Can a local government that freely enters into a contract later ignore its obligations because a key provision of the agreement violates state law? No, says a Mississippi court, if the parties expressly intended to preserve whatever remaining parts of the contract are viable.

In January 2008, the Claiborne County Board of Supervisors issued a request for proposals (RFP) for rural solid waste collection and disposal services. The county provided the RFP and contract documents to companies that had expressed interest in submitting a bid, including Home Base Litter Control LLC (HBLC).

Among its other provisions, the RFP set an initial term (April 1, 2008 thru March 31, 2011) which would be automatically extended for an additional three-year period unless the county or contractor, giving at least 60 days’ written notice, elected to terminate the contract at the end of the initial term.

HBLC submitted the winning bid, and signed a collection services agreement with the county on March 31, 2008. However, two weeks earlier, Preferred Transport Co., an unsuccessful bidder, had challenged the award of the contract to HBLC by filing a lawsuit alleging that the county had improperly considered factors outside the RFP—namely, that HBLC was locally owned, would offer special services for elderly customers, and would provide employment for local residents.

The trial judge agreed that the county had exceeded its authority in considering factors outside the RFP, and reversed the decision to award the bid to HBLC. He ordered local officials to reopen the procurement, but directed that HBLC be allowed to continue providing disposal services during the bidding process. As a follow-up, the county issued a second RFP with documents and specifications comparable to the earlier one.

Again the winning bidder, HBLC was awarded a three-year contract commencing on December 8, 2008. But here lies the rub. Instead of creating a new contract, the parties executed an extension of the original contract, committing the parties to an "additional" three-year period ending December 8, 2011. The continuation incorporated the terms and conditions of the original contract, effective on April 1, 2008, including the automatic three-year extension.

About 13 months into the second three-year term, the county notified HBLC that its engagement would be terminated on May 31, 2012. Although the county admittedly failed to give HBLC the obligatory 60-day termination notice, officials claimed that the agreement was void. In effect, the county believed it could disavow any obligation to HBLC because the contract violated a state law flatly prohibiting a board of supervisors from contracting for solid waste collection for a term longer than six years. Miss. Code Ann. § 17-17-5(1).

HBLC sued the county for breach of contract, arguing that the current term began upon the award of the new contract in December, 2008, and provided for a permissible term of six years. By incorporating the terms of the prior contract, which had been ruled void, the second agreement could not have been a mere extension of the prior contract. Therefore, HBLC further asserted, with no notice from the county prior to December 8, 2011, of its intention to end the relationship, the new agreement automatically extended for an additional three-year term expiring on December 8, 2014.

For its part, the county insisted that the term of the second agreement began on April 1, 2008—the effective date of the first agreement that was judicially set aside by the trial court—and ended on December 8, 2014. Thus, as the county saw it, the engagement was automatically void because it exceeded by eight months the maximum permissible term for solid waste contracts. How, then, could the county be found in breach of an illegal contract?

The trial court ruled in favor of the county, finding that the waste services contract, being for a period of more than six years, was void and the board of supervisors could cancel the contract as it did. “It was by the choice of the parties that subsequent to this court ordering Claiborne County to reopen the bidding process that an ‘Extension of Solid Waste Collection Contract’ was executed rather than a new Solid Waste Collection Contract,” the judge said.

On appeal, the full 10-member bench of the Mississippi Court of Appeals found that the second agreement was “plainly an extension of the first contract” and “the combined agreements created a six-year eight-month contract” that violated state law. However, the court noted, the contract contained a clause that required illegal or unenforceable provisions to be stricken and disregarded in order to preserve the overall viability of the contract. Thus, the judges concluded, by “[s]triking the final eight months of the contract, the remaining six-year term of the contract complies with the statute and is binding and enforceable.”

By reinterpreting the contract in order to save it, the appeals court put the county on the defensive: undeniably, the county had terminated HBLC without complying with the contractual notice requirement. “[HBLC] is entitled to damages for the breach from May 31, 2012, the date the contract was terminated, until April 1, 2014, the date the contract expired by law,” the opinion stated. The judges remanded the case to the lower court for a determination of the damages to be awarded to HBLC.

Home Base Litter Control, LLC v. Claiborne County, Miss., No. 2014-CA-00068-COA, June 16, 2015

Barry Shanoff is a Rockville, Md., attorney and general counsel of the Solid Waste Association of North America.