Lead Opinion
OPINION
delivered the opinion of the court,
The United States District Court for the Western District of Tennessee has submitted a certified question of law pursuant to our Rule 23 as to the validity of certain provisions within two separate employment contracts: “Whether a municipal utility board has the authority to enter into a contract with an appointed city official who serves at the will and pleasure of the Board of Mayor and Aldermen whereby the utility board contracts to continue to pay the official’s salary for a multi-year time period [8 and 14 years] after the official’s employment is terminated.” Because it is within our discretion to do so, we have elected to answer the question in a manner designed to fit the facts and circumstances in this particular case. Our conclusion is that neither Ripley Power and Light nor Ripley Gas, Water, and Wastewater, utility boards for the City of Ripley, Tennessee, had the authority to enter into multi-year contracts with Mike Allmand, the former superintendent of the two utilities, or to obligate the City for the payment of salary and benefits as provided by the terms.
Background
City of Ripley’s Charter
The City of Ripley, Tennessee, became an incorporated municipality pursuant to a Charter that was authorized by the Tennessee General Assembly in 1901 Private Acts, Ch. No. 223. The Charter provides for a Board of Mayor and Aldermen, consisting of seven members, one of whom serves as the Mayor. Pursuant to Section 5 of the Charter, the Mayor and other members of the Board of Mayor and Aldermen have terms of four years. Section 7 of the Charter includes the following language:
Be it further enacted, that the City shall be organized into departments of general government, police, fire, gas and water, electricity, parks and recreation, and public works. However, the Board of Mayor and Aldermen may abolish any of those departments, may create new departments, and may combine, or consolidate or merge any present or future departments. The Board of Mayor and Aldermen shall appoint the heads of the departments, and those heads of departments shall serve at the ivill and pleasure of the Board.
(Emphasis added). Further, Section 17 of the Charter provides as follows:
[T]he Board of Mayor and Aldermen may make all proper and necessary contracts for corporate purposes and uses, which shall be made in the name of the corporation, and signed by the Mayor and Recorder, and no person shall have power to create any liability against the corporation except by express authority of the Board, conferred at a meeting duly and regularly convened.
(Emphasis added).
Electric Department
On December 6,1957, the Board of May- or and Aldermen, acting pursuant to authority granted by the Municipal Electric Plant Law of 1935, Tenn.Code Ann. § 7-52-101, et seq. (2005 & Supp. 2008) created a Board of Public Utilities (“Electric Department”) as follows:
[B]e it resolved by the Board of Aider-men of the City of Ripley that a Board*622 of Public Utilities be, and it is hereby, constituted and established for the purpose of taking and having supervision and control of the improvement, operation, and maintenance of the City of Ripley’s Electric Department, which said Board shall be the Supervisory Body of the said Department and shall have all the powers and duties which are, or shall be, conferred upon such Board of Supervisory Body by the laws of Tennessee, including, but not limited to, the provisions of said Municipal Electric Plant Act....
(Emphasis added).
The resolution, which went into effect on January 1, 1958, provided that the Board governing the Electric Department would consist of three members, one of whom was a member of the City’s Board of May- or and Aldermen, with each serving a term of four years. Tenn.Code Ann. § 7-52-107. Pursuant to Tennessee Code Annotated section 7-52-114(b), the 1957 resolution further authorized the Electric Department’s Board to select and remove a Superintendent: “The Superintendent shall serve at the pleasure of the Board and may be removed for cause by said Board at any time.” See also Tenn.Code Ann. § 7-52-114(b) (“The superintendent shall serve at the pleasure of the supervisory body and may be removed by such body at any time.”).
Gas, Water and Sewer Department
On July 3,1962, the Board of Mayor and Aldermen adopted a resolution establishing a Board of Public Utilities (“Gas Department”) to supervise and control natural gas, water, and sewer facilities:
[B]e it resolved by the Board of Mayor and Aldermen of Ripley that a Board of Public Utilities be, and it is hereby constituted and established for the purpose of taking and having supervision and control of the improvement, operation and maintenance of the City of Ripley’s gas, water and sewer plants, which said Board shall be the Supervisory Body of the said plants and shall have all the powers and duties which are, or shall be, conferred upon such Board of Supervisory Body by the laws of Tennessee....
(Emphasis added). The 1962 resolution created a Gas Department Board consisting of five members, one of whom is to be a member of the City’s Board of Mayor and Aldermen. Like the Electric Department Board, the Board of the Gas Department was delegated the authority to select and remove a superintendent: “The Superintendent shall serve at the pleasure of the Board and may be removed for cause by said Board at any time, provided that such action is approved by [the] Board of Mayor and Aldermen.” While the state statute applicable to the Electric Department directs that the superintendent “serve at the pleasure of’ the board, there is no similar statutory provision applicable to gas, sewer, or water utilities. See Tenn. Code Ann. § 7-35-101, et seq. (2005 & Supp. 2008).
The Contracts
Beginning in the 1980s, Mike Allmand worked as the superintendent for both the City’s Electric and its Gas Departments. In 1985, 1991, and 1996, Allmand, desirous of both job security and freedom from “political influence,” sought and obtained five-year employment contracts. Each of the contracts contained, among other things, provisions whereby Allmand would continue to receive his full salary if terminated, regardless of the basis of the termination.
1. The [Gas Department] shall continue to employ Employee as President and CEO, and Employee hereby accepts and agrees to such continued employment. ...
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3. The initial term of this Agreement shall be for a period beginning on the date it is signed by the parties and ending on October 31, 2011. This Agreement shall automatically renew for successive five-year terms, provided that neither party submits written notice of termination six (6) months prior to the termination date....
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12. In the event that the Employer terminates Employee’s employment for any reason, during the term, of this Agreement, or any successive term, Employee shall be entitled to receive Employee’s annual salary, compensation, a ml all benefits for the remaining term of the Agreement or a period, of five years from the. date of the Employee’s termination, whichever is greater, provided however, that if the Employer can prove beyond a reasonable doubt that Employee voluntarily abandoned his job or engaged in intentional conduct that operated to the specific detriment of the Employer’s welfare, that the Employer may terminate this Agreement without obligation to provide the above-noted severance payments. In the event of a termination prior to the expiration of the Agreement, payments under this provision shall be paid pursuant to the Employer’s normal bi-weekly schedule. For purposes of this provision, the annual salary, compensation, bonuses and benefits shall equal the Employee’s salary, compensation, bonuses and benefits existing at the time of his termination but in no case to be less than the salary, compensation, bonuses and benefits Employee received during the year prior to his termination. The term benefits shall include, but not be limited to, medical insurance, life insurance, pension and supplemental pension plans, social security, and disability insurance. Employee shall be paid any and all accumulated sick leave and vacation, and any other accrued benefits, in a single lump sum if Employee leaves Company for any reason ....
(Emphasis added).
Similarly, on December 11, 2003, the Electric Department entered into a fourteen-year employment contract with All-mand, providing for automatic renewal after the original term for successive periods of one year, on the condition that “neither party submits written notice of termination at least one (1) year prior to the termination date.” Paragraph 14 of the Electric Department contract contained a post-termination payment provision similar to that in paragraph 12 of the Gas Department contract. The only other significant differences between the two contracts were that paragraph 14 did not include a provision allowing for “a period of five years from the date of the Employee’s termination, whichever is greater” and did not use the term “above-noted severance payments.”
Both contracts provided that Allmand “was being called upon to manage the two
On November 7, 2005, Allmand was discharged as superintendent of the Gas and Electric Departments. He was not paid a post-termination salary and received no other benefits as provided within the contracts.
District Court Proceedings
On August 31, 2006, some ten months after being discharged from his positions of employment, Allmand filed a complaint in the United States District Court for the Western District of Tennessee against the Defendants, seeking damages for the breach of each of the two contracts.
On July 23, 2007, the District Court granted partial summary judgment for the Defendants, ruling that “the Ripley City Charter and the Municipal Electric Plant Act, Tenn.Code Ann. § 7-52-101, et seq. did not allow the Utility Boards to enter into multi-year employment contracts with [Allmand], an appointed, official who senes ‘at the ivill and pleasure of the board ’ ” and that “in contracting with [All-mand] for definite term[s] of employment, the Utility Boards acted ultra vires.” (Emphasis added). As a result, the District Court concluded that the October 31, 2003 and December 11, 2003 multi-year employment agreements were “voidable as to all provisions contingent on a definite term of employment” but were valid as to “those provisions not contingent upon a definite term of employment, such as compensation, retirement, and annual/sick leave.” On August 7, 2007, the District Court entered an “Order of Clarification” which provided, in pertinent part, as follows:
The Court finds that the issue of severance is not precluded by the ... holding that the Board lacked the authority to contract for a term of years. The issue of severance is not inconsistent with an at-will contract. Accordingly, the issue of severance is not rendered moot by the Court’s earlier Order.
(Emphasis added).
Later, the District Court entered an order certifying the following question of law pursuant to our Rule 23: “Whether a municipal utility board has the authority to enter into a contract with an appointed city official who serves at the will and pleasure of the Board of Mayor and Aider-men whereby the utility board contracts to continue to pay the official’s salary for a multi-year time period [8 and 14 years] after the official’s employment is terminated.” The specific question, of course, is whether Allmand is entitled to compensation under the multi-year contracts if the City Charter or other provisions of law authorized the Electric and Gas Department Boards to offer employment only upon an at-will basis.
Analysis
Standard of Review
This case presents a certified question of law under Rule 23 of the Tennessee Supreme Court Rules. In reviewing a question of law, our review is de novo without a presumption of correctness. Tenn. R.App. P. 13; Colonial Pipeline Co. v. Morgan,
Scope of Certified Question
When appropriate, we are empowered to “exercise our discretion to re-frame the Rule 23 certified question before us so as to provide the guidance actually sought.” Shorts v. Bartholomew,
The district court asked “[w]hether a municipal utility board has the authority to enter into a contract with an appointed city official who serves at the will and pleasure of the Board of Mayor and Aldermen whereby the utility board contracts to continue to pay the official’s salary for a multi-year time period [8 and 14 years] after the official’s employment is terminated.” Read literally, this question requests a ruling applicable to all municipal utility boards. According to the United States Census Bureau’s 1997 census of governments, however, 343 municipal governments operate within the State of Tennessee. Census Bureau, U.S. Dep’t of Commerce, 1997 Census of Governments — Volume 1, Government Organization, app. A at A-236 (1997), available at http://www.census.gov/prod/gc97/gc971-l. pdf. All are different. Further, as this case illustrates, the phrase “utility board” may refer to a variety of entities providing different services under different legal constraints. See Black’s Law Dictionary 1582 (8th ed. 2004) (defining “public utility”).
In an effort to avoid the “limitless field of advisory opinions,” State v. Brown & Williamson Tobacco Corp.,
Dillon’s Rule and Long-Term Employment Contracts
“Fundamental in [Tennessee] law is that municipalities may exercise only those express or necessarily implied powers delegated to them by the Legislature in their charters or under statutes.” City of Lebanon v. Baird,
“Municipal corporations represent the public, and are themselves to be protected against the unauthorized acts of their officers, when it can be done without injury to third parties.... The protection of public corporations from such unauthorized acts of their officers is a matter of public policy, in which the whole community is concerned.” That a municipal corporation cannot and should not be bound by an ultra vires contract is a proposition that is well settled by authority, and sustained by reason and justice. To hold otherwise would be to vastly enlarge the authority of public agents, and permit them to bind a municipal corporation by contracts absolutely prohibited by law, and would thus expose the public to evils and abuses that the limitations and restrictions thrown around corporate officers are intended to prevent.
City of Nashville v. Sutherland, 92 Term. 335,
In consequence, “[w]hen a municipality fails to act within its charter or under applicable statutory authority, the action is ultra vires and void or voidable.” Baird,
In the recent case of Arnwine v. Union County Board of Education,
[ejxcept as otherwise authorized or provided by law, municipalities are ... authorized to enter into long-term contracts for such period or duration as the municipality may determine for any purpose for which short-term contracts not extending beyond the term of the members of the governing body could be entered....
Tenn.Code Ann. § 7-51-903 (2005). We concluded, however, that section 7-51-903 did not apply because “there are specific statutes referring to personnel and employment contracts in education” and those with more specificity prevail over the general rule of section 7-51-903. Arnwine,
(1) the power is granted in the “express words” of the statute, private act, or charter creating the municipal corporation; (2) the power is “necessarily or fairly implied in, or incident to[,J the powers expressly granted”; or (3) the power is one that is neither expressly granted nor fairly implied from the express grants of power, but is otherwise implied as “essential to the declared objects and purposes of the corporation.”
Id. at 807-08 (quoting S. Constructors,
As in Arnwine, whether a multi-year employment contract would be permissible in this ease depends upon the level of authority granted under law. In our view, neither the City Charter nor the relevant statutes empower the Electric Department or the Gas Department to enter an agreement containing the terms at issue.
I. The City Charter
Initially, the City Charter required that the superintendent serve at the “will and pleasure” of the Board of Mayor and Alderman. A “pleasure appointment” is “[t]he assignment of someone to employment that can be taken away at any time, with no requirement for notice or a hearing.” Black’s Law Dictionary 1192 (8th ed. 2004).
II. The Municipal Electric Plant Law
(1) Acquire, improve, operate and maintain within or without the corporate or county limits of such municipality, and within the corporate or county limits of any other municipality, with the consent of such other municipality, an electric plant and to provide electric service to any person, firm, public or private corporation, or to any other user or consumer of electric power and energy, and charge for the electric service;
(7) Make contracts and execute instruments containing such covenants, terms and conditions as in the discretion of the municipality may be necessary, proper or advisable for the purpose of obtaining loans from an3r source, or grants, loans or other financial assistance from any federal agency; make all other contracts and execute all other instruments as in the discretion of the municipality may be necessary, proper or advisable in or for the furtherance of the acquisition, improvement, operation and maintenance of any electric plant and the furnishing of electric service; and carry out and perform the covenants and terms and conditions of all such contracts and instruments;
(9) Do all acts and things necessary or convenient to carry out the powers expressly given in this part.
Tenn.Code Ann. § 7-52-103(a); see also Tenn.Code Ann. § 7-52-107 (giving municipality authority to create board of public utilities). Allmand also relies upon Tennessee Code Annotated section 7-52-134, which permits municipal authorities to “do all things necessary or convenient to carry out the purposes of this part in addition to the powers expressly conferred in this part” and which requires that the powers granted by the Municipal Electric Plant Law be “liberally construed to effectuate the purposes of this part.” Tenn.Code Ann. § 7-52-134.
The statutes cited by Allmand, however, must be read in conjunction with Tennessee Code Annotated section 7-52-114(b), which specifically states as follows:
The supervisory body shall appoint an electric plant superintendent ... who shall be qualified by training and experience for the general superintendence of the acquisition, improvement and operation of the electric plant. The superintendent need not be a resident of the state at the time of appointment. The superintendent’s salary shall be fixed by the person or agency appointing such superintendent. The superintendent shall serve at the pleasure of the supervisory body and may be removed by such body at any time.
Tenn.Code Ann. § 7-52-114(b) (emphasis added). This specific provision controls over the more general ones cited by All-mand. Moreover, this provision is almost identical to the restrictions in the City’s Charter, which likewise prevails over the general statutory provisions relied upon by Allmand. See Grubb v. Mayor of Morristown,
Lastly, Allmand argues that the employment contracts with the post-termination compensation provisions were authorized under various statutes governing Gas, Sewers and Waterworks. For example, he cites the provisions of Tennessee Code Annotated section 7-35-406(a):
Every incorporated city and town in this state acquiring a waterworks or sewerage system under the provisions of this part shall be required and is hereby authorized and empowered to appoint a board of waterworks and/or sewerage commissioners to have supervision and control of construction and operation of such works. “Board,” as used in this part, means a board of waterworks and/or sewerage commissions as required and authorized in this section, constituted and appointed as provided in §§ 7-35-407-7-35-409. The governing body of any incorporated city or town may, by proper ordinance, elect to perform the duties required of the boards under this part, in which event the governing body shall have all the powers, duties and responsibilities imposed upon the board, and all references to the board shall refer to such governing body acting in the capacity of such board.
Tenn.Code Ann. § 7-35-406(a); see also Tenn.Code Ann. § 7-35-406(b) (“Municipalities ... owning or operating a gas system shall have the power and are hereby authorized to transfer to and confer upon the board of waterworks and sewerage commissioners the jurisdiction over such gas system.”). Allmand also points to Tennessee Code Annotated section 7-35-412, which provides, in part, as follows:
The board of waterworks or sewerage commissioners ... has the power to take all steps and proceedings and to make and enter into all contracts and agreements necessary or incidental to the performance of its duties and the execution of its powers under this part, subject only to limitations on matters requiring approval by the governing body of the city or town in question .... After completion and acceptance of the works by the board, and approval of such acceptance by the governing body of the city or town, the board shall have the power, and it shall be its duty, to proceed with all matters and perform everything necessary to the proper operation of the works and collection of charges for service rendered, subject only to the limitation of funds available for operation and maintenance. To this end, the board may employ such employees as in its judgment may be necessary and may fix their compensation, all of whom shall do such work as the board shall direct.
Tenn.Code Ann. § 7-35-412 (emphasis added).
Again, these general statutory provisions must be read in conjunction with the City Charter and the prohibition against actions beyond the powers conferred by the City Charter. See Grubb,
Post-Termination Compensation
Allmand further argues that the post-termination compensation described in the contracts were mere severance payments that would not have conflicted with the at-will nature of his employment. Cf. Myers v. Town of Plymouth,
By the terms in each of the two contracts, Allmand would have been entitled to continuing pay and benefits upon termination for any reason other than “voluntarily abandoning] his job or engaging] in intentional conduct that operated to the specific detriment of the [City’s] welfare.” If those provisions are enforceable, the Electric and Gas Departments will undergo the full cost of a superintendent but receive no benefit from Allmand’s services for a period of years. Such an onerous requirement would have the practical effect of establishing precisely the type of long-term obligation that the City’s charter forbids. See Haynes v. City of Pigeon Forge,
However onerous the obligation may be, we emphasize that our response to the question of law does not rest on that fact alone. Instead, we further conclude that the provisions obligating the Departments to continue to pay salary years after the termination of employment have few of the characteristics associated with a traditional severance package, and that the contracts, read as a whole, do not suggest that the parties intended them as such.
A cardinal rule of contractual interpretation is to ascertain and give effect to the intent of the parties. Allstate Ins. Co. v. Watson,
This Court’s decision in Guiliano v. Cleo, Inc.,
a form of compensation paid by an employer to an employee at a time when the employment relationship is terminated through no fault of the employee. Black's Law Dictionary 1374 (6th ed. 1990). The reason for severance pay is to offset the employee’s monetary losses attributable to the dismissal from employment and to recompense the employee for any period of time when he or she is out of work.... The amount of payment is generally based upon the types of services and the number of service years performed by the employee on behalf of the employer.
Id. at 97 (footnote and case citations omitted). We emphasized that severance, unlike liquidated damages, is not conditioned upon a breach of contract or a reasonable estimation of damages in consequence thereof, but is instead an absolute entitlement to recovery regardless of any breach. Id. Applying these principles, we stated as follows:
Paragraph 9 provides that if [the employer] terminates the contract and [the employee’s] employment without cause, the [employee] shall continue to receive his then current salary from the date of termination until October 31, 1995, the contract expiration date. Paragraph 9 does not state that sums payable are based upon an estimation of damages in the event of a breach of contract. However, it is clear that the provision affords the [employee] a set amount of compensation in the event that [the employer] terminates the agreement and [employee’s] employment, without cause, before the end of the contract. Relying on the plain meaning of the language in Paragraph 9, we conclude that recovery therein is conditioned upon [the employer’s] breach of contract.
Id. at 97 (emphasis added). As a result, the Court held that the provision was “one for liquidated damages and not severance pay.” Id. at 97-98.
Here, the only reference to the term “severance payment” is in paragraph 12 of the Gas Department contract — “above-noted severance payments.” The Electric Department contract does not include the term at all. The payments are predicated upon Allmand’s termination before the expiration of the eight — and fourteen-year terms set forth in the agreements, i.e., a breach of the contract. Conversely, the contracts contain no reference to the nature of Allmand’s services, the length of his tenure to the City, or any other characteristics that might warrant the classification of the post-termination compensation as severance pay. See id. at 97-98.
Labeling the post-termination recompense as a “severance payment” in one of the two contracts is not determinative of the parties’ intent. Id. at 98. Instead, “[t]he better rule in all cases is to read the whole instrument and give effect to every part if possible, and thereby reach its true meaning, and not resort to artificial or arbitrary rules until the former rule is exhausted.” Stratton v. Thompson,
Although severance provisions are common and may be viewed favorably as a matter of policy, our established precedent mandates that the intent of the parties controls. Here, the parties crafted employment agreements in which the post-termination payment provisions were dependent on a breach of the purported employment terms of eight and fourteen years. The practical effect of the provisions would have granted liquidated damages to Allmand for the breach of the very terms that the Departments had no authority to approve.
Moreover, it is immaterial whether the City was operating in its “governmental” or “proprietary” capacity when making the contracts, as further argued by Allmand. He insists that the employment agreements and the post-termination payments were authorized under the principle that “a municipality operating] a utility, ... operates it in a proprietary capacity and is held to the same standard as a private corporation.” Maury County Bd. of Pub. Utils. v. City of Columbia,
[I]t should be pointed out that our decision is not based on any distinction between “governmental” and “proprietary” functions, as mentioned in Cox [v. Greene County,26 Tenn.App. 628 ,175 S.W.2d 150 (1943)]. As this Court noted in State ex rel. Association for the Preservation of Tennessee Antiquities v. City of Jackson,573 S.W.2d 750 , 754 (Tenn.1978), “we do not find the dichotomy of ‘governmental’ and ‘proprietary’ functions to be particularly helpful from a standpoint of legal analysis.... ” Attempts to distinguish contracts entered into in “governmental” as opposed to “proprietary” capacities contributes only ambiguity and confusion. Courts have been altogether unsuccessful in defining the scope of “governmental” functions. See Garcia v. San Antonio Metro. Transit Authority,469 U.S. 528 ,105 S.Ct. 1005 ,83 L.Ed.2d 1016 (1985).
Washington County Bd. of Educ. v. MarketAmerica, Inc.,
Conclusion
Neither the Ripley Electric nor the Ripley Gas Department Boards had the authority to enter into an employment agreement with a superintendent providing for multi-year post-termination compensation.
WILLIAM C. KOCH, JR., J. filed a separate dissenting opinion.
Notes
. The District Court's order refers to the latter two entities as "Ripley Power” and "Ripley Gas.” In 2007, the certified population of Ripley was 7,844. Municipal Incorporation, County, Charter and Population Table, Tenn. Code Ann. Vol. 13, at 250 (2008 Supp.).
. "The Supreme Court may, at its discretion, answer questions of law certified to it by the Supreme Court of the United States, a Court of Appeals of the United States, a District Court of the United States in Tennessee, or a United States Bankruptcy Court in Tennessee. This rule may be invoked when the certifying court determines that, in a proceeding before it, there are questions of law of (his state which will be determinative of the cause and as to which it appears to the certifying court there is no controlling precedent in the decisions of the Supreme Court of Tennessee.” Tenn. Sup.Ct. R. 23, § 1.
. In June of 2003, the Division of Municipal Audit for the State of Tennessee advised the
. An act is ultra vires when it is "beyond the scope of power allowed or granted by a corporate charter or by law.” Black’s Law Dictionary 1559 (8th ed. 2004); see Smith v. Nelson,
. The school board may enter into a four-)ear contract with the director (superintendent) of schools. Tenn.Code Ann. § 49 -2-203(a)(14)(A) (2002 & Supp.2008). Similarly, a school principal may enter into a multi-year contract so long as it does not exceed the contract term of the current superintendent. Tenn.Code Ann. § 49-2~303(a)(l) (2002 & Supp.2008).
. John Forrest Dillon served as Judge of Iowa's Seventh Judicial Circuit from 1858 to 1862. For eight years thereafter he served on the Iowa Supreme Court before being appointed by President Grant to what eventually became the Eighth Circuit of the United States Court of Appeals. See Clinton v. Cedar Rapids & the Missouri River R.R.,
. After adopting the "prospective approach” as to liquidated damages — that is, a determination based upon the circumstances existing at the time of the contract — this Court observed that any award is an unenforceable penalty as against public policy if "the provision and circumstances indicate that the parties intended merely to penalize for a breach....” Guiliano,
. Our resolution of this certified question does not preclude the possibility that a local government may, in some cases, be authorized to enter into an agreement obligating it to provide severance pay. Cf. Thompson v. Memphis Light, Gas and Water Div.,
Dissenting Opinion
dissenting.
This Court accepted a question of law certified by the United States District Court for the Western District of Tennessee regarding the authority of municipal utility boards to enter into employment contracts with at-will employees that provide for severance benefits if the employee is terminated without cause. While the Court has decided that “some form of severance compensation ... [may be] permissible,” it has concluded that the particular severance provisions in the two employment contracts at issue in this case are not enforceable. I respectfully disagree.
I.
Mike Allmand is a long-time employee of the City of Ripley. Since 1980, he has managed Ripley Power and Light Company (“Ripley Power”) under five employment contracts. In more recent times, he was also employed as the general manager of the Ripley Gas, Water and Wastewater Department (“Ripley Gas”).
After a decision was made in mid-2003 to merge Ripley Power and Ripley Gas, Mr. Allmand and Ripley Gas entered into an employment contract on October 31, 2003, naming Mr. Allmand as the president and chief executive officer of Ripley Gas. Less than two months later, on December 11, 2003, Ripley Power and Mr. Allmand entered into a new employment contract naming him as the president and chief executive officer of Ripley Power. These dual employments were apparently intended to facilitate the planned merger of Ripley Power and Ripley Gas.
Mr. Allmand is an at-will employee. However, both his October 31, 2003 contract with Ripley Gas and his December 11, 2003 contract with Ripley Power were for multi-year terms. The Ripley Gas contract was for an eight-year term, and the Ripley Power contract was for a fourteen-year term. Both contracts also contained separate severance provisions that would be triggered unless Mr. Allmand “voluntarily abandoned his job” or “engaged in intentional misconduct.” Under the Ripley Power contract, Mr. Allmand was entitled “to receive [his] annual salary, compensation, and all benefits for the remaining term of the Agreement.” These payments would be made “pursuant to the Employer’s normal bi-weekly pay schedule.” Under the Ripley Gas contract, Mr. Allmand was entitled “to receive [his] annual salary, compensation, and all benefits for the remaining term of the Agreement or a period of five years from the date of ... termination, whichever is greater.” This contract also required the severance payments to be made “pursuant to the Employer’s normal bi-weekly pay schedule.”
In July 2004, following a local election in April 2004, Ripley’s Board of Mayor and Aldermen voted to abolish the Board of Public Utilities and to assume its oversight responsibilities. On November 7, 2005, the Board of Mayor and Aldermen terminated Mr. Allmand’s contracts with Ripley Gas and Ripley Power. It abolished the position of president and chief executive officer of Ripley Gas and hired a new superintendent. The Board of Mayor and Aldermen also abolished the position of
On February 24, 2006, Mr. Allmand filed suit in the United States District Court for the Western District of Tennessee. His complaint contained a claim for breach of his employment contracts and sought his “severance pay benefits” as part of his damages. One of the Ripley defendants’ defenses to Mr. Allmand’s breach of contract claim was that both the October 31, 2003 and the December 11, 2003 contracts were void because they conflicted with Mr. Allmand’s status as an at-will employee.
On July 23, 2007, the District Court granted the Ripley defendants a partial summary judgment regarding Mr. All-mand’s employment contracts. The court held that these contracts “are voidable as to all provisions contingent upon a definite term of employment.” However, the court also determined that the contracts were valid “[w]ith respect to those provisions not contingent upon a definite term of employment, such as compensation, retirement, and annual/sick leave.” When the parties disagreed over the application of this ruling to the severance provisions in Mr. Allmand’s contracts, the District Court filed an order of clarification on August 8, 2007, stating:
The Court finds that the issue of severance is not precluded by the Court’s holding that the Board lacked the authority to contract for a term of years. The issue of severance is not inconsistent with an at will contract. Accordingly, the issue of severance is not rendered moot by the Court’s earlier order.
At this juncture, the Ripley defendants filed a motion seeking reconsideration, permission to pursue an interlocutory appeal to the United States Court of Appeals for the Sixth Circuit, or certification of the issue to this Court in accordance with Tenn. Sup.Ct. R. 23. The District Court chose the certification option. In its amended certification order entered on September 5, 2007, the District Court certified the following question of law:
Whether a municipal utility board has the authority to enter into a contract with an appointed city official who serves at the will and pleasure of the Board of Mayor and Aldermen whereby the utility board contracts to continue to pay the official’s salary for a multi-year time period [8 and 14 years] after the official’s employment is terminated.
As I construe this order, the District Court has requested this Court to address only one question of law — the question regarding whether employment contracts with at-will employees of municipal utilities boards may include severance provisions such as those found in Mr. Allmand’s contracts.
In its answer to the District Court’s certified question, the Court states that “some form of severance compensation” for at-will employees of local governments might be permissible but then holds that the particular severance provisions in Mr. Allmand’s two employment contracts are not only “inconsistent with the at-will nature of the employment” but also do not authorize an award of severance. The Court bases this conclusion on the following considerations: (1) the fact that the “practical effect” of the contracts “estab
I have concluded that the severance provisions in Mr. Allmand’s contracts are entirely consistent with severance provisions generally used in both the public and private sectors and that they cannot be equated with liquidated damages provisions because, as this Court noted in Guiliano v. Cleo, Inc.,
II.
In its most general sense, severance pay includes any payment “made by an employer to an employee for permanently terminating the employment relationship primarily for reasons beyond the control of the employee.” 1 Howard A. Specter & Matthew W. Finkin, Individual Employment Laiv and Litigation § 5.26, at 327 (1989) (quoting Everett D. Hawkins, Dismissal Compensation 5 (1940)). In the private sector, neither federal nor state law requires employers to provide severance pay;
Severance agreements arise in essentially two contexts. First, they are negotiated either at the beginning of employment or when an employee is offered a new position with different or expanded responsibilities. In this circumstance, the agreement serves as an inducement for the employee to accept the employment or to continue his or her employment with new duties and responsibilities. Second, severance agreements are negotiated after an employer has decided to terminate an employee.
During the past three decades, employment contracts containing severance provisions have become a normal part of executive recruitment in the private sector. Executives began insisting on severance provisions because they provided added
Severance provisions are now considered to be one of the six basic ingredients of any executive employment contract.
A recent survey of 100 executive employment agreements reported that 36% of the employers based the severance pay on the executive’s base salary, while 64% of the employers based the severance pay on the executive’s base salary plus bonuses. Salwen, at 53. The same survey reported severance payout periods of between 3 and 3.5 years for chief executive officers in 41% of the contracts, and payment periods of 5 years or more in 11% of the contracts. For other executives, the survey reported severance payout periods of between 3 and 3.5 years in 29% of the contracts, and payout periods of 5 years or more in 13% of the contracts. Salwen, at 54 tbl. 2-33.
The inclusion of severance provisions in employment contracts has migrated from the private sector to the public sector. These provisions are used to attract skilled employees to serve in at-will positions, Village of Oak Lawn v. Faber,
While the issue has not been exhaustively litigated, courts have concluded that a provision for severance pay in a government employee’s employment contract is not inconsistent with an employee’s at-will status. Thus, at-will government employees who have a severance pay provision in their employment contract may still be terminated at any time for any reason. However, the government employer must honor its contractual obligation to pay severance benefits if the employee is otherwise entitled to them. McGregor v. Bd. of Comm’rs,
III.
Mr. Allmand’s employment contracts contained severance provisions. Even though there is no standard severance provision, the substantive and procedural aspects of the provisions in Mr. Allmand’s employment contracts essentially mirror the severance provisions used by other corporations and governmental employers. Thus, I must respectfully disagree with the Court’s conclusion that the severance provisions in Mr. Allmand’s employment contracts “have few of the characteristics associated with a traditional severance package.” Because the courts must construe contracts based on their substance, there is little room for reasonable doubt that the contractual provisions at issue are, as found by the District Court, severance provisions.
For the purpose of this appeal, we may comfortably presume that the District Court correctly decided that the provisions in Mr. Allmand’s employment contracts providing for a multi-year term of employment were invalid because they conflicted with Mr. Allmand’s status as an at-will employee. However, the fact that these provisions are invalid does not undermine the remaining provisions in the contracts. See Taylor v. Butler,
One final question remains — whether an otherwise valid contract can be undermined on the ground that enforcing the contract will cause financial hardship on one of the parties. Under Tennessee law, the answer to that question is resoundingly “no.” Tennessee law favors allowing competent parties to strike their own bargains, 21 Steven W. Feldman, Tennessee Practice: Contract Laxo & Practice § 1:6, at 17 (2006), and also favors enforcing written contracts. Bob Pearsall Motors, Inc. v. Regal Chrysler-Plymouth, Inc.,
There is no rule of law or policy that dictates applying these general contract principles to government contracts with any less rigor than they are applied to contracts between private parties. I agree with the Court’s observation that while requiring the Ripley defendants to honor their contractual commitments in Mr. All-mand’s employment contracts may be onerous, that fact alone does not provide a sufficient basis for invalidating the severance provisions in his employment contracts.
For these reasons, I respectfully dissent.
. Because the District Court had already determined that Tennessee law does not permit the multi-year terms in Mr. Allmand’s contracts, it did not request this Court to address that question. The validity of the muhi->ear employment provisions and the severance provisions are separate and distinct issues.
. Gerard P. Panaro, Guidelines for Severance Pay, Nov./Dec. 2006, at 7, available at 12 No. 6 HR Advisor: Legal and Practical Guidance 7 (Westlaw) (hereinafter “Panaro”). It is not uncommon for government employers to enact statutes or ordinances requiring or permitting severance payments to their employees.
. This Court recognized this type of severance agreement in Guiliano v. Cleo, Inc.,
. See also Michael B. Snyder, Benefits Guide § 9:45 (June 2009), available at, BNGD § 9:45 (Westlaw) (hereinafter “Snyder") (reporting that a recent survey of 124 large employers by Hewitt Associates found that they provided severance benefits to their executives).
. The other five basic ingredients are: (1) the term of the contract, (2) the duties of the job, (3) the compensation, (4) the benefits, and (5) the grounds and procedure for termination. Tarrant, at 23.
.For terminations without cause, the period of time for the payment of severance benefits may be the remainder of the term of the contract. Often, however, the employer and the employee will agree on a fixed period of time for the payment of severance benefits. Salwen, at 27. Salary continuation payments are frequently paid in accordance with the employer's regular payroll periods. Snyder § 9:45.