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Tri-Tech Environmental Engineering, Inc. v. Nutley Board of Education

L-009675-08 (N.J. Super. Law Div. 2009) (Unpublished)

CONTRACTS; MUNICIPALITIES; SETTLEMENTS — A settlement agreement between a private company and a municipality aimed at resolving a contract dispute will not be enforced if the municipality had no source of funds to honor the settlement and if the settlement contained provisions that are contrary to law.

A construction management company entered into a contract to manage the expansion and renovation of seven schools within a municipality’s school district. The contract was subject to a condition that the required funding for the project be approved by a public referendum and would be partly funded by the state. Neither party questioned whether a “no bid” contract was appropriate under the statute. Moreover, when the referendum for the project was defeated, neither party attempted to modify the contract. After the contract was executed, the state awarded a grant to the municipality in connection with the project, provided that any consultant contracts funded through the grant meet state requirements that were not part of the initial contract with the management firm. Again, neither party attempted to modify the contract reflecting these changes. Finally, six years later, a referendum was passed that authorized the project for all seven schools. At that point, the school board advised the construction management firm that it no longer needed its services because of what it called a reduced scope of work.

The management firm then terminated the contract and filed an arbitration demand. The parties reached a settlement during the arbitration proceedings. The agreement obligated the municipality to pay the management firm a certain sum and, in turn, required the management firm to perform certain additional services in connection with the project. The settlement agreement (which required the firm to provide services to the municipality through 2011) on its face violated a state law restricting contracts to twenty-four months. It was also a contract for services that was unsupported by a funding source. The resolution passed by the municipality with respect to the settlement stated that the approval of the settlement was expressly conditioned upon the opinion of bond counsel that the municipality’s obligations could be funded from the money available from a prior referendum. The board’s attorney wrote to the management firm that it had reviewed the written opinion of bond counsel and that it believed the opinion satisfied the condition contained in the resolution. However, the opinion of bond counsel was, in fact, contingent upon a number of factors. After an initial payment under the settlement agreement, the board adopted a resolution “voiding” its prior resolution approving the settlement. The board claimed that no surplus monies remained from the earlier referendum to pay the settlement. The management firm sued to enforce the settlement agreement.

The Court held that the management firm could not claim a right to proceed with a summary action because the statute only permitted such an action to vacate an arbitration award. In the instant case, the Court held that the settlement agreement was not an “arbitration award.” It noted that the settlement agreement did not provide that disputes over its enforcement should be referred to arbitration. Thus, it held that enforcement was specifically reserved to the courts. The Court ruled that the principle of unilateral mistake required rescission of the settlement agreement. First, it held that it would be unconscionable to enforce the agreement because the board had no source of funds to honor the settlement and because the settlement contained provisions that were contrary to law. Second, the board mistakenly believed that its bond counsel had opined that the settlement agreement could be funded entirely through the money raised in the earlier referendum. It noted that the board’s resolution expressly conditioned its approval upon an unequivocal opinion from bond counsel that the earlier proceeds could lawfully and completely fund the settlement. Third, the Court found that the board’s mistake was reasonable and was based, in part, on a misplaced reliance on its own bond counsel’s opinion on the matter. It believed that any error by counsel should not be held against a public body. Fourth, it held that the only prejudice to the management firm would be to return to arbitration of its claims and temporarily disgorge the initial payment it received as a result of the settlement agreement. Finally, the Court ruled that considerations of equity warranted rescission since: (a) the dispute concerned a substantial expenditure of public funds; and (b) both sides had entered into a contract of questioned legality that was premised upon a speculative future condition that never materialized.

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