things in action. “Goods”also includes the unborn of animals and growing crops and other identified things attached to the realty as described in the section on goods to be severed from realty. (Section 47-2-107).
Needless to say, that definition does not expressly include water, sewer, or gas. However, the cases have reasoned that the sale of water, gas and electricity (but not sewer) are goods because they are “moveable” and can be measured.
The significance of water and gas being “goods” within the meaning of Tennessee Code Annotated, section 47-2-101 et seq., is that Tennessee Code Annotated, section 47-2-201 says this about the delegation and performance and assignment of rights by sellers and buyers of goods:
(2) Unless otherwise agreed all rights of either seller or buyer can be assigned except where the assignment would materially change the duty of the other party, or increase materially the burden of risk imposed on him by his contract, or impair materially his chance of obtaining return performance. A right to damages for breach of the whole contract or a right arising out of the assignor’s due performance of this entire obligation can be assigned despite agreement otherwise.
(3) Unless the circumstances indicate the contrary a prohibition of assignment of “the contract” is to be construed as barring only the delegation to the assignee of the assignor’s performance.
(4) An assignment of “the contract” or of “all my rights under the contract” or an assignment in similar general terms is an assignment of rights and unless the language or the circumstances (as in an assignment for security) indicate the contrary, it is a delegation of performance of the duties of the assignor and its acceptance by the assignee constitutes a promise by him to perform those duties. This promise is enforceable by either the assignor or the other party to the original contract. [Emphasis is mine.]
In the comments to the official text, note 1 says that “Generally, this section recognizes both delegation of performance and assignability as normal and permissible incidents of a contract for the sale of goods. Comment 2 says that “Delegation of performance, either in conjunction with an assignment or otherwise, is provided for by subsection (1) where no substantial reason can be shown as to why the delegated performance will not be as satisfactory as personal performance.” [Emphasis is mine.]
The only limitation on the assignability of the contract between the Tennessee Department of Corrections and the city operates against the latter. [Para D.5.]
Under the contract the city agrees to provide the Tennessee Department of Correction’s prison with water, sewer and gas. If the Department of Corrections assigned its right to receive those services to a private company, that assignment did not materially change the duty of the city; the city is merely delivering the water, sewer and gas service to a party other than the Tennessee Department of Corrections. Arguably, the risk to the city of non-payment of the utility bills is greater than it is with respect to the Tennessee State Department of Corrections. However, that risk apparently would have to be materially greater to permit the city to disclaim the contract. The resolution passed by the city unilaterally changing some of the rates is dated March 13, 1995. Presumably, the private company has paid the utility bills, except the amount of bills reflecting the city’s unilateral change of rates. If that is true, the city’s argument is weak on that point.
Although sewer service is probably not a “good” within the meaning of Tennessee Code Annotated, section 47-2-101 et seq., it has been held that when the contract involves the sale of both goods and non-goods the contract is governed by that statute if the predominant assets transferred are goods. [Hudson v. Town and County True Value Hardware, Inc., 666 S.W.2d 51 (Tenn. 1984)]. In this case, the predominant assets delivered under the contract between the Tennessee Department of Corrections and the city are probably goods: water and gas.
The city’s unilateral raising of the water and sewer rates are probably on shaky legal ground. The basis for the city’s raising of the rates was the increased demand for water, wastewater and gas services (although the resolution provides for no gas rate increases). The city has an argument under Para A.1.c. that it was obligated to provide wastewater service only to the extent of 190,000 GPD average daily flow. However, there is no similar “limit” contained in the contract with respect to water or gas. Likewise, there is no cap on monthly water, wastewater or gas volumes under Paras. A.3.a, b, and c. In fact with respect to monthly wastewater treatment rates, the first 4,000,000 gals. is to be charged at $ 1.60 per 1000 gal., over 4,000,000 at $.70 per 1000 gal. [Emphasis is mine.] That provision suggests that the city contemplated providing over 4,000,000 gal. wastewater treatment per month. If it is assumed that a month is 30 days, and the city provided 190,000 gal. wastewater treatment a day for 30 days, the total provided equals 5,700,000 gals. That figure may not be out of the range contemplated by the city when it entered into the contract with the Tennessee Department of Corrections in 1991, given that over 4,000,000 per month was apparently contemplated in the contract. In addition, under Para. B.1.a and b, the Tennessee Department of Corrections pays minimum bills on water and wastewater treatment, based on certain gallons, the minimum bills escalating over a three month period in 1992 culminating in minimum bills based on the following gallons: water, 4,750,000 gal. beginning June 1, 1992, and wastewater treatment 4,000,000 beginning June 1, 1992.
Under Paras. C.5.a, b, and c, the water, wastewater and gas rates, respectively, are to be reviewed in April, May and June of the second year of each two year contract term (which, based on Paras. C.2--4, would occur in even-numbered years, the next of which is 1998).
Summary of two points:
1. Even if the Tennessee Department of Corrections assigned its contract to the private company (which is not certain based on the limited information at hand), the assignment is probably valid.
2. Any unilateral raising of water and wastewater rates by the city would probably be on legally shaky ground.