Bureau of Municipal Finance Law
The U.S. Court of Appeals for the 1st Circuit ruled against a company which supplied road salt to the City of Boston in the winter of 2004-2005 and then disputed with the City over the amount owed for the deliveries. The decision is International Salt Company, LLC v. City of Boston, (1st Circuit. Mass., December 18, 2009).
In August 2004 the City of Boston sought bids for 75,000 tons of road salt for the upcoming winter season. The City accepted the bid of International Salt Company, LLC (ISCO) and a contract was executed. Under the terms of the contract, ISCO agreed to supply 75,000 tons of road salt at $36.42 per ton for a total price of $2.7 million. In October 2004 the City Auditor certified the appropriation of funds. A week later the Mayor approved the contract in writing.
ISCO delivered about 71,000 tons of road salt to the City by February 2005 at the agreed price of $36.42 per ton. It was a very snowy winter, however, and the City officials demanded additional deliveries through the end of the contract term on June 30, 2005 so as to ensure public safety. ISCO contended that it was obligated to supply only 75,000 tons at $36.42 per ton. The company informed the City that shipping costs had risen sharply and any deliveries in excess of 75,000 tons would have to be paid for at a price to be negotiated or later determined by a court. Under protest, ISCO delivered an additional 27,000 tons in excess of the 75,000 ton contract figure. Although ISCO wanted a price increase for the 27,000 additional tons of road salt, the City paid the vendor at the $36.42 contract rate. ISCO attempted to negotiate with the City and argued that the City by placing orders in excess of the contractually established 75,000 ton figure had implicitly agreed to pay the fair market price for the extra deliveries. ISCO's position was that the City should be expected to pay the market rate of $56.37 per ton instead of the contract price of $36.42 per ton. Consequently, ISCO asserted that the City of Boston should pay $1.5 million for the additional 27,000 tons instead of the $984,000 amount as calculated by the City.
When contract negotiations reached an impasse, ISCO filed suit in federal District Court in Boston which had diversity jurisdiction since ISCO was a Pennsylvania firm doing business with a Massachusetts municipality. The District Court ruled in favor of the City and ISCO appealed to the First Circuit Court of Appeals. Legal counsel for ISCO argued that the plaintiff fully met the terms of the contract by supplying 75,000 tons of road salt at the agreed upon price. When the City requested additional deliveries totaling 27,000 tons, ISCO characterized it as a supplemental agreement at the then market tonnage rate which was enforceable under the emergency provision of the State Uniform Procurement Act (M.G.L. Ch. 30B) as well as by the doctrine of equitable estoppel.
The federal 1st Circuit Court of Appeals wrote that this litigation concerned an issue of contractual interpretation. Both the plaintiff and the City agreed with the Court that ISCO had to prove a new contract had been formed to win its case. The Court then examined the actions of the parties against the background of Massachusetts state statute and the City of Boston Charter. It ruled that both M.G.L. Ch. 30B (Uniform Procurement Act) and the City Charter set forth strict procedural requirements on making contracts in order to protect the public interest and to assure the most favorable price. Under the facts presented, it held that the parties who had numerous communications on this subject never satisfied the strict procedural provisions of the bid law as found in M.G.L. Ch. 30B sec. 17. The Court then examined ISCO's claim that the ordinary public bidding requirements were not applicable due to the emergency exception of the Massachusetts bid law.
Specifically, M.G.L. Ch. 30B Sec. 8 provides that a procurement officer could make emergency purchases for public health or safety reasons but any such purchases under the terms of the statute "shall be limited to only supplies or services necessary to meet the emergency." M.G.L. Ch. 30B Sec. 8 also requires a procurement officer to notify the Secretary of State promptly about any emergency procurement. Agreeing with the District Court, the Court of Appeals held that ISCO failed to demonstrate that a true emergency existed. According to the Court, M.G.L. Ch. 30B Sec. 8 by its terms limited an emergency purchase to those supplies absolutely necessary to meet the emergency, and the City did not have an immediate need for those extra tons of road salt. Furthermore, the City never notified the Secretary of State of the "emergency" purchase as required by the statute.
In addition, the Court of Appeals held that ISCO's new contract claim did not comply with the strict provisions of the City Charter. The Charter expressly required contracts for $10,000 or more to (1) be in writing, (2) be signed by the Mayor and (3) have the City Auditor's certification of an available appropriation. Even though the City Auditor provided the necessary certification of an appropriation, the Court held that there was no written agreement signed by the Mayor for the purchase of the extra salt. The City Charter also lacked an emergency exception provision like that found in M.G.L. Ch. 30B. For these reasons, the Court ruled that ISCO's claim of a subsequent contractual agreement violated the City Charter.
Having determined there was no enforceable contract, the Court then addressed the plaintiff's second legal argument which was recovery under the doctrine of equitable estoppel. Under this legal theory, ISCO claimed that it should be reimbursed at a higher per tonnage rate for the goods furnished in good faith to the City. The Court, however, ruled that Massachusetts law (as interpreted by the Supreme Judicial Court) must be applied in this fact situation. It observed that under prior Massachusetts decisions any party entering into a municipal contract is responsible for knowing the limitations on a city or town's contracting power. In fact, courts in Massachusetts have consistently refused to permit equitable recovery to a plaintiff who furnished goods or services but failed to comply with the material requirements of the public bidding laws. The Court, therefore, felt constrained to follow Massachusetts legal precedents and declined to create a public policy exception to benefit the plaintiff.
Consequently, the Court of Appeals upheld the decision of the District Court and held that ISCO was not eligible to be reimbursed for its extra shipping costs since the plaintiff failed to comply with the State bidding laws and the City Charter. By this decision, any party doing business with a municipality must fully understand the rules for public contracts and noncompliance with these rules risks loss when furnishing goods or services to a governmental entity.