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County of Warren v. Health Care Consulting Services Inc.

A-3690-02T3 (N.J. Super. App. Div. 2004) (Unpublished)

CONTRACTS; MUNICIPALITIES —Even a contingency fee contract with no ascertainable cost that can be budgeted is within the appropriations statute and requires ratification.

A consultant serviced a nursing home pursuant to a series of annual fixed price contracts and assisted in the preparation of the yearly Medicare and Medicaid Cost Reports. Its fee was in the range of $16,000 to $18,000 per year. The nursing home included those costs in its annual budget appropriation request to the municipality. Annually, the Board of Chosen Freeholders would review and approve the municipality’s funding requests and appropriate the necessary funds to the nursing home. The municipality would then budget the fees relating to the contracts as an appropriation to the nursing home and pay the consultant’s invoices to the nursing home pursuant to a County purchase order.

The consultant wrote to the nursing home’s administrator that it had developed a “concept” to increase the home’s Medicaid revenues. The letter offered services at a fee equal to twenty percent of the first year’s additional Medicaid revenue. It requested that the administrator consult with the necessary municipality representatives. The administrator signed the proposal without submitting it to the municipality or for approval by the Freeholders. Thus, no appropriation was ever approved to cover the potential costs of the revenue-increasing proposal.

The nursing home’s administrator was replaced. After a while, the consultant wrote to the nursing home’s new administrator stating that, because of its efforts, the municipality had received an additional $1,621,500 in revenues. It enclosed an invoice in the amount of $324,200 as its fee. The new administrator responded that the municipality would not agree to any contingent fee payment. The County Welfare Board also stated that the Board of Chosen Freeholders should not pay the consultant’s invoice. In response, the consultant sued the municipality for breach of contract.

The lower court dismissed the consultant’s claim, holding that the contract was void as ultra vires. It found that, having failed to comply with the Local Public Contract Law (LPCL), the consultant could not reasonably believe that the contract was a valid and binding on the municipality. On appeal, the consultant claimed that the contingent fee agreement was not ultra vires because it was entered into the same manner as all other contracts between the parties.

The LPCL governs the awarding of public contracts by municipal authorities. Under the LPCL, only the municipality’s governing body, the Board of Chosen Freeholders or its legally established purchasing agents or purchasing board have the authority to contract on behalf of the municipality. Consequently, the Appellate Division held that the nursing home’s administrator did not have the authority to bind the municipality to a contract without the ratification of the Board of Freeholders. The consultant argued that it was not necessary for the Board of Freeholders to make an appropriation because the contract was a contingent fee contract with no ascertainable cost which could be budgeted, bringing it outside of the appropriations statute. It also argued that the fee was not to be paid with or out of public funds, using the term public funds to mean funds derived from taxes. It claimed that the payment would have come from State Medicaid funds, not from taxes. The Court disagreed, holding that when the State appropriates funds to a municipality they are still public funds. Even if the contract were outside the bidding statute, it would still need ratification by the Board of Chosen Freeholders. And, there is no provision in the statutes for an employee of the municipality, in this case the administrator of the nursing home, to enter into binding contracts on behalf of a municipality without first obtaining approval from the Board of Freeholders.

The consultant also argued that if the contract was ultra vires, the lower court should have applied the doctrine of equitable estoppel to make the municipality pay the fee. It argued that it reasonably relied upon an established and ongoing contractual relationship between the parties and the execution procedures for entering into the contract.

The Appellate Division disagreed. The course of dealing between the consultant and the municipality reflected a price range for specific services in the annual range of $16,000-$18,000 range. Those contract terms were substantially different from the unspecified services to be performed by the consultant on a twenty percent contingent fee basis. Thus, the consultant’s proposal was quite different from the parties’ established course of conduct. Even though the Court affirmed the lower court’s dismissal of the company’s breach of contract claim, it remanded the matter to allow the company to pursue a claim for quantum meruit if it desired.

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