Uintah Basin Medical Center v. Hardy

• Decision Date: 30 August 2002
• Docket Number: No. 20000501.,20000501.
• Parties: UINTAH BASIN MEDICAL CENTER, Plaintiff and Appellee, v. Leo W. HARDY, M.D., Defendant and Appellant.
• Court: Utah Supreme Court

54 P.3d 1165

2002 UT 92

UINTAH BASIN MEDICAL CENTER, Plaintiff and Appellee, v. Leo W. HARDY, M.D., Defendant and Appellant.

No. 20000501.

Supreme Court of Utah.

August 30, 2002.

Blaine J. Bernard, Eric G. Maxfield, Christine T. Greenwood, E. Blaine Rawson, Salt Lake City, for plaintiff.

John P. Harrington, Joni J. Jones, Melissa H. Bailey, Salt Lake City, for defendant.

INTRODUCTION

DURRANT, Associate Chief Justice:

¶ 1 This appeal concerns the voidability of certain government contracts. Specifically, we consider the question of when a contract entered into by a predecessor governing body is voidable by a successor governing body. Throughout the country, substantial case law has developed to distinguish between those government contracts that may be voided and those that may not be voided by a successor governing body. Various common law tests have been articulated, all designed to balance the tension between the right of a successor governing body to implement its own policies and not be bound by those of a former body, and the interest in providing some certainty to parties who contract with governing bodies. Utah courts have relied on the governmental/proprietary test, a test under which contracts involving proprietary functions and having reasonable durations are enforceable against successor governing bodies.

¶ 2 In this case, the district court granted summary judgment to a county hospital on the theory that the particular contract at issue, a contract for the provision of pathological services to the hospital by a doctor, was voidable by the hospital's governing body—its board of trustees. The district court held that the contract had been entered into by a predecessor board and thus was voidable by successor boards.

¶ 3 Because we conclude that the contract for pathological services involves a proprietary function, we remand with instructions that the district court determine whether the contract's duration was reasonable.

BACKGROUND

¶ 4 The following facts are undisputed. On November 29, 1994, Dr. Leo Hardy entered into a contract with Uintah Basin Medical Center ("UBMC"), a hospital owned by Duchesne County and operated by a board of trustees. Under the terms of the contract, Dr. Hardy received $400 per month for providing UBMC pathological services on a part-time basis and serving as the director of its pathology laboratory. The contract did not recite a termination date, but provided that either party could terminate the contract for "just cause" following ninety days' notice.

¶ 5 Although Dr. Hardy performed his contractual obligations satisfactorily and received no complaints from UBMC or its medical staff, on July 18, 1996, the UBMC board of trustees voted to give Dr. Hardy ninety days' notice and invite another doctor to join its medical staff as a pathologist and emergency room physician. When Dr. Hardy's termination became effective, UBMC sought a declaratory judgment that it had "just cause" to terminate the contract. Dr. Hardy counterclaimed, contending that UBMC materially breached the contract by terminating him because UBMC did not have "just cause." The district court initially denied the parties' respective motions for summary judgment, ruling that the jury would decide whether UBMC had "just cause".

¶ 6 Following this ruling, the district court accepted supplemental briefing from the parties on an issue UBMC had raised for the first time in its answer to Dr. Hardy's counterclaim: whether the contract violated common law rules against government contracts that bind successor governing bodies. After hearing from the parties, the court granted UBMC summary judgment on the ground that the contract was voidable even without "`just cause' simply because it could not bind successor Boards." In reaching this conclusion, the district court explained, "Due to the rapid advance of science, medicine [sic] changes and needs of patients there should be no reason for such an agreement to continue into the future or be binding on successor [b]oards where the governing [b]oard is a governmental entity." Dr. Hardy appeals. Section 78-2-2(3)(j) of the Utah Code gives us appellate jurisdiction over this case. Utah Code Ann. § 78-2-2(3)(j) (Supp.2001).

ANALYSIS

I. STANDARD OF REVIEW

¶ 7 "In deciding whether the trial court correctly granted [summary] judgment as a matter of law, `we give no deference to the trial court's view of the law; we review it for correctness.'" SME Indus., Inc. v. Thompson, Ventulett, Stainback & Assocs., 2001 UT 54, ¶ 9, 28 P.3d 669 (quoting Ron Case Roofing & Asphalt Paving, Inc. v. Blomquist, 773 P.2d 1382, 1385 (Utah 1989)).

II. RATIONALE BEHIND COMMON LAW RESTRICTIONS ON GOVERNMENT CONTRACTS THAT BIND SUCCESSOR GOVERNING BODIES

¶ 8 Before addressing Dr. Hardy's specific claims on appeal, we briefly discuss the rationale behind the common law rules regarding contracts that bind successor governing bodies.

¶ 9 Government contracts raise public policy concerns beyond those involved with private contracts. See, e.g., Mitchell v. Chester Hous. Auth., 389 Pa. 314, 132 A.2d 873, 876 (1957)

. One such concern involves contracts that extend beyond the term of the governing body that originally entered into the contract. Such contracts, if enforced, potentially allow a former governing body to perpetuate its policies beyond its term and thereby limit a successor governing body's ability to respond to the public's changing needs. See generally Figuly v. City of Douglas, 853 F.Supp. 381, 384 (D.Wyo.1994).

¶ 10 While such concerns militate against enforcing a predecessor governing body's contracts against its successors, the common law also recognizes a countervailing concern: that permitting successor governing bodies to indiscriminately terminate government contracts may make private parties hesitant to contract with government entities, thereby reducing the viability of contracts as a means of solving public problems. See Plant Food Co. v. City of Charlotte, 214 N.C. 518, 199 S.E. 712, 714 (1938).

¶ 11 A desire to accommodate these competing concerns animates the various common law tests for determining whether a contract should be enforced against a successor governing body. The test on which Utah courts rely is known as the governmental/proprietary test. See Bair v. Layton City Corp., 6 Utah 2d 138, 147-48, 307 P.2d 895, 902 (1957)

; see also Salt Lake City v. State, 22 Utah 2d 37, 42, 448 P.2d 350, 354 (1968) (holding that contract for providing water to state capitol grounds was enforceable under the governmental/proprietary test).¹ Under the governmental/proprietary test, a contract is (1) unenforceable against successor governing bodies if it involves a governmental power or function, but (2) enforceable against successor governing bodies if it involves a proprietary power or function and is of a reasonable duration. Bair, 6 Utah 2d at 147-48,

307 P.2d at 902.

¶ 12 Having set forth the governmental/proprietary test, we next apply it to Dr. Hardy's contract to determine whether the contract may be validly enforced against successor hospital boards of trustees.

III. WHETHER DR. HARDY'S CONTRACT IS ENFORCEABLE AGAINST SUCCESSOR BOARDS OF TRUSTEES

¶ 13 Dr. Hardy maintains the district court erred in concluding that his contract was voidable because it bound successor boards.² Relying on the governmental/proprietary test, Dr. Hardy argues that his contract for pathological services involves a proprietary function and therefore was enforceable against successor boards provided it is of a reasonable duration. We agree.

A. Dr. Hardy's Contract Was Proprietary in Nature

¶ 14 The factors on which courts have relied to distinguish between governmental and proprietary contracts strongly support the conclusion that Dr. Hardy's contract for pathological services involves a proprietary function. First, UBMC has not demonstrated that the services Dr. Hardy provides under the contract are "indispensable to the proper functioning of government." County Council v. SHL Systemhouse Corp., 60 F.Supp.2d 456, 465 (E.D.Pa.1999). To the contrary, consistent with the view that Dr. Hardy's contract did not involve functions essential to governance, Duchesne County conveyed the hospital to a non-profit organization on July 3, 2000.

¶ 15 Moreover, under the terms of the contract, Dr. Hardy merely recommended, but did not have authority to set, policies related to UBMC's pathology laboratory. The board's retention of this policymaking discretion weighs heavily in favor of deeming the contract proprietary. See Rhode Island Student Loan Auth. v. NELS, Inc., 550 A.2d 624, 627 (R.I.1988)

(concluding contract was proprietary because contracting party "could neither exercise discretion nor set policy in performance of its duties").

¶ 16 Accordingly, we conclude that Dr. Hardy's contract involves a proprietary function.

B. Whether Dr. Hardy's Contract Was of Reasonable Duration Depends on the Scope of the Contract's "Just Cause" Provision

¶ 17 Under the governmental/proprietary test, Dr. Hardy's proprietary contract is enforceable if its duration was reasonable at the time the parties executed the contract. Bair, 6 Utah 2d at 148, 307 P.2d at 902. Whether a contract's duration is "reasonable" depends on the circumstances of each case. See, e.g., id., 6 Utah 2d at 143, 148, 307 P.2d at 899, 903 (holding that a fifty-year sewage treatment contract was valid because its lengthy duration allowed city to obtain treatment facilities without undue delay and expense, and also facilitated long-term planning). Depending on the circumstances, a lengthy or indefinite contractual duration is not necessarily unreasonable. See id.; see also Salt Lake City, 22 Utah 2d at 42,

448 P.2d at 354 (validating contract that required city to provide free water to land as long as the land served as the state capitol grounds, noting that city derives continuing economic benefit from capitol's presence).

¶...