2017 Ohio 4064
Ohio Ct. App.2017Background
- In 1990 Westlake and Cleveland executed a standardized water service agreement (WSA) under which Cleveland would be the “sole and exclusive supplier” of water for an initial 10-year term with automatic year-to-year renewals and a clause requiring 5 years’ written notice to terminate. Westlake’s charter forbids exclusive franchises and caps non‑exclusive franchises at 25 years.
- At signing the parties also executed a negotiated Memorandum of Understanding (MOU) stating Article 5’s “sole supplier” language was not intended to grant an exclusive franchise in violation of Westlake’s charter and that the MOU would remain on file with the WSA. Westlake’s council also passed Ordinance 1989-7 authorizing the mayor to enter the WSA and stating it granted Cleveland a non‑exclusive franchise for 25 years.
- Years later Westlake explored alternative water sources (Avon Lake) and notified Cleveland it would not continue purchasing after what Westlake believed was a 25‑year expiration. Cleveland invoked a WSA clause permitting rate increases for customers who had “taken steps toward leaving the Cleveland water system” and imposed surcharges intended to recoup alleged "stranded" costs.
- Westlake sued for declaratory and injunctive relief; the trial court held the MOU and the Westlake ordinance amended the WSA to a non‑exclusive 25‑year franchise that expired March 19, 2015, and enjoined Cleveland’s surcharge and recovery of stranded costs.
- On appeal Cleveland argued the MOU merely memorialized the parties’ understanding and that the WSA’s duration (10 years with yearly renewals) remained controlling; Cleveland also argued it could impose surcharges under Article 4.02(1) after notice of Westlake’s intent to terminate.
Issues
| Issue | Plaintiff's Argument (Westlake) | Defendant's Argument (Cleveland) | Held |
|---|---|---|---|
| Did the MOU amend the WSA to eliminate an exclusive franchise? | MOU showed parties agreed Article 5 was not an exclusive franchise; thus WSA became non‑exclusive. | MOU only memorialized understanding; integration clause bars extrinsic amendment. | MOU amended WSA to make the franchise non‑exclusive (court rejects Cleveland’s integration argument). |
| Did Westlake Ordinance 1989‑7 amend the WSA to set a fixed 25‑year term? | Ordinance and charter language show parties intended a 25‑year term. | Ordinance is one‑sided legislation and did not contractually amend the WSA. | Ordinance did not amend the WSA’s duration; it put Cleveland on notice of charter limits but did not fix a 25‑year term. |
| Is the WSA expired (25 years) and is the 5‑year notice provision enforceable? | WSA expired after 25 years so no further notice required. | WSA’s text provides initial 10‑year term with automatic year‑to‑year renewals; therefore no automatic 25‑year expiration. | WSA is a 10‑year initial term with yearly renewals (new annual agreements). A perpetual term is disfavored; the 5‑year notice requirement is inapplicable to year‑to‑year renewals; reasonable notice (fact issue) governs termination. |
| May Cleveland impose surcharges to recover "stranded" costs under Article 4.02(1) after Westlake’s May 2013 letter? | Westlake’s communications were mere reminders of expiration and not affirmative steps to leave; WSA contains no authority for surcharges. | Westlake’s letter constituted notice/steps toward leaving, triggering Article 4.02(1) and permitting rate increases/surcharges to recover stranded costs. | Cleveland has no contractual right to impose the challenged surcharges or recover stranded costs as enacted; Article 4.02(1) applies only to concrete, affirmative steps to terminate, and the ordinance surcharge was beyond Article 4’s scope. |
Key Cases Cited
- Nationwide Mut. Fire Ins. Co. v. Guman Bros. Farm, 73 Ohio St.3d 107 (1995) (contract interpretation: give effect to plain language of parties’ agreement)
- Hallock v. Kintzler, 142 Ohio St. 287 (1943) (courts disfavor perpetual contracts; intent to create perpetuity must be clear)
- Baltimore & Ohio R. Co. v. West, 57 Ohio St. 161 (1897) (holding that holding over creates a new year‑to‑year tenancy/agreement)
- United Fuel Gas Co. v. Ironton, 107 Ohio St. 173 (1923) (municipalities cannot bind themselves in a way that exceeds statutory power)
- Wellston v. Morgan, 59 Ohio St. 147 (1898) (ordinance exceeding statutory grant of contracting power is ultra vires and void)
- Jacot v. Secrest, 153 Ohio St. 553 (1950) (statutes or charters limiting a municipality’s power are read into contracts with the municipality)