(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for
the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please
note that, in the interests of brevity, portions of any opinion may not have been summarized).
(A-59-97)
Argued December 1, 1997 -- Decided March 9, 1998
GARIBALDI, J., writing for a majority of the Court.
This appeal concerns the per diem reimbursement rate due the County of Morris (“County”) from
the State under their County Correctional Policy Act (“CCPA”) contract for housing state prisoners in the
County's prison facilities.
In June 1981, in response to the problem of prison overcrowding, Governor Brendan Byrne issued
an executive order, declaring prison overcrowding to be an emergency and permitting the Commissioner of
Corrections to alleviate the problem temporarily by housing state-sentenced prisoners in county correctional
facilities for the 90-day duration of the Order. That Order also directed the Commissioner to develop an
appropriate program to compensate those counties holding state prisoners.
Thereafter, the legislature passed the County Correctional Policy Act, which attempts to address the
overcrowding crisis by establishing a long-term financial assistance program to provide State grants to
participating counties to renovate and construct county correctional facilities. In return, the Act permits the
Commissioner of the Department of Corrections (“DOC”) to house certain state prisoners in medium and
minimum security county facilities. Pursuant to the CCPA, the DOC entered into a contract for renovation
and housing with the County of Morris, as well as with several other counties.
In 1983, pursuant to the CCPA, the DOC and the County of Morris entered into the Morris County
Correctional Facility Assistance Contract (“MMCFAC”), which provided that the county would construct a
forty-bed addition and make renovations to its county correctional facility in exchange for $2,156,676. On
completion of that facility, the county was required to make available to the DOC forty cells to house forty
minimum or medium security state prisoners. The contract set the per diem reimbursement rate at 75" of
the average of the budgeted daily costs of housing state prisoners in the State prisons at Trenton, Rahway,
and Leesburg.
The County began to house state prisoners pursuant to the contract in fiscal year 1986. At that
time, the average of the budgeted daily costs of housing state prisoners in the state prisons was $36.51. Prior
to the time that the DOC began to house contract prisoners in Morris County, any state prisoners housed in
the County's facilities were executive order prisoners. The reimbursement rates for those executive order
prisoners were initially determined through separate negotiations with each county. As that became too
cumbersome, the DOC set a uniform rate of compensation for all executive order prisoners.
On September 7, 1984, before any state prisoners were housed in the County under the contract, the
Commissioner wrote a letter to Captain John Delaney of the Morris County Jail, stating that the DOC had
increased the per diem rate for housing State-sentenced prisoners in the county facilities to $45.00 effective
July 1, 1984, which rate would remain effective through fiscal year 1985. That letter made no explicit
mention of the type of prisoners -- executive order, contract, or both -- to which the rate would apply.
Approximately one year after that letter, state prisoners were first housed in Morris County under the contract. Based on the Commissioner's letter, the County submitted invoices to the DOC under the contract in the amount of $45 per prisoner per day. The State paid the DOC that amount. The $45 rate
paid was, for three years (1985-1987), more than the average daily cost of housing in state prisons, the
amount referred to in the contract. Thus, for those years, the State overpaid the amounts due. In the
subsequent years, however, the $45 amount was lower than that required under the contract terms. For that
period, therefore, the State under paid the rates in the contract. In all that time, neither party inquired into
nor questioned the propriety of the $45 amount.
On April 7, 1992, almost seven years after it first began to house state prisoners, the County filed a
notice of claim with the Commissioner, alleging that the DOC had breached the payment provisions of the
contract by failing to reimburse the County for the entire per diem rate the County was entitled to receive
under the contract. The County sought $2,604,000 in damages, representing the twenty-dollar difference
between $45 and the actual $65 per diem rate for that period based on the contract. Even after it sent that
notice, however, the County continued to submit invoices at the $45 rate.
On October 14, 1992, the County filed suit against the Commissioner, the DOC, and the State. In
June 1994, the County filed a motion for partial summary judgment, claiming it was entitled to $407,879.97
for the period covering fiscal years l988 through 1993. The Commissioner cross-moved for summary
judgment, which the trial court granted. In its order, the trial court found that from 1985 until 1992, both
parties ignored the payment terms of the contract. The court ordered that the payment provisions of the
contract would be enforced as of the date the County filed its suit against the DOC. It further ordered that
Morris County be reimbursed for any difference in rates that had occurred after the filing of its action,
despite the fact that the County had continued, until the court's order, to submit invoices at the $45 rate.
The Appellate Division reversed, finding that the parties did not completely abandon the contract
because they adhered to its material portions, and further finding that the parities did not partially modify
the payment terms of the contract because there was neither mutual assent to modify nor new consideration
to support such a modification. The court instead concluded that the County had been misled. Because the
Appellate Division believed that the State was the only party privy over the years to the true facts regarding
the accuracy of the State's payments, the court used the discovery rule to determine the accrual date of the
County's claim. The Appellate Division then remanded the matter to the trial court for a calculation of
damages owed from the date that state prisoners were first housed in the County pursuant to the contract.
The Supreme Court granted the Commissioner's petition for certification.
HELD: Morris County and the Department of Corrections have not abandoned or modified the Morris
County Correctional Facility Assistance Contract and the County's cause of action is not barred by equitable
principles; although, under the New Jersey Contractual Liability Act, the contract must be enforced as
written from here forward, Morris County is entitled to be reimbursed for some of the State's
underpayments.
1. An abandonment of a contract can only take place by the consent of both parties, and requires as clear
evidence of the waiver as of the existence of the contract. (pp. 12-14)
2. Abandonment of a contract is similar to the remedy of rescission, which generally requires that the entire
contract be terminated. (pp. 14-15)
3. Although the words and actions of the parties may have demonstrated mistaken assumptions about their
agreement, nothing in the record warrants a conclusion that the County and the DOC mutually intended to
abandon the entire contract. (pp. 15-17)
4. Limited changes or amendments to a contract can be accomplished through modification, which can be proved by an explicit agreement to modify or by the actions and conduct of the parties, so long as the intention to modify is mutual and clear. A modification must be supported by new or additional
consideration. (pp.17-19)
5. The County and the DOC did not clearly express a mutual intention to modify their contract, nor did one
party demonstrate knowledge and acceptance of the other party's expressed intentions. (pp. 19-21)
6. As a result of both parties' lack of research regarding the accuracy of the payment rates, no party was
misled, but both parties acted on mistaken assumptions and mutually erred in the construction of their
contact. (pp. 21-22)
7. Where the terms of a contract are clear, the court must enforce it as written. (pp. 22-23)
8. Equitable estoppel is applied against governmental entities only in very compelling circumstances and
cannot be invoked against the County to prevent it from pursuing its reimbursement claim. (pp. 23-24)
9. Waiver cannot be predicated on consent given under mistake of fact. It must be voluntary and there
must be a clear act showing the intent to waive the right. (pp. 24-25)
10. Because the County did not have knowledge of its claims against the State until many years after the
incorrect payments began, laches does not apply. (pp. 25-26)
11. The immunity of the State from contract actions was abolished on a statutory basis by the passage of the
Contractual Liability Act. (pp. 26-27)
12. The discovery rule should not be applied to determine when the County's claims accrued because both
parties mutually erred and both parties should have discovered the rate error at an earlier time. Instead, the
installment contract approach should be applied. (pp. 28-33)
13. The County is entitled to reimbursement for the difference between what was paid on the contract and
what should have been paid under the contract for all invoice periods occurring on or after January 9, 1992
to date, but is barred from reimbursement for all periods occurring before that date. (pp. 33- 34)
Judgment of the Appellate Division is AFFIRMED in part and REVERSED in part.
JUSTICE STEIN wrote a separate opinion, in which JUSTICE HANDLER joins, concurring in part
and dissenting in part from the Court's opinion. Justice Stein believed that the record mandated a remand
for an evidentiary hearing to permit the trial court to determine whether the State acted in good faith in
failing to honor the contract terms for such an extended period, and whether the County, through the
exercise of reasonable diligence, could have discovered earlier the fact and the extent of the State's non-compliance with the contract's reimbursement provisions.
CHIEF JUSTICE PORITZ and JUSTICES POLLOCK, O'HERN, and COLEMAN join in
JUSTICE GARIBALDI's opinion. JUSTICE STEIN filed a separate opinion concurring in part and
dissenting in part, in which JUSTICE HANDLER joins.
SUPREME COURT OF NEW JERSEY
A-
59 September Term 1997
COUNTY OF MORRIS,
Plaintiff-Respondent,
v.
WILLIAM FAUVER, COMMISSIONER
OF THE NEW JERSEY DEPARTMENT
OF CORRECTIONS, THE NEW JERSEY
DEPARTMENT OF CORRECTIONS and
THE STATE OF NEW JERSEY,
Defendants-Appellants.
Argued December 1, 1997 -- Decided March 9, 1998
On certification to the Superior Court,
Appellate Division, whose opinion is reported
at
296 N.J. Super. 26 (1996).
Joseph L. Yannotti, Assistant Attorney General,
argued the cause for appellants (Peter Verniero,
Attorney General of New Jersey, attorney; Mr.
Yannotti and Mary C. Jacobson, Assistant Attorney
General, of counsel; Andrew R. Sapolnick, Deputy
Attorney General, on the briefs).
W. Randall Bush, First Assistant County
Counsel, argued the cause for respondent
(Ronald Kevitz, Morris County Counsel,
attorney).
Benjamin D. Leibowitz, Deputy County Counsel,
argued the cause for amicus curiae, County of
Middlesex (Bruce J. Kaplan, Middlesex County
Counsel, attorney).
The opinion of the Court was delivered by
GARIBALDI, J.
This appeal presents yet another facet of the prison
overcrowding crisis in New Jersey. In County of Gloucester v.
State,
132 N.J. 141 (1993) and Worthington v. Fauver,
88 N.J. 183
(1982), we addressed the State's authority to house state
prisoners in county facilities under executive orders issued
under the Civil Defense and Disaster Control Act ("CDDCA" or
"Disaster Control Act"), N.J.S.A. App. A:9-30 to -63. In this
appeal, we address a similar issue under the County Correctional
Policy Act ("CCPA"), N.J.S.A. 30:8-16.3 to -16.l2. Specifically,
this appeal concerns the per diem reimbursement rate due the
County of Morris (“County”) from the State under their CCPA
contract for housing state prisoners in the County's prison
facilities.
A.
Commissioner's Authority to House State Prisoners
in County Facilities
housing state-sentenced prisoners in county correctional
facilities for the 90-day duration of the Order. Id. at 190-91.
That Order also directed the Commissioner to develop an
appropriate program to compensate those counties holding state
prisoners. Id. at 191.
In Worthington, supra, this Court upheld the validity of the
Governor's Orders because they had a basis in legislative
authority - the Disaster Control Act - as well as a limited time
span. Id. at 200-202. The Court cautioned, however, that the
Disaster Control Act did not permit a permanent delegation of
power to the Governor to authorize the reallocation of prisoners
by executive order; rather, if the Legislature wanted to change
the prison housing system officially, “it could pass a statute to
that effect.” Id. at 203.
The Legislature responded by passing the County Correctional
Policy Act. The CCPA attempts to address the overcrowding crisis
by establishing a “long-term, financial assistance program to
provide State grants to participating counties to renovate and
construct county correctional facilities so that county
correctional services may be developed, implemented, operated and
improved.” N.J.S.A. 30:8-16.5(a). In return, the Act permits
the Commissioner of the Department of Corrections ("DOC") to
house state prisoners, excluding those with anticipated periods
of confinement in excess of twenty-four months and those
convicted of certain sexual offenses, in medium and minimum
security county facilities. N.J.S.A. 30:8-16.5(b). The counties
are instructed to establish a twelve member county corrections
advisory board responsible for developing a comprehensive plan to
provide, among other things, for the allocation of bed space for
the housing of state prisoners and for the formation of “per diem
reimbursement rates favorable to the State.” N.J.S.A. 30:8-16.7.
As noted by the Appellate Division, however, "there is no
indication in the record when or if such a board was constituted
in Morris County." County of Morris v. Fauver,
296 N.J. Super. 26, 30 n.3 (1996). Nevertheless, pursuant to the County
Correctional Policy Act, the DOC entered into a contract for
renovation and housing with the County of Morris, as well as with
the following counties: Atlantic, Bergen, Camden, Cumberland,
Gloucester, Hudson, Middlesex, Mercer, Monmouth, Ocean, Passaic,
Somerset, and Union.See footnote 1
Despite the passage of the CCPA and the DOC's contracts with
various counties, however, the executive prison orders still
remained in effect. They were extended continuously over the
next twelve years by sixteen more executive orders issued by
three different governors. County of Gloucester, supra, 132 N.J.
at 149. Finally, in 1993, in County of Gloucester, supra, this
Court held that prison overcrowding could no longer be classified
as an “emergency” under the Disaster Control Act and, thus, the
line of executive orders were no longer valid. Id. at 150. The
Court stated that the long-term overcrowding problem called for a
more permanent legislative solution. Id. at 152.
In response to that observation by the Court, the
Legislature passed P.L. 1994 c. 12, which declared once again
that state prison overcrowding was an emergency and gave the
Governor, for two years, independent statutory authority to issue
executive orders deemed “necessary and appropriate to respond to
the crowding problem.” In 1996, the Legislature extended the
Governor's authority in that area for an additional two years.
P.L. 1996 c. 9. Pursuant to those two statutes, two more
executive orders were issued allowing the DOC to house state
inmates in county facilities for appropriate compensation.
Executive Order No. 16 (1994); Executive Order No. 48 (1996).
Thus, from the time period around 1981 or 1982 to date, the
Commissioner has had the authority to house state prisoners in
county facilities through the executive orders as well as under
the CCPA and financial assistance contracts with the counties.
The Contract, Reimbursement Rates, and Actions of the Parties
County would “construct a forty bed addition and make renovations
to its county correctional facility” in exchange for $2,156,676,
which the Legislature had appropriated to the DOC to assist the
County in meeting the construction costs of its facility. On the
completion of that facility, the County was required to make
available to the DOC forty cells to house forty minimum or medium
security state prisoners, with certain restrictions on the
identity of such prisoners.
Paragraph 11 set forth the method for computing the per diem
reimbursement rates required under the CCPA as well as the forty-year term of the contract:
The Department shall pay the County a per-diem rate for housing of State prisoners in
the 40 cells reserved for such prisoners in
the county correctional facility. The rate
shall be 75" of the average of the budgeted
daily costs of housing state prisoners in the
State prisons at Trenton, Rahway and Leesburg
during that fiscal year. The 75 per cent
per-diem rate shall remain in effect until
such time as the total monies retained by the
Department because of the discount equals
$120,680.00. Thereafter, the County shall
continue to make available to the Department
a total of 40 cells for use by State
prisoners, but the per-diem rate shall be 100
percent of the average daily cost of housing
State prisoners in the State prisons at
Trenton, Rahway and Leesburg during that
fiscal year. The County shall continue to
make 40 cells available to the Department for
use by State prisoners for the useful life of
the facility, as set forth in N.J.S.A. 40A:2-22 (forty years). At the end of this period,
the Commissioner and the County shall
reassess the need for continued use of the 40
cells by the Department, and may negotiate a
continuation of this agreement upon such
terms as are deemed appropriate.
Paragraph 12 provided that the ordinary and reasonable costs of
housing the State prisoners in the county facility, including the
costs of housing, facility maintenance, security, food, routine
medical and dental care, prescriptions, transportation, and
salaries of County personnel used to provide those services would
be encompassed in the per diem rate. Furthermore, the DOC also
was required to reimburse the County for the costs of all
extraordinary and necessary medical, dental, surgical,
psychiatric, and hospital services.
According to interrogatory answers by the Commissioner of
the DOC, the County “'began to house state inmates pursuant to
the MCCFAC [the contract] in Fiscal Year 1986, beginning with the
period October 1, 1985, through December 31, 1985.'” County of
Morris, supra, 296 N.J. Super. at 32 (alterations in original).
At that time, “'the average of the budgeted daily costs of
housing state prisoners in the state prisons at Trenton [New
Jersey State Prison], Rahway [East Jersey State Prison] and
Leesburg [Bayside State Prison] ... was $36.51.'” Ibid.
(alterations in original). For various other years, according to
the Appellate Division, the average per capita costs for state
prisoners, which were supposed to be the measure of payment under
the contract, were the following: 1985 - $36.87; 1986 - $36.51;
1987 - $42.74; 1988 - $45.43; 1989 - $48.26; 1990 - $49.79; 1991
- $53.13; 1992 - $51.75; 1993 - $56.87. Id. at 29 n.1.
Prior to the time that the DOC began to house contract
prisoners in Morris County, any state prisoners housed in the
County's facilities were executive order prisoners.
According to statements by William Fauver, the Commissioner of
the DOC, the reimbursement rates for executive order prisoners
were initially determined through separate negotiations with each
county. As that became too cumbersome, the DOC set a uniform
rate of compensation comparable to the costs of housing prisoners
in one or various state prisons. The per diem reimbursement rate
for executive order prisoners was $42.95 per inmate for fiscal
year 1981, $45.00 beginning in fiscal year 1985, and $58.50 as of
1994. Ibid.
On September 7, 1984, before any state prisoners were housed
in the County under MCCFAC, Commissioner William Fauver wrote a
letter to Captain John Delaney of the Morris County Jail stating:
Please be advised that the Department of
Corrections has increased the per diem rate
for housing State-sentenced inmates in the
county facilities to $45.00 effective July 1,
1984. This rate will be paid through Fiscal
Year 1985 to all counties who are housing
State-sentenced inmates beyond the fifteen-day exclusionary period.
That letter made no explicit mention of the type of prisoners
executive order, contract, or both - to which it was referring.
Approximately one year after that letter, state prisoners
were first housed in Morris County under the MCCFAC. Based on
Fauver's letter, the County submitted invoices to the DOC under
the contract in the amount of $45 per prisoner per day. The
State paid the DOC that amount. The $45 rate paid under the
contract was, for three years (1985-1987), more than the average
daily cost of housing in state prisons, the amount referred to in
the contract. Thus, for those years, the State overpaid the
amounts due. In the years subsequent to 1988, however, the $45
amount was lower than that required under the contractual terms.
Therefore, for that period, the State underpaid the rates in the
contract. In all that time, neither party inquired into nor
questioned the propriety of the $45 amount. County of Morris,
supra, 296 N.J. Super. at 33.
Procedural History
The State has been paying the County at the rate of $45.00 per prisoner per day purportedly based on the State's average per diem rate. However, on October 23, 1989 William H. Fauver, Commissioner of the New Jersey Department of Corrections testified under oath in United States District Court Civil Action No. 82-1946 entitled “Camden County, et. al. v. John J. Parker, Warden, et. al [sic] that the cost to house a state sentenced prisoner in the Trenton State facility was $63.00 per day .... Furthermore, based upon information and belief, the present average cost to house a State prisoner is approximately $65.00 per day.
Alleging that the DOC had “failed to reimburse the County for the
entire per diem rate which the County [was] entitled to” under
the contract, the County sought $2,604,000 in damages,
representing the twenty-dollar difference between $45 and $65 for
40 prisoners for 3255 days, the time period from May 11, 1983 to
April 7, 1992. Even after it sent that notice, however, the
County continued to submit invoices at the $45 rate. County of
Morris, supra, 296 N.J. Super. at 33.
On October 14, 1992, the County filed suit against the
Commissioner, the DOC, and the State. In June 1994, the County
filed a motion for partial summary judgment, claiming it was
entitled to $407,879.97 for the period covering Fiscal Years 1988
through 1993. The Commissioner cross-moved for summary judgment,
and the trial court granted the Commissioner's motion.
In its order dated December 5, 1994, the court found that
from 1985 until 1992 both parties ignored the payment terms of
Paragraph 11 of the contract. The court ordered that the
contract terms would govern in the future, but for all periods up
to the date of the court's order in which the County submitted
vouchers for $45 per day, the County was not permitted to seek
any payment beyond the amounts it had already received. In a
modified order on January 5, 1995, the trial court held that as
of October 14, 1992, the date the County filed its action against
the DOC, the County was insisting on its right to be paid
according to the terms of Paragraph 11. Therefore, the Court
concluded, the payment provisions of the contract would be
enforced as of that date. Furthermore, Morris County would be
reimbursed for any difference in rates that had occurred after
the filing of its action, despite the fact that the County had
continued, until the court's order, to submit invoices at the $45
rate. After the court's decision, the County submitted vouchers
to the State at a per diem rate of $58.50, “[without] prejudice
as to any future submittals.” County of Morris, supra, 296 N.J.
Super. at 35.
The Appellate Division reversed. County of Morris, supra,
296 N.J. Super. 26. That court found that the parties did not
completely abandon the contract because they adhered to its
material portions - the advancement of construction funds and the
housing of State prisoners. Furthermore, the parties did not
partially modify the payment terms of the contract because there
was neither mutual assent to modify nor new consideration to
support such a modification. The court instead concluded that
the County had been misled.
To determine whether and to what extent any damages were
warranted, the Appellate Division analyzed whether the
Contractual Liability Act, N.J.S.A. 59:13-1 to -10, applied. The
Contractual Liability Act bars recovery in contract actions
against the State if a notice of claim is not submitted to the
State within ninety days of the claim's accrual. N.J.S.A. 59:13-5. Because the Appellate Division believed that the State was
the only party privy over the years to the true facts regarding
the accuracy of the State's payments, the court used the
discovery rule to determine the accrual date of the County's
claim. Finding that the County's claim accrued when the County
first became aware of the State's breach in 1992, the court
declared that the County's notice of claim against the State,
filed shortly after that discovery, satisfied the requirements of
the Act. Furthermore, because of the continuing nature of the
State's breach, the court concluded that the restrictions in the
Contractual Liability Act did not apply. The Appellate Division
then remanded for a calculation of damages owed from the date
that state prisoners were first housed in the County pursuant to
the contract.
On May 21, 1997, we granted the Commissioner's petition for
certification.
149 N.J. 409 (1997).See footnote 3
The ability to abandon or modify one's contract has been consistently upheld in New Jersey. It is well-established in
this State that, “[i]n the absence of some vested derivative
interest in another, a contract may be modified, abrogated or
rescinded by ... the contracting parties.” Gillette v. Cashion,
21 N.J. Super. 511, 516 (App. Div. 1952).
However, an abandonment of a contract “can only take place
by the consent of both parties, 'and requires as clear evidence
of the waiver as of the existence of the contract.'” Wheaton v.
Collins,
84 A. 271, 273 (Ch. 1912) (citation omitted). To
effectuate an abandonment, mutual assent is always required.
Gillette, supra, 21 N.J. Super. at 516 (“mutual assent” needed to
abrogate or rescind contract); City of Del Rio v. Ulen
Contracting Corp.,
94 F.2d 701, 704 (5th Cir. 1938) (“Rescission
by abandonment requires mutual assent of the parties.”). As with
the formation of a contract, a proposal to terminate the contract
by one party must actually be accepted by the other in order to
constitute an abandonment. See Gillette, supra, 21 N.J. Super.
at 516; Ferber v. Cona,
91 N.J.L. 688, 691 (E. & A. 1918).
The determination of whether contracting parties intend to
abandon their agreement need not be express; it may be inferred
from all their acts and circumstances. Mossberg v. Standard Oil
Co.,
98 N.J. Super. 393, 406 (Law Div. 1967). As a general rule,
a contract “will be treated as abandoned where one party acts in
a manner inconsistent with the existence of the contract and the
other party acquiesces in that behavior.” Dorchester Manor v.
Borough of New Milford,
287 N.J. Super. 163, 170-71 (Law Div.
1994), aff'd,
287 N.J. Super. 114 (App. Div. 1996). The
intention to abandon a contract by actions or acquiescence,
however, must be “clearly expressed.” Mossberg, supra, 98 N.J.
Super. at 406-407. Under New Jersey law, when rescission or
abandonment of a contract “is to be implied from the conduct of
the parties, the actions must be positive and unequivocal.”
Anstalt v. F.I.A. Ins. Co.,
749 F.2d 175, 178 (3d Cir. 1984); see
also City of Del Rio, supra, 94 F.
2d at 704 (“Where conduct is
relied upon, the acts of the parties must be positive,
unequivocal and inconsistent with an intent to be further bound
by the contract.”).
Moreover, abandonment of a contract is similar to the remedy
of rescission, which generally requires that the entire contract
be terminated. County of Morris, supra, 296 N.J. Super. at 37.
As a general rule, rescission “must be exercised in toto and is
applied to the contract in its entirety with the result that what
has been done is wholly undone and no contract provisions remain
in force to bind either of the parties.” M.J. Merickel v.
Erickson Stores Corp.,
95 N.W.2d 303, 306 (Minn. 1959). A
contract, or a term or provision of a contract, cannot be
partially rescinded. Bonnco Petrol, Inc. v. Epstein,
115 N.J. 599, 612 (1989); see also Magliaro v. Modern Homes, Inc.,
115 N.J.L. 151, 155 (E. & A. 1935) (“[B]reach of an independent
covenant . . . does not, necessarily, make for a breach or
abandonment of the entire contract on the part of the party
thereto.”). If a party were allowed to “repudiate the
unfavorable parts of a contract and claim the benefit of the
residue,” it would amount to unjust enrichment and would bind the
parties “to a contract which they did not contemplate.” 17A Am.
Jur. 2d Contracts § 548 (2d ed. 1991). Only where a contract is
severable into different transactions may one of those separate
transactions be avoided. Bonnco Petrol, supra, 115 N.J. at 612;
17A Am. Jur. 2d Contracts § 548 (2d ed. 1991).
The County of Morris and the DOC did not abandon MCCFAC. We
agree with the Appellate Division that "[n]othing in the record
warrants a conclusion that either party to the contract had
clearly or implicitly rejected it." County of Morris, supra, 296
N.J. Super. at 36. The words and actions of the parties, while
perhaps demonstrating mistaken assumptions about their agreement,
did not evidence a definite mutual intention to abandon the
entire contract. Because there were no contract prisoners housed
in Morris County at the time Commissioner Fauver wrote the letter
stating that the per diem rate was now $45; because the letter
referred to the fifteen-day period beyond which, at that time,
State prisoners could not be housed absent the Governor's
executive orders; because the letter never mentioned contract
prisoners; and because the reimbursement rate for executive order
prisoners had actually been increased that year to a $45 amount,
it is clear that the Commissioner's letter was intended to apply
only to executive order prisoners. Therefore, in writing that
letter, the Commissioner did not propose to abandon the contract
and, contrary to the view of the Appellate Division, the County
could not reasonably have relied on that letter as an offer to
rescind. See County of Morris, supra, 296 N.J. Super. at 36.
Similarly, although the County submitted vouchers at the
incorrect rate of $45 per day, it too did not express a clear
intention to terminate the contract. While the County could
have, and should have, researched or inquired into the propriety
of the $45 amount, the County did not actually know at the time
that $45 was not the appropriate rate of reimbursement. Without
that knowledge, the County could not have intended, by insisting
on those incorrect terms, to repudiate the outstanding provisions
of the contract. Moreover, even if the County did so intend,
finding the State's payment of the County's requests for $45 to
be evidence of the State's acceptance of that intention would be
illogical because, at the time the State began paying the $45
rate, that amount was more than the State was required to pay
under the contract.
Finally and most importantly, although the parties acted
inconsistently with the payment provisions of their contract,
they did adhere to the material portions of their agreement.
Because the State advanced construction funds, the County
expanded its facilities, and the County housed State prisoners,
the parties did not "completely ignore the contract and operate
contrary to it or under the terms of a different agreement."
County of Morris, supra, 296 N.J. Super. at 36. The parties
clearly did not terminate their agreement in its entirety and,
because the payment provisions of the contract were not
severable, they did not satisfy the requirements for abandonment.
The conclusions reached by the courts in Mossberg, supra,
98 N.J. Super. 393, and Dorchester Manor, supra,
287 N.J. Super. 163, do not compel a different result. In Mossberg, supra, the
court found that the plaintiff's employment contract was
completely abandoned by a later collective bargaining agreement
that fixed his wages for almost twenty years. 98 N.J. Super.
at 407. The actions of the parties in that case are
distinguishable, however, because they ignored their entire
contract and they "clearly expressed" their intent to be governed
by their new agreement. In Dorchestor Manor, supra, the
plaintiff developer entered into an agreement with the Borough of
New Milford providing that the plaintiff would construct a
development complex in accordance with the Borough's ordinances
and the defendant would remove garbage from that development two
days a week. 287 N.J. Super. at 167. The Borough failed to
provide any such garbage service and instead paid the plaintiff
random amounts of money for twenty years. Id. at 171. As a
result, the Court found that the contract had been abandoned.
Ibid. Because the Borough never provided any garbage service at
all, the abandonment in Dorchester, supra, is distinguishable
from this case in which the State advanced construction funds and
the County housed State prisoners.
As with abandonment, parties to an existing contract may, by
mutual assent, modify it. Bohlinger v. Ward & Co.,
34 N.J.
Super. 583, 587 (App. Div. 1955), aff'd,
20 N.J. 331 (1956).
While abandonment of a contract requires repudiation of the
entire contract, limited changes or amendments to a contract can
be accomplished through modification. Merickel, supra, 95 N.W.
2d
at 306 (finding that rescission “by [m]utual agreement of a
single provision of a contract is a modification or an amendment
without a cancellation or a voidance of the contract as a
whole”). Such modification can be proved by an explicit
agreement to modify, or, like abandonment, by the actions and
conduct of the parties, so long as the intention to modify is
mutual and clear. See 17A C.J.S. Contracts § 375 (1963)
("[A]mbiguous course of dealing from which one party might
reasonably infer that the original contract was still in force,
and the other that it had been changed," will not support a
modification).
A proposed modification by one party to a contract must be
accepted by the other to constitute mutual assent to modify.
Wheaton, supra, 84 A. at 273 (holding that proposed modification
of the contract, “not being accepted or acted on by either party,
leaves both complainant and defendant to their equitable rights
under the original contract”). Unilateral statements or actions
made after an agreement has been reached or added to a completed
agreement clearly do not serve to modify the original terms of a
contract, especially where the other party does not have
knowledge of the changes, because knowledge and assent are
essential to an effective modification. See Bonnco Petrol,
supra,
115 N.J. 599 (unilateral insertion by purchaser that
option monies were to be applied towards purchase price, without
pointing out insertion to other side before signing, was
ineffective in changing contract). Finally, an agreement to
modify must be based upon new or additional consideration. Ross
v. Orr,
3 N.J. 277, 282 (1949) (“[T]he terms of an agreement may
be altered or changed by a subsequent agreement if based on
proper consideration.”).
The County of Morris and the DOC did not modify the terms of
their prisoner housing contract. As with abandonment, the
parties did not clearly express a mutual intention to modify
their contract, nor did one party demonstrate knowledge and
acceptance of the other party's expressed intentions. As
discussed previously, the State's letter was intended to apply
only to executive order prisoners and, thus, was not intended to
modify the payment provisions of the contract. In addition,
because the County was unaware that $45 was not the correct
reimbursement amount, the County's submission of vouchers at that
rate did not demonstrate a purpose to transform the agreement.
Finally, there seems to have been no consideration given for the
alleged modification of the contract.
Various cases from other jurisdictions dealing with attempts
to modify contract payment provisions are consistent with our
conclusions. In B.C. Truck Lines, Inc. v. Kelley, the parties
entered into a contract whereby the plaintiff was to receive 70" of whatever amount defendant received for each load hauled by
defendant in plaintiff's truck.
95 S.E.2d 309, 310 (Ga. Ct. App.
1956). When the defendant began paying only 60" instead of 70%,
and then continued to pay that amount for almost two years, the
defendant insisted that there had been a mutual departure from
their contract. Ibid. The plaintiff disagreed, contending that
he thought the 10" was being withheld to be applied to a stock
purchase for his benefit. Ibid. Finding for the plaintiff, the
court stated that "[t]he mere acceptance of a lesser amount in
and of itself does not show a mutual departure." Ibid.; 17A
C.J.S. Contracts § 375 (1963). Similarly, in Walker v.
Associated Dry Goods Corp.,
189 A.2d 91, 97 (Md. 1963), the court
held that there was no modification of the parties' agreement
because the "mere acceptance by the [plaintiffs] for several
years of payments in less amounts than they were entitled to
under the lease does not evidence an intention on their part to
modify the terms of the lease."
Also, when a party overpays on a contract for a number of
years, as a result of an error in computation or
misinterpretation or mistake of fact, that party may generally
recover that overpayment and will not be obligated to continue
overpaying. 13 Williston on Contracts § 1574 (Jaeger ed. 1961);
Liebeskind v. Mexican Light & Power Co.,
116 F.2d 971, 974 (2d
Cir. 1941). In Liebeskind, supra, where the defendant was
required to pay interest coupons in Canadian dollars but
continually paid certain coupons in United States currency,
without regard to fluctuations in the rate of exchange, the
defendant had not modified his agreement so as to require
continued overpayment. Ibid. As noted by the court, "if a
contract clearly demands a specified performance, the fact that
the obligor has done more in part performance than the letter of
his obligation required should not be used to compel a similar
over-performance of the remainder." Ibid.
Neither the County's acceptance of $45, a lesser amount than
it was due, for the four years before it filed suit, nor the
State's payment of $45, more than it owed, for the first three
years of the contract, demonstrate that either party intended to
modify their contract.
It does seem, however, that both parties have misinterpreted their respective rights and obligations under the contract. Although the State should have realized and then informed the County that the $45 amount was not the average cost specified under the contract, and although the State should have specified more clearly to which prisoners the letter referred, the State did not mislead the County, as the Appellate Division erroneously suggests. See County of Morris, supra, 296 N.J. Super. at 38. Because of the letter's reference to the required fifteen-day transfer period, its lack of reference to contract prisoners, and the fact that the letter was sent before any
contract prisoners were yet housed in Morris County's facilities,
the County could not have reasonably relied on the letter as
specifying the correct reimbursement amount. Moreover, the State
had no incentive to pay the County $45 per day for contract
prisoners at the time the letter was sent. When the County began
to house contract prisoners, the actual daily cost of housing a
prisoner at the three state prisons was $36.51. County of
Morris, supra, 296 N.J. Super. at 29 n.1, 32. Furthermore, the
terms of Paragraph 11 of the MCCFAC provided that the State was
to pay 75" of the average rate ($27.38) to the County until the
discount from the reduced rate equaled $120,680. Therefore, when
the State began to pay the County, it was overpaying by $17.62
per prisoner per day. Because it was not in the State's interest
to have made such overpayments, we do not find that the State
intended the $45 rate specified in the letter to apply to
contract prisoners, nor do we find that the State attempted to
mislead the County into thinking that it did apply. Finally, the
average state housing rates were public information and,
therefore, the County had an obligation to use reasonable
diligence to inquire into the appropriate figure. As a result of
both parties' lack of research regarding the accuracy of the
payment rates, no party was misled, but both parties acted upon
mistaken assumptions and mutually erred in the construction of
their contract.
Where a contract is ambiguous, courts will consider the
parties' practical construction of the contract as evidence of
their intention and as controlling weight in determining a
contract's interpretation; where the terms of a contract are
clear, however, the court must enforce it as written. Koshliek
v. Board of Chosen Freeholders,
144 N.J. Super. 336, 344 (Law
Div. 1976). Furthermore, where both parties to a contract have
erred in the construction of that contract, courts will generally
not require that the parties continue in that mistaken
construction, but will instead insist on a return to the written
provisions of the contract. Bellisfield v. Holcombe,
102 N.J.
Eq. 20, 31 (Ch. 1927) ("Where terms, used in a written contract,
are themselves susceptible of definite legal construction the
fact that the parties have adopted and acted on an erroneous
construction of the contract, will not preclude them, as to
transactions not clear, from insisting on the proper and true
legal construction.").
Considering the parties' mutual misconstruction of their
contract, we hold that the payment terms of the MCCFAC, which
were clear as written, not only should have been followed over
the years, but also continue to apply. To avoid similar mistakes
in the future, we conclude that the State must provide the County
with regular reports stating the average costs of housing in the
state prisons. Similarly, the County must regularly provide the
State with the exact number of contract, as opposed to executive
order, prisoners housed in the County's facilities.
As previously observed, we find that the equitable defenses
of estoppel, laches, and waiver also do not bar the County's
contract action. We discuss each principle briefly.
Equitable estoppel is:
The effect of the voluntary conduct of a party whereby he is absolutely precluded, both at law and in equity, from asserting rights which might otherwise have existed
. . ., as against another person, who has in good faith relied upon such conduct, and has been led thereby to change his position for the worse . . . .
[Carlsen v. Masters, Mates, & Pilots Pension Plan
Trust,
80 N.J. 334, 339 (1979) (citations
omitted).]
In O'Mally v. Department of Energy, this Court stated: "Equitable estoppel is rarely invoked against a governmental entity. . . . Nonetheless equitable considerations are relevant to assessing governmental conduct, and may be invoked to prevent manifest injustice." 109 N.J. 309, 316 (1987) (citations omitted); see also Township of Fairfield v. Likanchuk's, Inc., 274 N.J. Super. 320, 331 (App. Div. 1994) (explaining that equitable estoppel is applied against governmental entities "'only in very compelling circumstances'") (citations omitted). This is so because "matters of public interest and legislative will should not be easily compromised by freely applying the doctrine of estoppel to irregular municipal conduct." Juliano v. Borough of Ocean Gate, 214 N.J. Super. 503, 507 (Law Div. 1986). This case presents no such compelling circumstances, and
therefore, the doctrine of estoppel cannot be invoked against the
County to prevent it from pursuing its reimbursement claim.
Waiver "is the intentional relinquishment of a known right." West Jersey Title & Guar. Co. v. Industrial Trust Co., 27 N.J. 144, 152 (1958). Waiver must be voluntary and there must be a clear act showing the intent to waive the right. Ibid. Furthermore, waiver "presupposes a full knowledge of the right and an intentional surrender; waiver cannot be predicated on consent given under a mistake of fact." Id. at 153. For reasons previously expressed, there is no showing that the County voluntarily and knowingly waived its right to complete payment under the terms of the contract.
Laches "has been found where there is unexplainable and inexcusable delay in enforcing a known right whereby prejudice has resulted to the other party because of such delay." Dorchester Manor, supra, 287 N.J. Super. at 171. The policy behind laches is to discourage stale claims. Ibid. The time constraints imposed are flexible under the doctrine. Lavin v. Board of Educ., 90 N.J. 145, 151 (1982). The factors to be considered when determining whether to apply laches include: length of the delay; reasons for the delay; and "changing conditions of either or both parties during the delay." Id. at 152. "It is assumed that the party to whom laches is imputed has knowledge of his rights, and sufficient opportunity to assert
them in the proper forum." Dorchester Manor, supra, 287 N.J.
Super. at 172. The other party, in contrast, may have good
reason to believe those rights have been abandoned. Ibid.
Because the County did not have knowledge of its claims
against the State until many years after the incorrect payments
began, laches does not apply. Although the County's delay in
asserting its rights was long, the mistaken assumptions of the
parties suggest that their claim should be permitted. Moreover,
the conditions of the parties have not changed to an extent that
justifies barring the County's claim.
Although we hold that the parties have not abandoned or modified the contract and that the cause of action is not barred by equitable principles, the New Jersey Contractual Liability Act applies. Under that Act, although the MCCFAC must be enforced as written from here forward, the County is entitled to be reimbursed for some of the State's underpayments.
Prior to 1970, the State could not be sued in actions in tort or contract as a result of its sovereign immunity. Frapaul Constr. Co. v. New Jersey Dep't of Transp., 175 N.J. Super. 84, 88 (App. Div. 1980); Richard J. Hughes & William F. Hyland, Report on the New Jersey Tort Claims and Contractual Liability Acts 1 (July 1, 1975). The immunity from contract actions was first abolished as a common law doctrine by the Supreme Court in
1970 and was later abolished on a statutory basis by the passage
of the Contractual Liability Act. P, T & L Constr. Co. v.
Commissioner, Dep't of Transp.,
55 N.J. 341, 346 (1970); Frapaul,
supra, 175 N.J. Super. at 88-89. The Report of the Attorney
General's Task Force on Sovereign Immunity, which urged the
passage of that Act, noted that most states and the Federal
Government had already subjected themselves to liability for
contract actions and that it is “unconscionable for a State to be
permitted to repudiate a contract which it has voluntarily
entered and which binds the other parties.” George F. Kugler,
Jr., Attorney General, Report of the Attorney General's Task
Force on Sovereign Immunity 9 (May 1972).
Specifically, the Contractual Liability Act “waives [the
State's] sovereign immunity from liability arising out of an
express contract or a contract implied in fact and consents to
have the same determined in accordance with the rules of law
applicable to individuals and corporations.” N.J.S.A. 59:13-3.
The Contractual Liability Act also requires that all parties
contracting with the State who wish to file a breach of contract
suit against the government file a notice of claim with the
contracting agency within ninety days of the accrual of their
claim. N.J.S.A. 59:13-5. Failure to file a notice of claim
within the appropriate time period results in a permanent bar
against recovery, unless application is made to a judge of the
Superior Court giving “sufficient reason” for permission to file
a late notice of claim. N.J.S.A. 59:13-5-6. If permission is
granted, the notice of claim must then be filed within one year
of the accrual of the claim. N.J.S.A. 59:13-6. The claimant
will also be barred from recovering if he fails to file suit
within two years of accrual of his claim or within one year after
completion of the contract giving rise to the claim. N.J.S.A.
59:13-5. As noted by various courts, the purposes of the notice
provisions of the Act are to give state agencies, which are often
faced with large amounts of litigation, “an opportunity to
determine the merits of the claims for the possibility of a
settlement, as well as to investigate the claims for the purpose
of preparing for trial.” Frapaul, supra, 175 N.J. Super. at 92;
accord Housing Auth. of Newark v. Sagner,
142 N.J. Super. 332,
343 (App. Div. 1976).
We must first ascertain the date of accrual of the County's
claim to determine when its notice of claim had to be filed. The
Act itself states that “'Accrual of claim' shall mean the date on
which the claim arose and shall not be affected by the notice
provisions contained herein.” N.J.S.A. 59:13-1. In addition,
courts have generally stated that a claim accrues, for statute of
limitations purposes, on “the date on which 'the right to
institute and maintain a suit' first arose.” Rosenau v. City of
New Brunswick,
51 N.J. 130, 137 (1968); Deluxe Sales and Serv.,
Inc. v. Hyundai Eng'g & Constr. Co.,
254 N.J. Super. 370, 374
(App. Div. 1992).
In this case, we apply the installment contract approach
described in Metromedia Co. v. Hartz Mountain Associates,
139 N.J. 532, 535 (1995), to determine when the County's claim
accrued. Under the installment contract method, claims based on
installment contracts or other divisible, installment-type
payment requirements accrue with each subsequent installment. In
other words, a new statute of limitations begins to run against
each installment as that installment falls due and a new cause of
action arises from the date each payment is missed. Id. at 535-36. The Court in Metromedia, supra, noted that, absent a
repudiation, a plaintiff may sue for each breach only as it
occurs because “[t]o hold otherwise would allow a claimant to
trigger the statute of limitations upon presentation of a claim
rather than having the existence of a claim trigger the statute
of limitations.” Ibid. As a result, the Court found that where
the defendant agreed to reimburse the plaintiff for cleaning
costs, and for six and one-half years the plaintiff paid for the
service but did not submit bills to the defendant, the
plaintiff's “enforceable right” arose on a monthly basis, upon
completion of the cleaning services and the accumulation of the
right to payment. Id. at 533-35. Therefore, the plaintiff in
that case could recover only for those bills relating to the
months for which the applicable statute of limitations had not
expired at the time plaintiff filed suit; any bills submitted for
months more than six years before the suit was commenced were
forever barred from recovery. Id. at 536.
The installment contract approach has been applied in a
variety of situations. As noted by the Court in Metromedia,
supra, the theory has been used in connection with coupons on
county bonds due annually, periodic payments for promissory
notes, periodic payments under a divorce settlement, and monthly
payments under an equipment lease. Id. at 535. In Ballantyne
House Associates v. City of Newark,
269 N.J. Super. 322, 331-32
(App. Div. 1993), the Appellate Division found that Newark's
failure to perform its garbage collection obligations, under the
tax abatement agreements at issue in that case, “could be
considered a series of continuing breaches for which plaintiffs
could maintain an action for any breach occurring within six
years of the filing of the complaint, even if more than six years
had elapsed since Newark's initial breach.” Similarly, courts in
various jurisdictions have found that a new cause of action
accrued monthly on electricity contracts where a new payment was
due each month based on the customer's usage over that month,
Kiamichi Elec. Cooperative v. Underwood,
842 P.2d 358 (Okla. Ct.
App. 1992); that the obligation to make pension fund withdrawal
liability payments was akin to the obligation to make payments on
an installment contract, Board of Trustees v. Kahle Eng'g Corp.,
43 F.3d 852, 857 (3d Cir. 1994); and that the dates of submission
of invoices for payment were the dates on which a plaintiff's
claims accrued, Deluxe Sales and Serv., Inc., supra, 254 N.J.
Super. at 374-75.
The discovery rule should not be applied to determine when
the County's claims accrued. The discovery rule provides that,
“in an appropriate case, a cause of action will not accrue until
the injured party discovers, or by exercise of reasonable diligence and intelligence should have discovered, facts which form the basis of a cause of action.” O'Keefe v. Snyder, 83 N.J. 478, 491 (1980). Although it seems “inequitable that an injured person, unaware that he has a cause of action, should be denied his day in court solely because of his ignorance, if he is otherwise blameless,” it may also be “unjust, however, to compel a person to defend a law suit long after the alleged injury has occurred, when memories have faded, witnesses have died and evidence has been lost.” Lopez v. Swyer, 62 N.J. 267, 274 (1973). Therefore, this Court has held that the equitable claims of the parties must be weighed against each other and that not every delayed discovery will justify the application of the rule. Id. at 274-75. As a result, the discovery rule has been applied most frequently in personal injury or negligence-type actions, which by their nature are often self-concealing or undiscoverable. Although the rule originally was developed to provide relief for plaintiffs in foreign body or other medical malpractice claims, id. at 273, the rule has since been extended to various other negligence-type suits, such as legal malpractice, Grunwald v. Bronkesh, 131 N.J. 483, 493-94 (1993); products liability suits, id. at 493 (citing Burd v. New Jersey Tel. Co., 76 N.J. 284, 291-92 (1978)); negligent miscalculation of acreage by a professional engineer and land surveyor, Lopez, supra, 62 N.J. at 273 (citing New Market Poultry Farms, Inc. v. Fellows, 51 N.J. 419 (1968)); and common law fraud, Interlox
Punch & Die Corp. v. Insilco Corp.,
174 N.J. Super. 175, 176 (Law
Div. 1980).
The rationale for employing the discovery rule in tort- or
fraud-type actions, however, does not carry over to most contract
actions, and therefore, the discovery rule generally has not been
applied in such suits. Although some negligence or malpractice
actions involve inherently undiscoverable types of injuries, most
contract actions presume that the parties to a contract know the
terms of their agreement and a breach is generally obvious and
detectable with any reasonable diligence. Because the discovery
rule imposes on plaintiffs an affirmative duty to use reasonable
diligence to investigate a potential cause of action, and thus
bars from recovery plaintiffs who had “reason to know” of their
injuries, the discovery rule generally does not apply to contract
actions. See Berlen v. Consolidated Rail Corp.,
291 N.J. Super. 542, 551 (App. Div. 1996) (finding affirmative duty to
investigate); O'Keefe, supra, 83 N.J. at 497-98 (imposing duty of
reasonable diligence in investigation in order to toll statute of
limitations); D'Aries v. Schell,
274 N.J. Super. 349, 363 (App.
Div. 1994) (“lack of diligence precluded plaintiff from
benefiting from the discovery rule”); c