Lobolito, Inc. v. North Pocono Sch. Dist.

• Decision Date: 31 July 2000
• Citation: 562 Pa. 380,755 A.2d 1287
• Parties: LOBOLITO, INC., Appellant, v. NORTH POCONO SCHOOL DISTRICT, Appellee.
• Court: Pennsylvania Supreme Court

755 A.2d 1287

562 Pa. 380

LOBOLITO, INC., Appellant, v. NORTH POCONO SCHOOL DISTRICT, Appellee.

Supreme Court of Pennsylvania.

Argued January 31, 2000.

Decided July 31, 2000.

Charles B. Zwally, Harrisburg, Guy P. Beneventino, for Lobolito, Inc.

William J. Rinaldi, Scranton, for North Pocono School Dist.

Before FLAHERTY, C.J., ZAPPALA, CAPPY, CASTILLE, NIGRO, NEWMAN, SAYLOR, JJ.

OPINION

NIGRO, Justice.

We granted allocatur to determine whether an agreement to build a new school, entered into by a school board at the expiration of its term, is binding on the successor school board. For the reasons that follow, we affirm in part and reverse in part. On May 15, 1991, Lobolito, Inc., (Lobolito) and the school board of the North Pocono School District (School District) entered into a written agreement, entitled "Joint Development Agreement." Under this initial agreement, Lobolito proposed to construct, own and operate a sewage treatment plant (STP). The STP would provide sewage disposal services to a new elementary school that the School District proposed to construct on eighteen acres of its own property located in Clifton Township. The STP would also provide sewage disposal services to a residential subdivision, which Lobolito would construct on 220 acres of its own property located in Lehigh Township. Pursuant to the Joint Development Agreement, over the next several years, Lobolito and the School District proceeded to obtain and share the costs of the necessary planning and permit approvals for the proposed STP.

In November of 1994, a new majority of the school board was elected. On December 7, 1994, while still awaiting the approval of needed permits, Lobolito and the old school board entered into a second written agreement, entitled "Memorandum of Agreement"—the agreement at issue in the present appeal. Based on the record before this Court, it appears that the newly elected board members were not yet in place at the time of the second agreement.

This second agreement changed the proposed location of the STP, altered the financing arrangements of the Joint Development Agreement and revised the terms of the STP's service obligations to the new elementary school. It also terminated the Joint Development Agreement.¹ In the Memorandum of Agreement, the School District promised to "proceed with the School District Project, subject to all regulations and laws by which it is governed." Memorandum of Agreement ¶ 7. Under this agreement, Lobolito and the School District would no longer share costs associated with attaining the remaining approvals and permits. Rather, the parties agreed that "all costs incurred in the connection with obtaining permits and approvals for the proposed sewage treatment plant shall be paid by Lobolito ... and shall be recovered by rates and charges as set forth in the Service Agreements...." Memorandum of Agreement ¶ 8. Lobolito claims to have incurred substantial costs after the execution of the Memorandum of Agreement in attempting to acquire the necessary approvals and permits.

Approximately one year after the execution of the Memorandum of Agreement and the school board election, the School District adopted a resolution promulgated by the successor school board which provided that the elementary school would not be built and that, even if it were built, it would not utilize the proposed STP for sanitary sewage disposal services. Believing that the resolution breached its agreement with the School District, Lobolito filed a cause of action seeking to recover its costs and lost profits.

The School District responded by filing preliminary objections in the nature of a demurrer, claiming, inter alia, that Lobolito's Complaint failed to state an actionable claim because the School District's new school board, which Lobolito alleges to have breached the agreement, cannot be bound by a contract executed by the predecessor school board. The trial court granted the School District's preliminary objections and dismissed the case with prejudice. On appeal, the Commonwealth Court affirmed, finding that the succeeding school board could not be bound by a contract executed by the predecessor board which encompassed a governmental as opposed to a proprietary function. Lobolito v. North Pocono Sch. Dist., 722 A.2d 249, 251-53 (Pa.Commw.Ct.1998).²

This Court has long viewed agreements involving governmental bodies in a different light than agreements made exclusively between private parties. Since the mid-nineteenth century, we have distinguished between agreements encompassing governmental functions of governing bodies from agreements encompassing proprietary or business functions. See Western Saving Fund Soc'y of Philadelphia v. City of Philadelphia, 31 Pa. 175, 183 (1858) (distinguishing governmental contracts, or contracts encompassing "things public," from proprietary contracts, or contracts encompassing "things of commerce").³

With respect to those agreements involving municipal or legislative bodies that encompass governmental functions, we have repeatedly held that governing bodies cannot bind their successors. See, e.g., Mitchell v. Chester Housing Auth., 389 Pa. 314, 328, 132 A.2d 873, 880 (1957); Commonwealth ex rel. Fortney for Use of Volunteer Fire Dep't v. Bartol, 342 Pa. 172, 174-75, 20 A.2d 313, 314 (1941); Born v. City of Pittsburgh, 266 Pa. 128, 132-33, 109 A. 614, 615 (1920); Moore v. Luzerne County, 262 Pa. 216, 220-22, 105 A.2d 94, 94-96 (1918).⁴ In Fortney we explained:

In the performance of sovereign or governmental, as distinguished from business or proprietary, functions, no legislative body, or municipal board having legislative authority, can take action which will bind its successors. It cannot enter into a contract which will extend beyond the term for which the members of the body were elected.

Commonwealth ex rel. Fortney, 342 Pa. at 175, 20 A.2d at 314 (citations omitted).

In Mitchell, we described the public policy behind this rule of law in the following terms:

The obvious purpose of the rule is to permit a newly appointed governmental body to function freely on behalf of the public and in response to the governmental power or body politic by which it was appointed or elected, unhampered by the policies of the predecessors who have since been replaced by the appointing or electing power. To permit the outgoing body to `hamstring' its successors by imposing upon them a policyimplementing [sic] and to some extent, policymaking [sic] machinery, which is not attuned to the new body or its policies, would be to most effectively circumvent the rule.

Mitchell, 389 Pa. at 324, 132 A.2d at 878.⁵

Our Court has noted only one exception to the general rule against binding governmental successors. In MacCalman v. County of Bucks, 411 Pa. 316, 191 A.2d 265 (1963), Bucks County through its commissioners entered into a long-term contract with a water and sewage treatment authority. The aim of the contract was to provide safer sewage treatment and water to nine municipalities within the county and it was executed after comprehensive independent studies indicated that the county's public water and sewage facilities were wholly inadequate. Several property owners challenged the validity of the contract, arguing that it bound future county commissioners. The lower court found the contract to be enforceable. We agreed with the lower court's assessment that:

if the [contract] is `deemed to constitute a contractual impairment or limitation upon future county commissioners in a legislative or governmental function, then we ... believe that considerations of urgency and necessity, especially when coupled with the stipulated public interest and absence of bad faith or ulterior motivation, should permit the commitment to be sustained as an exception to the general rule.'

MacCalman, 411 Pa. at 321, 191 A.2d at 267 (quoting Court of Common Pleas of Bucks County, No. 715 December Term, 1962, Satterthwaite, J.).⁶

The most contemporary illustrations of the governmental-proprietary distinction come from the Commonwealth Court. That court has recently explained, for example, that a multi-year custody and securities lending agreement between the Commonwealth's treasurer and a bank encompasses a governmental function (safekeeping the Commonwealth's assets) and thus was unenforceable against the succeeding Commonwealth treasurer. State Street Bank & Trust Co. v. Commonwealth Treasury Dep't, 712 A.2d 811, 815 (Pa. Commw.Ct.1998). The Commonwealth Court has also explained that an employment contract between a township's supervisors and a police chief encompasses a governmental function (ensuring public safety) and thus was unenforceable against future supervisors who wanted to appoint a new police chief. Falls Township v. McManamon, 113 Pa.Cmwlth. 504, 537 A.2d 946, 947 (1988). The Commonwealth Court has also found, however, that a contract between a county's commissioners and a private contractor to operate a free-standing drug and alcohol treatment facility encompassed a proprietary and not a governmental function, and thus could be enforced against successor commissioners. County of Butler v. Local 585, 158 Pa. Cmwlth. 519, 631 A.2d 1389, 1393 (1993).

Applying these principles to the case at bar, we must determine whether the Memorandum of Agreement encompassed a proprietary or governmental function. We first note, as the Commonwealth Court observed below, that the Memorandum of Agreement cannot reasonably be construed only as an agreement to provide sewage treatment services, which is arguably a proprietary function. See Lobolito v. North Pocono Sch. Dist., 722 A.2d 249, 253 (Pa.Commw.Ct.1998). Unless the school was built, no sewage disposal services would be necessary. Thus, the driving force behind the Memorandum of Agreement was construction of the new school. The services aspect of the agreement would be devoid of meaning without the school board's predicate promise to...