Chemical Bank v. Washington Public Power Supply System: an Aberration in Washington's Application of the Ultra Vires Doctrine

• Publication year: 1984

UNIVERSITY OF PUGET SOUND LAW REVIEWVolume 8, No. 1FALL 1984

COMMENTS

Chemical Bank v. Washington Public Power Supply System: An Aberration in Washington's

I. Introduction

The Washington Supreme Court has given new life to the old, but very powerful, ultra vires doctrine.(fn1) In two recent decisions, Noel v. Cole(fn2) and Chemical Bank v. Washington Public Power Supply System,(fn3) the Washington Supreme Court applied different forms of the doctrine to invalidate contracts between public entities and private parties. In Chemical Bank, the court used the form known as primary ultra vires(fn4) in holding that Washington public utility districts and municipalities did not have statutory authority to enter into contracts that obligated them to pay for bonds sold to finance the construction of two aborted nuclear power plants.(fn5) Six months earlier in Noel, the court applied the form of the doctrine known as secondary ultra vires(fn6) in determining that the State Department of Natural Resources improperly exercised its authority to sell public timber when it failed to comply with provisions of the State Environmental Policy Act (SEPA).(fn7)

The Washington Supreme Court erred in Chemical Bank by misapplying the distinctions between primary and secondary ultra vires that it had articulated in Edwards v. City of Renton(fn8) and reaffirmed in Noel.(fn9) In the interest of consistent, fair, and logical results, the court will ultimately need to retreat from the very technical interpretation of primary ultra vires that it applied in Chemical Bank. Otherwise, the court may find itself splitting hairs over the exact scope of enabling legislation when the statutes and subsequent legislative acts manifest approval of the actions taken.(fn10)

II. Development of Ultra Vires in Washington

A. Introduction

Municipal corporations, public utility districts, and state agencies possess only the powers granted in their enabling legislation.(fn11) Legislatures, as creators of these subordinate units of government, may enlarge, abridge, qualify, or even repeal the powers of municipal corporations.(fn12)

Historically, courts have used the ultra vires doctrine as a tool to control the actions of public entities.(fn13) Contracts that exceeded the scope of an agency's legislatively granted authority were declared void and unenforceable.(fn14) Thus, the doctrine protected citizens from the consequences of improvident acts of their government.(fn15) The emergence of two different forms of the doctrine, however, created some confusion. An analysis of how the doctrine is applied must begin with an explanation of each form.

B. Primary Ultra Vires

The Washington Supreme Court has defined a primary ultra vires act as one that a municipality has no authority whatsoever to perform.(fn16) Since public entities derive authority from state constitutions and statutes, acts that are primary ultra vires are outside the scope of the pertinent authorizing instrument.(fn17) Consequently, a primary ultra vires contract is void and unenforceable.(fn18) No performance by either party can give an unlawful contract validity.(fn19) More important, a party to a primary ultra vires contract is foreclosed from seeking any quasi-contractual relief.(fn20)

The classic application of the primary ultra vires doctrine involves the invalidation of actions that directly contravene express constitutional or statutory provisions. For instance, a water district violated the doctrine when it obtained the support of a private developer to expand the boundaries of the district in exchange for deferring collection of an assessment.(fn21) The agreement was primary ultra vires because it expressly violated the state constitution's prohibition on the lending of credit.(fn22) Primary ultra vires has also been used to invalidate unauthorized personal service contracts to market municipal bonds(fn23) and to prohibit the state from making voluntary payroll deductions to the political action committee of an employee's union.(fn24) In each of these cases the party that had contracted with the public entity was denied any equitable relief.(fn25)

Other primary ultra vires cases contain more subjective determinations of the public entity's authority. In State ex rel.

PUD No. 1 v. Wylie,(fn26) a public utility district attempted to acquire all of the power-generating resources of a private electric utility. The court concluded that the PUD's plan to sell $134 million in revenue bonds was ultra vires even though the district's enabling statute authorized the acquisition of generating resources outside its boundaries. The court reasoned that the scope of the PUD's authority was limited to acquisitions that were not unreasonably large or entirely inappropriate for purposes of meeting its customers' electric energy needs.(fn27)

The harsh treatment of parties who enter into primary ultra vires arrangements with public entities is grounded in fundamental common law assumptions about the difference between public and private organizations.(fn28) The acts of public agencies and municipal corporations are matters of public record, and, as such, their authority to act can be readily ascertained. Thus, all who contract with a municipal corporation are charged with constructive knowledge of the public entity's authority and limitations.(fn29) The constructive knowledge theory can be traced to English common law and has been applied in the United States for over a century.(fn30) Washington State embraced this notion long ago.(fn31)

Courts have consistently concluded that the need to protect citizens from the usually expensive consequences of unauthorized municipal actions outweighs the injustice wrought upon the private contracting party.(fn32) Courts, therefore, deny equitable remedies, such as equitable estoppel, against governmental entities that commit primary ultra vires acts.(fn33)

C. Secondary Ultra Vires

Courts apply a different form of the ultra vires doctrine to invalidate contracts that are within the authority of a public entity but that involve procedural irregularities in formation or execution.(fn34) The Washington Supreme Court has described such arrangements as secondary ultra vires.(fn35)

Secondary ultra vires contracts are distinguishable from their primary ultra vires counterparts because they stem from legitimate exercises of authority and the courts may afford equitable relief.(fn36) Such actions are within the substantive authority of the public entity and are undertaken in good faith for a tangible public benefit, but are executed in a statutorily deficient manner.(fn37) Equitable estoppel may be applied against a public entity that commits a secondary ultra vires act.(fn38) Thus, the public entity cannot use the doctrine to shield itself from the consequences of procedurally improper acts that are within its general authority. Although a finding of secondary ultra vires invalidates the contract, the private party often can obtain quasi-contractual relief.(fn39)

The Washington Supreme Court has adopted the aforementioned distinctions in applying the secondary ultra vires doctrine. Contracts for bridge(fn40) and road(fn41) construction, franchises for the operation of street railways,(fn42) and contracts for the acquisition of electric power plants(fn43) have all been recognized as beneficial public acts within the authority of the sponsoring public entity.(fn44) In each instance, the public entity was authorized to contract for the service provided, but it had improperly executed its authority. Nevertheless, the entities were required to pay to the private party the reasonable value of the benefits provided.

Application of the doctrine of equitable estoppel to secondary ultra vires acts prevents public entities from profiting by authorized, but procedurally improper, actions.(fn45) The Washington Supreme Court recognized very early that it is manifestly unjust to place the burden of guaranteeing a procedurally proper contract on the party contracting with the public entity.(fn46) To do so would permit the public to receive the benefit of goods and services without adhering to procedural requirements.(fn47) In recent years the subject has been addressed within the context of the sovereign immunity debate. The argument made is that a citizen has a right to expect the same standard of honesty and fair dealing in contracts with public entities as is expected in contracts between individuals.(fn48)

In Jones v. City of Centralia,(fn49) the court recognized that the expectations of private parties to a procedurally improper municipal contract should be protected.(fn50) The court stated that: While laws vesting municipal corporations with statutory powers must be construed by the courts in such a manner as to prevent municipal corporations from exercising powers not conferred upon them by law, courts should not . . . be overly technical in determining just how and by what means municipalities shall exercise powers undoubtedly vested in them by statute.(fn51) The court applied this principle of statutory construction to uphold the validity of an election by the people of Centralia authorizing the issuance of bonds for construction of a dam.(fn52) The election was, in fact, the second time that citizens had approved the measure. The second election was...