My Deal Was Approved By High-Ranking Government Officials How Can I Not Have a Binding Contract?
Parties entering into contracts with corporations, limited liability companies, and other legal entities often require proof, in the form of resolutions by the board of directors or members authorizing an identified officer to sign the contract on behalf of the entity, that a contract signed by that officer will bind the entity. In the absence of such evidence of actual authority, if one of the parties disputes the validity of the contract, the concept of the “apparent authority” of a high ranking officer to bind the entity may save the day for the party seeking to enforce the contract.
When the party disputing the validity of the contract is a government agency, however, apparent authority will not cut it. No matter how impressive the title of the person who signed the disputed contract on behalf of the government may be, if he or she did not have actual authority to bind the government, there is no enforceable contract. A real estate developer learned that hard lesson in a May 1, 2020 decision issued by the Maryland Court of Special Appeals in The Mayor and City Council of Havre de Grace v. K. Hovnanian Homes of Maryland, LLC.
The developer, K Hovnanian Homes, purchased property in the City of Havre de Grace, Maryland on which it intended to develop a residential subdivision. The developer proposed to enter into a “Recoupment Agreement” with the City. Under that agreement, the developer would build the infrastructure needed for the development, roads and water and sewer lines. The City would reimburse the developer for the infrastructure costs later when the developed lots were sold to homeowners and the homeowners paid to use the roads, water services, and sewer services.
The agreement was presented to the City Council which approved it by unanimous vote. The agreement was modified to provide in the last section that “The City Council of Havre de Grace has approved this Recoupment Agreement, and authorized the Mayor to sign the Agreement, by affirmative vote at the meeting of the City Council on October 4, 2010.” The Mayor, however, never signed the agreement.
The developer proceeded to construct the roads and water and sewer lines, develop the property, and sell lots to homeowners. However, when lots were sold, the City did not pay the fees provided for in the recoupment agreement. Because the Mayor had not signed it, the City contended that the agreement was not binding on the City.
The developer sued the City to enforce the recoupment agreement. The trial court ruled in favor of the developer. The City appealed to the Court of Special Appeals.
The Court of Special Appeals reversed. The Court devoted eight pages of its opinion to analyzing the Charter of the City of Havre de Grace and the structure of the City’s government. The Court noted that if the City Council had enacted an ordinance and the Mayor had neither signed it nor vetoed it within 14 days, the ordinance would be deemed approved by the Mayor under the Charter. However, the procedures for enactment of an ordinance, including that it be considered by the City Council at meetings on two separate days absent a suspension of the procedural rules, and that the ordinance be certified to the Mayor by the Director of Administration, had not been followed with respect to the recoupment agreement. If the recoupment agreement was not an ordinance, it could only be enforceable as a contract of the City. The Charter required contracts to be signed by the Mayor.
The Court said that “[e]very person is presumed to know the nature and extent of the power of municipal officers, and therefore cannot be deemed to have been deceived or misled by acts done without legal authority.” The reason for this rule, the Court said, is to protect to public. “[I]t seems more reasonable that an individual should occasionally suffer from the mistakes of public agents or officials, than to adopt a rule, which through proper combinations and collusion, might be turned to the detriment and injury of the public.” In other words, government officials have no apparent authority to bind the government. Because the Mayor had not signed the recoupment agreement, the City was not bound by it despite unanimous approval by the City Council.
The Court of Special Appeals’ decision is not an anomaly. Many courts follow the rule that government agencies are not bound by contracts if the contracts have not been approved properly because actual authority can be ascertained from statutes and regulations. However, the fact that it took the Court of Special Appeals eight pages of analysis of Charter provisions to determine whether the recoupment agreement had been properly approved, however, calls into question that reasonableness of the presumption that those who deal with the government can readily “know the nature and extent of the power of municipal officers.”