A municipal corporation performs certain state functions on a local level and possesses powers that are conferred upon it by the state. A municipal corporation derives the power to govern by the state constitution, state statutes, or through the legislative grant of a charter.
A corporation or its officers cannot do an act, make a contract, or incur liability without authorization. All acts done by a municipal corporation beyond the scope of the powers granted are void. A municipal corporation is thus confined to the circumference of the power granted and cannot travel beyond the scope of its charter or in excess of the granted authority[i].
In executing contracts, municipalities are presumed to be acting within the broad scope of their authority. Municipalities are authorized to execute contracts and are liable for any breach[ii].
When a state contracts, the state is liable on contracts made for its benefit like any private party. Additionally, a state waives immunity from liability when the state contracts with private citizens. However, the state does not waive immunity from suits simply by contracting with a private person. In order to sue a state, legislative consent is necessary[iii].
A council or governing body makes contracts on behalf of a municipality. A municipality is contractually bound by contracts made by the council or governing body. The liability arises by the original act or by ratification.
Formal requisites of a binding contract are:
- it must comply with the statutes or municipal charters requiring the formality of an ordinance;
- it must be in writing;
- it must be signed by a person authorized by the municipal council; and
- it must be duly authorized by the board or the council.
However, an irregular and unauthorized act of a municipal corporation can be corrected by subsequent ratification and confirmation[iv]. A municipality’s agreement is manifested by its acts and conduct[v].
Usually statutes require a municipality to adopt an annual budget and prohibit expenditures for which no appropriation is made. In most states, a municipality cannot bind itself by contract to expenditures for more than one year. For example, in New Jersey, contracts for performance of services must not exceed twenty-four consecutive months and contracts for professional services must not exceed twelve consecutive months[vi].
Additionally, a municipal agreement having a perpetual term is not preferred. When a municipality exercises its governmental powers as opposed to granted powers, a contract entered by a governing body will not be binding upon its successors. Every contract is made subject to the condition that its fulfillment will not affect a proper exercise of the police power. However, when a statute specifically empowers unlimited duration, a municipality can enter into a contract for an unlimited time.[vii].
When a municipality voluntarily accepts and retains the benefit of a contract on a subject in which the municipality had power but exercised the power defectively, the doctrine of quasi contract applies. The municipality is subject to implied liability over such acts. A municipality is duty bound to refund money obtained by mistake or without authority of law. The liability does not arise from any contract entered into, but from the general obligation to do justice[viii].
Additionally, a municipal corporation is estopped from escaping liability on a contract made on its behalf. In state actions, estoppel arises due to positive acts of municipal officials that induce parties to act in a certain manner. The parties must rely upon an official’s actions by incurring a change of position or making expenditures relying on the officials’ actions. When a public body’s actions create a situation where it is inequitable and unjust to permit the public body to deny the act done or permitted to be done, the doctrine of estoppel is applied. However, estoppel is not available in every situation. Where the matter is within their authority and not illegal, the municipality is bound by its dealings even though the power is exercised in an irregular fashion or in disregard of a directory provision in the charter[ix].
[i] Highgate Condominium Asso. v. Watertown Fire Dist., 210 Conn. 6, 16-17 (Conn. 1989).
[ii] Boca Raton v. Gidman, 440 So. 2d 1277, 1280 (Fla. 1983).
[iii] General Servs. Comm’n v. Little-Tex Insulation Co., 39 S.W.3d 591, 594 (Tex. 2001).
[iv] De Muro v. Martini, 1 N.J. 516, 522 (N.J. 1949).
[v] B. F. Goodrich Rubber Co. v. Collinsville, 101 S.W.2d 583, 584 (Tex. Civ. App. 1937).
[vi] Town of Secaucus v. City of Jersey City, 20 N.J. Tax 562, 568-569 (Tax Ct. 2003).
[viii] Methodist Episcopal Church South v. Vicksburg, 50 Miss. 601, 605-606 (Miss. 1874).
[ix] Parker, supra, 592. Cross v. Whedon, 93 Mich. App. 13, 18-19 (Mich. Ct. App. 1979).