472 S.W.3d 118
Ark.2015Background
- In 2009 Lead Hill and Ozark entered a 40-year wholesale water purchase contract obligating Lead Hill to a monthly "minimum charge" based on historical average daily usage, payable regardless of actual water taken; Ozark built facilities and incurred bond debt relying on the contract.
- Ozark began supplying water in November 2012; Lead Hill paid initially but later stopped paying invoices in 2013 and voted to terminate the contract.
- Ozark sued for declaratory relief and writ of mandamus; the circuit court granted summary judgment for Ozark and issued a writ compelling Lead Hill officials to perform; Lead Hill appealed raising four main points.
- Lead Hill argued the contract violated Arkansas Const. art. 12 § 4 and Amendment 78, violated federal law (7 U.S.C. § 1926(b)), Ozark lacked capacity to contract, and multiple contract defenses (impracticability, frustration, unconscionability, lack of mutuality) barred enforcement.
- The Arkansas Supreme Court majority affirmed the grant of summary judgment on all points, concluding the contract pledges only water-revenue (so art. 12 § 4 and Amendment 78 do not bar it), federal noncurtailment statute does not apply, Ozark had authority to contract, and no triable issues of fact supported the equitable/contractual defenses.
- Two justices dissented, arguing genuine factual disputes (especially under art. 12 § 4 and whether the writ/mandamus was appropriate) made summary judgment improper and that mandamus was an inappropriate remedy to compel payment without a money judgment.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether art. 12 § 4 (limit on contracts exceeding annual revenue) voids the contract | Lead Hill: Minimum charges over 40 years create obligations exceeding town’s annual revenue; pledge is effectively a general obligation | Ozark: Contract expressly limits payment to water-revenue; historical Arkansas precedent allows multiyear water contracts secured by water-revenue | Held: Affirmed for Ozark — contract pledges only water-revenue and does not violate art. 12 § 4 |
| Whether Amendment 78 (5-year limit on short-term financing) applies | Lead Hill: 40-year term exceeds Amendment 78’s 5-year cap on short-term financing obligations | Ozark: Contract is not a "short-term financing obligation" as defined by Amendment 78 | Held: Affirmed for Ozark — Amendment 78 not applicable |
| Whether 7 U.S.C. § 1926(b) (USDA noncurtailment) voids contract | Lead Hill: Contract curtails Lead Hill’s ability to repay USDA loans by forcing disconnection and exclusive purchase | Ozark: Statute protects against competitive curtailment of rural systems; here there is no competition or curtailment of a USDA-financed rural system | Held: Affirmed for Ozark — § 1926(b) inapplicable (no curtailment/competition) |
| Whether Ozark lacked capacity / contract was ultra vires | Lead Hill: Ozark failed corporate formalities; any act is ultra vires and unenforceable | Ozark: Statutory authority authorizes water authorities to contract for wholesale water; acts were within or ratifiable under law | Held: Affirmed for Ozark — Ozark had statutory authority; any irregularity would be ratifiable |
| Whether defenses (impossibility, impracticability, frustration) excuse performance | Lead Hill: Loss of ~50% of customers makes contract impracticable/frustrated; enforcement would violate statutes/constitution | Ozark: No factual proof in record; no basic-assumption change; remedies in contract not pursued | Held: Affirmed for Ozark — no genuine factual dispute supporting these defenses |
| Whether contract is unconscionable or lacks mutuality (illusory) | Lead Hill: Minimum-charge clause is oppressive and creates perpetual obligation; reallocation provisions are illusory | Ozark: Consideration was exchanged; parties performed for months; no proof of gross inequality or unconscionability | Held: Affirmed for Ozark — record does not show unconscionability or lack of mutuality |
Key Cases Cited
- McGehee v. Williams, 191 Ark. 643 (1935) (multiyear water-purchase contract valid where payments come from water-revenue, not general faith-and-credit)
- Hink v. Bd. of Directors of Beaver Water Dist., 235 Ark. 107 (1962) (Amendment 10/art.12 §4 does not bar obligations secured solely by a separable utility’s revenues)
- Barnhart v. City of Fayetteville, 321 Ark. 197 (1995) (distinguishes ultra vires contracts void ab initio from irregular acts that can be ratified)
- Gulfco of La., Inc. v. Brantley, 2013 Ark. 367 (2013) (standards and factors for unconscionability review)
- LegalZoom.com, Inc. v. McIllwain, 2013 Ark. 370 (2013) (discussion of unconscionability doctrine and its application)