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Monday, September 24, 2012

City Prevails in Equitable Estoppel Contract Case

On January 6, 2012, we reported on a decision by the Illinois Appellate Court requiring a municipality to pay a vendor for additional work outside of the contract even though that work was not authorized by the city council.  The city subsequently filed an appeal with the Illinois Supreme Court.  We noted in January that the case was significant to Illinois municipalities because the Second District’s ruling modified the long-standing rule that equitable estoppel will only be applied against a municipality where actions are induced by the municipality itself (through action of the corporate authorities) or a municipal official with actual, not apparent authority.  On September 20, 2012, the Illinois Supreme Court reversed the appellate court's decision, finding that equitable estoppel does not apply against a municipality where the municipal official possesses apparent authority rather than express authority.  Patrick Engineering v. City of Naperville, 2012 IL 113148 (Sept. 20, 2012).  This is good news for municipalities.

A brief summary of the case is below: 

The city had entered into a contract with a vendor through a competitive-bidding process. The contract required that any additional services outside of those specified in the scope of the contract had to be agreed to in writing between the parties.  If the vendor did not receive confirmation that the additional services were approved by the city, then the vendor was not obligated to perform and would not be paid for those additional services.  Nevertheless, the vendor performed what it claimed to be additional services, but did not get the written approval or confirmation as required by the contract.  Nevertheless, the vendor submitted a substantial bill to the city for these additional services.  The city declined to pay for the additional services, citing the contract terms.  The vendor sued for breach of contract, claiming that it relied on statements by two employees to perform the additional work and the city should be required to pay for the additional work under a theory of equitable estoppel.

The trial court dismissed the case against the city, holding that equitable estoppel does not apply against a municipality unless the representation is made by the municipality itself or by an officer or employee who has explicit authority to act on behalf of the municipality.  The city could not be held responsible for statements made by someone acting beyond the scope of his or her authority. The appellate court reversed, however, holding that the city was bound to the representations made by its employees, despite the fact that they had no express authority and the city council did not approve the additional work pursuant to the terms of the contract. 

The primary issue before the Illinois Supreme Court was whether the doctrine of equitable estoppel can apply against a municipality based on the alleged apparent authority of its employees.  The Illinois Supreme Court stated the rule as follows:  "a plaintiff seeking to invoke equitable estoppel against a municipality must plead specific facts that show (1) an affirmative act by either the municipality itself or an official with express authority to bind the municipality; and (2) reasonable reliance upon that act by the plaintiff that induces the plaintiff to detrimentally change its position."  The act must be affirmative, but may be either an act by the municipality itself, such as legislation, or an act by an official with express authority to bind the municipality.  In applying the factors to Patrick Engineer's complaint, the Court found no allegations to support a delegation of authority to City employees or that Patrick Engineering reasonably relied on the verbal statements of City employees.  Consequently, the Court reversed the appellate court on the equitable estoppel count.  Two counts (quantum meruit, Local Government Prompt Payment Act) are still pending at the trial court.
Post Authored by Julie Tappendorf, Ancel Glink


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