County contracts with private company for services. Contract has a set annual price and is for three years subject to annual approval by Commissioners Court. However, contract says that if the county terminates before the three year term then it will pay private company 75% of what it would have paid in the remaining years. The same services can now be had for much cheaper on the open market. The contract has mediation and arbitration provisions.

Question #1: The County can't pay the 75% "penalty" as it is worded since it is for services which the County will never receive, right? How do you explain to the other side that you can't do what was agreed upon?

Question #2: Has anyone encountered this problem and would be willing to steer me in the right research direction?

I suppose my first response would be a question: What kind of contract is it? If it's not a contract for engineering, architectural or construction services (or for goods related to engineering, architectural or construction services) a-la section 262.007, Local Government Code, the initial inclination would be to terminate in accordance with the county's reserved right, then have your governmental-immunity based plea to the jurisdiction ready to pour out the claim for the liquidated damages.

The precise language used in the 75-percent clause also would be enlightening. Unless there's language in the contract or in the parties' negotiation thereof supporting the conclusion that damages for a breach would be difficult or impossible to calculate, and that 75 percent of all remaining potential contract payments is a reasonable estimate of damages, you've probably got a good argument that it's an unlawful punitive liquidated damages clause.

And then you reach the constitutional issues. As you note, if the county receives no public benefit from the expenditure of the 75-percent penalty, it has all the markings of a grant or gift within the prohibition of article 3, section 52(a). The tricky part will be reexamination of whether the commissioners determined at the time the contract was made that the benefit to be received under the contract was sufficient that the 75-percent penalty was an acceptable part of the contractual consideration. The same issue would be relevant in looking at the case under article 3, section 53.

Confident that I have confused and irritated the masses, I now return to under my rock.

Also depending on exact timing as to what actually occurred on the county accounting books at time the contract was signed, check out Brodhead v. forney 538 sw 2d 873, as to the sinking fund, payable out of current revenue, etc. as this contract's annual renewal clause is one way to avoid the effect of this constitutional provision, BUT if you tack on this penalty for using the annual option clause, then the purpose that is intended by this constitutional provision (i.e., to prevent one court from binding one or more future courts for years to a contract or failing to set aside funds and so forth), the clause with a penalty has effectively eviscerated the purpose of this constitutional provision.

[This message was edited by LV on 09-10-04 at .]