Westlake v. Cleveland

2017 Ohio 4064

• Court: Ohio Court of Appeals
• Decided: June 1, 2017
• Docket: 104282
• Status: Published

Opinion

[Cite as Westlake v. Cleveland, 2017-Ohio-4064.]

Court of Appeals of Ohio EIGHTH APPELLATE DISTRICT COUNTY OF CUYAHOGA

JOURNAL ENTRY AND OPINION No. 104282

CITY OF WESTLAKE PLAINTIFF-APPELLEE

vs.

CITY OF CLEVELAND DEFENDANT-APPELLANT

JUDGMENT: REVERSED AND REMANDED

Civil Appeal from the Cuyahoga County Court of Common Pleas Case No. CV-12-782910

BEFORE: Stewart, P.J., S. Gallagher, J., and Celebrezze, J.

RELEASED AND JOURNALIZED: June 1, 2017 ATTORNEYS FOR APPELLANT

Robert J. Hanna Susan M. Audey Karl A. Bekeny Tucker Ellis L.L.P. 950 Main Avenue, Suite 1100 Cleveland, OH 44113

Barbara A. Langhenry Director of Law City of Cleveland Law Department 601 Lakeside Avenue, Room 106 Cleveland, OH 44114

ATTORNEYS FOR APPELLEE

Dennis M. O’Toole Frank S. Carlson Matthew A. Dooley Ashleigh B. Kerr O’Toole, McLaughlin, Dooley & Pecora 5455 Detroit Road Sheffield Lake, OH 44054

John D. Wheeler Director of Law City of Westlake 27700 Hilliard Boulevard Westlake, OH 44145 MELODY J. STEWART, P.J.:

{¶1} In 1990, defendant-appellant city of Cleveland and plaintiff-appellee city of

Westlake entered into a water service agreement (“agreement”) in which the Cleveland

Water Department would be the “sole and exclusive supplier” of water to Westlake for a

period of ten years, with automatic annual renewals unless either side gave notice, five

years in advance, of intent to terminate. Years later, after becoming dissatisfied with

Cleveland’s water service and pricing, Westlake began exploring the possibility of

establishing its own water department and purchasing water from the Avon Lake Water

Department. As part of that effort, Westlake filed this action seeking a declaration of its

rights and responsibilities under the agreement. It asked the court to declare that the

agreement terminated after a period of 25 years and that Cleveland could not recover

“stranded” or other additional costs.

{¶2} While the declaratory judgment action was pending, Cleveland invoked a

clause of the agreement that allowed it to enact rate increases for customers “who have

taken steps towards leaving the Cleveland water system.” Ostensibly intended to recoup

$51 million in “stranded” costs relating to capital improvements of water lines within

Westlake, the rate increases would result in additional costs of approximately $5,000 per

homeowner and just over $100,000 for large commercial establishments for the remainder

of the five-year notice period. {¶3} Westlake asked the court to enjoin Cleveland’s imposition of the rate

increases. After the court granted a preliminary injunction to stay Cleveland’s rate

increases, the parties filed cross-motions for summary judgment. Westlake cited the

terms of a memorandum of understanding signed by both parties at the same time they

signed the agreement in which they acknowledged that Westlake was not granting

Cleveland an exclusive franchise to furnish water. Westlake argued that the

memorandum of understanding amended the terms of the agreement to grant Cleveland a

non-exclusive franchise to furnish water. Additionally, Westlake argued that its charter

prohibited a franchise charter in excess of 25 years, a fact memorialized by its city council

in enabling legislation to approve the water contract with Cleveland. That legislation

granted Cleveland a non-exclusive franchise to provide water “for a period of twenty-five

(25) years.” Westlake maintained that the agreement expired on March 19, 2015, at

which point Cleveland’s subsequent attempts to increase water rates would be a nullity.

{¶4} Cleveland argued that Westlake did not grant it the property right of a

“franchise” to furnish water, but merely a contractual right to be the sole supplier of

water. It further argued that the agreement did not expire by its own terms after 25 years

because Westlake granted Cleveland the property right to enter Westlake for 10 years,

with subsequent annual terms. Cleveland rejected Westlake’s assertion that the

memorandum of understanding amended the terms of the agreement: it argued that an

integration clause of the contract foreclosed reference to the memorandum of

understanding and, in any event, the memorandum of understanding merely memorialized the parties’ understanding that the agreement was not intended to grant an exclusive

franchise. It further rejected reliance on the terms of the Westlake enabling ordinance,

pointing out that legislation was one-sided because Cleveland was not a party to the

ordinance and the ordinance could not be construed as manifesting Cleveland’s

capitulation to amending the agreement.

{¶5} The court ruled that the agreement had been amended by both the

memorandum of understanding and the Westlake ordinance granting Cleveland a

non-exclusive franchise to operate a public utility for a period of 25 years. The court

ruled that the agreement terminated on March 19, 2015, and was no longer enforceable,

and that the provision requiring five-years notice of intent to terminate was no longer

applicable. The court ruled that Westlake could obtain water from a secondary source

without violating the agreement. Finally, the court ruled that Cleveland was not entitled

to recover stranded costs.

{¶6} Cleveland’s sole assignment of error complains that the court erred by

granting summary judgment and permanently enjoining it from enforcing its rate

increases to recover stranded costs. It maintains that the memorandum of understanding

did not amend the agreement, but merely memorialized the parties’ understanding that the

agreement did not violate Westlake’s city charter by granting the Cleveland Water

Department an exclusive franchise to provide water service for more than 25 years.

{¶7} A Civ.R. 56 motion for summary judgment rests on the assertion that there

are no genuine issues of material fact and that the moving party is entitled to judgment as matter of law. To the extent the nonmoving party maintains there are genuine issues of

material fact, the court is required to construe the facts most favorably to the nonmoving

party. See Civ.R. 56(C). However, when there are cross-motions for summary

judgment, both parties represent that there are no genuine of issues of material fact.

Sesko v. Hutchins Caw, Inc., 8th Dist. Cuyahoga No. 87359, 2006-Ohio-5434, ¶ 2;

Cincinnati v. Ohio Council 8, Am. Fedn. of State, Cty. & Mun. Emps., 93 Ohio App.3d

162, 164, 638 N.E.2d 94 (1st Dist.1994). We thus take the underlying facts as

established for purposes of this appeal.1

{¶8} The water service agreement was written on a master form that Cleveland

drafted and used with all of its political subdivision water customers. Article 5 of the

agreement states:

5.01. In consideration of the agreement of PURVEYOR and provided that Purveyor conforms all water rate increases strictly to the provisions of Article 4 of this AGREEMENT, and in consideration of the agreement of PURVEYOR to finance and construct the capital improvements provided for in Article 20 of this AGREEMENT, MUNICIPALITY agrees that it will not directly or indirectly, alone or together with others, by court proceedings or in any other way attempt to obstruct, enjoin, hinder or disable PURVEYOR from setting, charging, and collecting rates that PURVEYOR in its sole discretion deems necessary to enable PURVEYOR to fulfill its obligations hereunder. In addition, MUNICIPALITY agrees that PURVEYOR shall be the sole and exclusive supplier of water to MUNICIPALITY and its inhabitants for the term of this AGREEMENT.

{¶9} Article 23 of the agreement, titled “TERM OF AGREEMENT,” states:

Both the court and parties described the factual background leading to the agreement in 1

great detail. Those facts, however, are irrelevant to the legal question before us on appeal — whether the court erred in how it interpreted the agreement. 23.01. The term of this AGREEMENT shall be for a minimum period of ten (10) years commencing on the first day after execution of this AGREEMENT by PURVEYOR, and shall automatically continue in effect from year to year thereafter. This AGREEMENT may be cancelled by either party hereto by giving written notice to the other party at least five (5) years prior to the effective date of termination, provided that no such notice may be given until five (5) years after the date upon which this AGREEMENT is executed by PURVEYOR.

{¶10} Before signing the agreement, Westlake had concerns about both the

duration of the agreement and making Cleveland the “sole” provider of water to

Westlake. Westlake’s charter does not provide for exclusive franchises. The charter

does allow the city to grant non-exclusive franchises, but Article XI, Section 5 of the

Westlake City Charter states: “the Council may by ordinance grant a non-exclusive

franchise to a person, firm or corporation to construct or operate a public utility on,

across, under, over or above any public street or real estate within the Municipality for a

period not in excess of twenty-five (25) years.” Westlake told Cleveland that the “sole

and exclusive supplier” language of the agreement ran afoul of its charter.

{¶11} The Cleveland assistant law director assigned to the matter was aware that

Westlake believed that it could not sign the agreement as drafted: “I believe that the issue

[the Westlake law director] presented to me was that Westlake had a charter provision

[sic] prohibited Westlake from signing this agreement and, and [sic] that was the subject

of our discussion.” The parties agreed to sign a memorandum of understanding in which

they stated that “in consideration of the execution of the [agreement]” they “mutually

agree” that: Article 5 of the Contract provides that Cleveland will be the sole supplier of water to Westlake. Cleveland and Westlake agree that the language of Article 5 of the Contract is not intended to grant an exclusive franchise to provide water service to Westlake and its inhabitants in violation of Westlake’s Charter which prohibits the granting of an exclusive franchise for utility service to any utility company.

Westlake acknowledges that, as of the date of the Contract, Cleveland has been and will continue to be the sole supplier of water to Westlake and its inhabitants during the term of the Contract because there are no alternative sources of water to supply the community.

However, in the event that the second sentence of Article 5 of the Contract is construed to be invalid, illegal or unenforceable, pursuant to paragraph 26.03 of the Contract, such invalidity shall not effect any other term or provision of the Contract, and the Contract shall be interpreted and construed as if the sentence had never been contained therein.

{¶12} After reciting other agreements unrelated to this litigation, the memorandum

of understanding concluded with the parties agreeing that “the foregoing represents their

understanding of the provisions of the [agreement] and agree that this Memorandum of

Understanding shall remain on file with said [agreement].”

{¶13} Section 3 of the enabling legislation enacted by the Westlake City Council

authorizing its mayor to enter into the agreement states: “That this Council grants to the

City of Cleveland, pursuant to Article XI, Section 5, a non-exclusive franchise to

construct and operate a public utility for the furnishing to the City of Westlake and its

inhabitants potable water for a period of twenty-five (25) years.” See Westlake

Ordinances No. 1989-7.

{¶14} Both the memorandum of understanding and the enabling legislation

enacted by the Westlake City Council were forwarded to Cleveland. Cleveland signed the agreement and returned it along with the memorandum of understanding and a copy

of the Westlake enabling legislation. The parties do not dispute that March 19, 1990,

was the effective date of the agreement.

{¶15} There are two points to be made about the interaction between the

agreement and the Westlake charter. First, the Westlake charter only prohibits the city

from (1) entering into an exclusive franchise and (2) entering into a non-exclusive

franchise in excess of 25 years. Second, the agreement provided for a term of ten years,

after which it would “automatically continue in effect from year to year thereafter” unless

cancelled by written notice.

{¶16} With respect to the first point, the court found that Westlake could not enter

into the agreement as written because the “sole provider” language would grant Cleveland

an exclusive franchise to provide water to Westlake. The Westlake charter makes no

provision for the granting of exclusive franchises. Cleveland argues that the “sole

provider” language did not grant a franchise, but a contractual right to be the sole supplier

of water to Westlake. Cleveland argues that a “franchise” is a property right to enter the

streets of Westlake to construct and operate a utility, but does not prohibit a utility from

being a sole supplier.

{¶17} Cleveland’s argument fails to account for Article 7 of the agreement, which

separately addresses the “property right” granted to it. That section states that Cleveland

has the right to use Westlake’s streets, easements, and other public ways for the “purpose

of laying, extending, maintaining and repairing water mains and doing such other acts” necessary for the delivery of water to Westlake. This part of the agreement would

embody Cleveland’s understanding of the property right granted to it.

{¶18} Because Article 7 specifically addresses what Cleveland claims is the

property right encompassed by a franchise, we give independent meaning to Article 5 of

the agreement, titled in part as “EXCLUSIVE FRANCHISE.” While it is true that

section headings in a contract are not binding provisions, Jordan v. Marion Technical

College, 3d Dist. Marion No. 9-90-36, 1991 Ohio App. LEXIS 3966, at 5 (Aug. 15,

1991), there is no doubt that Article 5 addresses Cleveland’s desire to be the sole provider

of water for Westlake in a manner inconsistent with Cleveland’s assertion that it dealt

only with property rights. Cleveland drafted the agreement, so the court correctly viewed

the use of the words “exclusive franchise” used in Article 5 as being conceptually

different than the property rights granted under Article 7. World v. Grange Mut. Cas. Co.,

148 Ohio St.3d 11, 2016-Ohio-2913, 68 N.E.3d 738, ¶ 36.

{¶19} In addition, Cleveland’s interpretation of Article 5 is contrary to the express

terms of the memorandum of understanding. Given that Westlake had no authority to

grant an exclusive franchise, the memorandum of understanding made it clear that the

“sole provider” language of Article 5 was “not intended to grant an exclusive franchise to

provide water service to Westlake and its inhabitants in violation of Westlake’s Charter

which prohibits the granting of an exclusive franchise for utility service to any utility

company.” The parties went on to recite their understanding that although Cleveland

was apparently Westlake’s only source for obtaining water at the time, that did not mean that Cleveland had an exclusive franchise to provide water. In other words, the parties

agreed that Cleveland was the sole supplier of water to Westlake only because Westlake

had no other options. These recitations made it clear that Westlake granted Cleveland a

non-exclusive franchise to supply water.

{¶20} Our reference to the memorandum of understanding brings us to a key issue

in the case: whether the court erred by finding that the memorandum of understanding

amended the terms of the agreement.

{¶21} Cleveland argues that the plain language of the memorandum of

understanding contains no terms to amend or otherwise modify the agreement. It asserts

that Article 26.02 of the agreement contains an integration clause stating that the

agreement “contains all the promises, agreements, conditions, inducements and

understandings” between the parties and that there were “no promises, agreements,

conditions, understandings, inducements, warranties or representations, oral or written,

express or implied” other than as set forth in the agreement.

{¶22} Cleveland acknowledges, however, that Article 26.01 of the agreement

provided that the agreement could be modified by “a written instrument executed by the

party against whom enforcement of such * * * modification is sought.” It also did not

dispute below that the memorandum of understanding was a “negotiated” instrument.

Nevertheless, it maintains that “the only ‘negotiation’ that took place was that the

document memorialized the parties’ understanding of certain parts of the Agreement.”

(Emphasis sic.) {¶23} The “intent of the parties is presumed to reside in the language they chose to

use in their agreement.” Graham v. Drydock Coal Co., 76 Ohio St.3d 311, 313, 667

N.E.2d 949 (1996). That being so, it is unclear why there would be a need for Cleveland

to separately “negotiate” its subjective understanding of the agreement. The word

“negotiate” means to engage in discussion to reach a mutual agreement. If the parties

truly were negotiating their subjective understanding of the meaning of the agreement, it

was because there was some ambiguity or concern over the terms of agreement. The

undisputed facts show this to be the case: Westlake consistently told Cleveland that it

could not accept the water service agreement drafted by Cleveland because the provision

granting Cleveland an exclusive franchise to supply water to Westlake would violate the

Westlake charter.

{¶24} The memorandum of understanding was thus the product of a fundamental

disagreement over whether Westlake could, consistent with the agreement as drafted,

grant Cleveland an exclusive franchise to supply water. By indicating their

understanding that the agreement was not granting Cleveland an exclusive franchise to

supply water to Westlake, the parties were changing the meaning of Article 5. This is the

logical dilemma that Cleveland faces: if the Article 5 term “franchise” is not used in the

classic legal sense of granting a property right — an argument we reject — then the

memorandum of understanding makes clear the parties’ intention that Westlake was only

granting Cleveland a non-exclusive franchise. {¶25} It is true that the parties did not use the word “amend” in the memorandum

of understanding, but viewed in context, the memorandum of understanding had that

affect. This conclusion is compelled by other parts of the memorandum of understanding

where the parties made new promises not contained in the agreement. For example, the

parties agreed that “in any construction project performed by Cleveland or its contractor

in Westlake, pursuant to the Contract, Cleveland shall designate Westlake’s inspectors to

oversee all aspects of pavement restoration at no cost to Cleveland or its contractor.”

They also agreed that “Cleveland agrees that payments will not be made to Cleveland’s

contractor for pavement restoration work in Westlake until Westlake states in writing that

the work has been completed to Westlake’s satisfaction and that all areas disturbed by

Cleveland’s contractor, or those in its employ, have been satisfactorily restored.” In both

examples, the parties were acting to amend the terms of the agreement, even though they

did not use the word “amend.”

{¶26} We hold that the court did not err by finding that the memorandum of

understanding amended the agreement to allow Westlake to grant a non-exclusive

franchise.

{¶27} Cleveland next argues that the court erred by concluding that Westlake

Ordinances 1989-7 also amended the agreement. Cleveland maintains that no

amendment occurred because the ordinance is a one-sided legislative document to which

Cleveland was not a party.

{¶28} Westlake Ordinances 1989-7 states in relevant part: SECTION 1: That the Mayor be and he is hereby authorized to enter into a Water Service Agreement for direct service for furnishing to the City of Westlake and its inhabitants potable water, which said Agreement is attached hereto and made a part hereof as though fully rewritten herein and marked Exhibit A, and further provided that the terms and conditions of the Agreement do not conflict with any provision of the Charter of the City of Westlake * * *.

SECTION 3: That this Council grants to the City of Cleveland, pursuant to Article XI, Section 5, a non-exclusive franchise to construct and operate a public utility for the furnishing to the City of Westlake and its inhabitants potable water for a period of twenty-five (25) years * * *.

{¶29} We agree with Cleveland that the ordinance could not amend the agreement

because it contained none of the elements of a contract. Clifton Hills Realty Co. v.

Cincinnati, 60 Ohio App. 443, 449, 21 N.E.2d 993 (1st Dist.1938) (“It is clear that in

passing zoning ordinances a municipal council is engaged in legislating and not in

contracting.”).

{¶30} However, municipalities cannot exercise power that they do not have. And

those who would enter into contracts with municipalities are on notice of this limitation.

For example, in United Fuel Gas Co. v. Ironton, 107 Ohio St. 173, 140 N.E. 884 (1923),

the Ohio Supreme Court considered whether a municipality could enter into a rate

contract for a period of 25 years when, under the law in force at the time the city granted

the franchise, it had no power to make a rate contract in excess of ten years. The

Supreme Court held that “[i]f the municipality had attempted arbitrarily to fix a rate for a

period of twenty-five years there could be no doubt of its invalidity.” Id. at 182. And in

Wellston v. Morgan, 59 Ohio St. 147, 52 N.E. 127 (1898), the Ohio Supreme Court made

the point clear: Where a statute gives power to a municipal corporation to contract for the lighting of its streets and other public grounds for a period not exceeding ten years, the conclusive implication is that such corporation is forbidden to contract for a longer period. And where such corporation undertakes, by the passage of an ordinance, to contract with an electric light company for an exclusive privilege to such company for the use of its streets, and stipulating for the lighting of the street, et cetera, for ninety-nine years, at a given price per month, such ordinance is ultra vires and void, and the contractual stipulations contained therein are equally void, and neither party can enforce them.

Id. at paragraph one of the syllabus.

{¶31} Cleveland entered into the agreement with Westlake knowing that Westlake

could only grant a franchise that is non-exclusive and for no more than 25 years. As

stated in People ex rel. N.Y. v. Nixon, 229 N.Y. 356, 361, 128 N.E. 245 (1920), “[s]tatutes

then existing are read into the contract. They enter by implication into its terms. They

do not change the obligation. They make it what it is.” See also Jacot v. Secrest, 153

Ohio St. 553, 558, 93 N.E.2d 1 (1950), quoting Banks v. DeWitt, 42 Ohio St. 263 (1884),

paragraph two of the syllabus (“A contract made in pursuance of a statute or resolution,

must be construed as though such statute or resolution had been incorporated into such

contract.”). Ordinance 1989-7 did not amend the agreement, but it did put Cleveland on

notice that the agreement only provided a non-exclusive franchise. And the Westlake

Charter, being a document of independent legal force, likewise put Cleveland on notice

that Westlake could only grant a non-exclusive franchise.

{¶32} We also find that Ordinance 1989-7 did not establish the length of the

agreement at 25 years. Unlike the question of whether granting an exclusive franchise to

Cleveland would violate the Westlake charter, the terms of the agreement provided for an initial contract period of ten years that would “automatically continue in effect from year

to year thereafter” unless terminated by written notice. On its face, these terms do not

run afoul of the Westlake charter.

{¶33} Cleveland argued below that the initial ten-year period had passed, so the

agreement continued in force year to year unless cancelled by either party or renegotiated.

Cleveland was careful, however, to insist that “[t]he Agreement is for an initial 10-year

term that continues annually.” (Emphasis sic.) Cleveland motion for summary judgment

at 23. Without conceding that its argument could result in a perpetual contract,

Cleveland nonetheless maintains that “the Agreement should continue year to year unless

the five-year notice provision is triggered.” Id. at 24.

{¶34} Cleveland’s argument tries to have it both ways: while being careful not to

characterize the agreement as perpetual (that would run afoul of the Westlake charter

limiting non-exclusive franchises to 25 years), it essentially claims that the contract

continues indefinitely unless a party opts out or the agreement is renegotiated (“the

expiration date of the Agreement is not fixed.” Cleveland motion for summary judgment

at 24).

{¶35} Courts disfavor perpetual contracts and “an intention to create such a

perpetuity must be clearly shown.” Hallock v. Kintzler, 142 Ohio St. 287, 287, 51

N.E.2d 905 (1943). Because Westlake could not grant a franchise exceeding 25 years,

the agreement could not be perpetual. Construing the plain language of the agreement,

Nationwide Mut. Fire Ins. Co. v. Guman Bros. Farm, 73 Ohio St.3d 107, 652 N.E.2d 684 (1995), we find as a matter of law that the agreement provided for an initial ten-year term

with one-year renewals thereafter.

{¶36} The court did not ignore the agreement language relating to duration, but

presumed that the language used in Ordinance 1989-7 — that Cleveland was granted a

non-exclusive franchise to supply Westlake with water “for a period of twenty-five (25)

years” — was chosen for the specific purpose of amending Cleveland’s standardized

agreement “because any other interpretation would render those clear provisions of

Westlake Ordinances 1989-7 to be ‘meaningless or unnecessary.’”

{¶37} Unlike provisions of the agreement discussed above relating to the

exclusivity of the franchise, the ten-year length of the agreement with yearly renewals did

not plainly violate the Westlake charter. The Westlake charter only prohibited

non-exclusive franchises lasting more than 25 years. The agreement limited its duration

to ten years with yearly renewals. In related circumstances, courts have held that “year to

year” contracts are not perpetual, but annual contracts. Hallock at 289. As an annual

contract, it was renewable on the same terms contained in the original ten-year term, but

as a new contract lasting for a single year:

Here the new agreement grows out of, and is founded upon, the possession evidenced by the holding over, and is therefore referable to it, rather than to the possession under the prior agreement which had expired. The holding over is equivalent to a new entry; or, as said in Reed on the Statute of Frauds, section 806, concerning the application of the statute in such cases, the “effect of entry under a void lease, and of holding over after the expiration of a valid one, is identical.” Baltimore & O. R. Co. v. West, 57 Ohio St. 161, 168, 49 N.E. 344 (1897). See also

Kazmaier v. Fat Jacks, L.L.C., 6th Dist. Wood Nos. WD-09-048 and WD-09-057,

2010-Ohio-3627. The memorandum of understanding is silent on the agreement’s

duration. So unlike the nature of the franchise granted, the omission suggests that the

parties had no misgivings about the duration of the agreement such that they were

compelled to express their understanding in a separate document. The evidence indicates

that both parties were satisfied that the agreement fully expressed their intent with regard

to the length of the agreement.

{¶38} It is true that Ordinance 1989-7 speaks in terms of granting a non-exclusive

franchise for a period of “twenty-five (25) years,” but that fact alone did not amend the

agreement. The court could correctly find that both the memorandum of understanding

and Ordinance 1989-7 served to amend the agreement with respect to the type of

franchise granted because the agreement as written would have been in violation of the

Westlake charter. But nothing about the agreement having an initial term of ten years to

be followed by yearly renewals was in conflict with the Westlake charter. That part of

Ordinance 1989-7 authorizing the Westlake mayor to enter into an agreement for 25

years was actually immaterial to the agreement. The court erred by finding that

Ordinance 1989-7 amended the agreement to state a finite term of 25 years.

{¶39} Having found that the court erred by concluding that the agreement provided

for a 25-year contract that expired on its own in March 2015, we must necessarily find

that the court likewise erred by ruling that the notice provision was no longer enforceable because the 25-year contract had expired. This does not necessarily mean, however, that

a five-year notice provision was, or is, enforceable.

{¶40} With the parties operating under a year-to-year agreement, a new agreement

arose every year. For this reason, the five-year notice provision would be unenforceable

— it is irreconcilable to require that notice be given five years in advance of an intent to

terminate a one-year contract. In the analogous situation of a tenant holding over after

the expiration of a commercial lease term in which a new contract arises year to year, the

Ohio Supreme Court has held that “[n]otice to quit is not necessary to terminate a tenancy

from year to year arising from the tenant holding over his term.” Gladwell v. Holcomb,

60 Ohio St. 427, 431, 54 N.E. 473 (1899). See also 3637 Green Rd. Co. v. Specialized

Component Sales Co., 8th Dist. Cuyahoga No. 103599, 2016-Ohio-5324, ¶ 40. While

cases like Gladwell involve real property leases and have been superseded by statute in

the residential setting,2 there is no reason why the principles in those cases should not

apply with equal force to other kinds of contracts.

{¶41} Nevertheless, the notice provision shows that the parties contemplated that

some notice of termination be given. Whenever possible, courts should effectuate the

parties’ contractual intent. State ex rel. Kabert v. Shaker Hts. City Sch. Dist. Bd. of Edn.,

78 Ohio St.3d 37, 44, 676 N.E.2d 101 (1997). “Usually when a contract is terminable on

a specified date, the contract also specifies a date before then by which notice of

R.C. 5321.17(B) now requires a landlord or a tenant wishing to terminate a month-to-month 2

lease to give notice of termination “at least thirty days prior to the periodic rental date.” This statute applies only to residential leases, not commercial leases. 3637 Green Rd. Co. at ¶ 40. termination must be sent or received.” R.S. & V. Co. v. Atlas Van Lines, Inc., 917 F.2d

348, 351 (7th Cir.1990). The agreement between the parties made it clear that this is not

the kind of arrangement where one of the parties could simply walk away from the

agreement on March 19. Delivery of potable water is complex. Ceasing delivery

requires more than the mere flip of a switch. Some period of transition is necessary for

the parties, and this means that some period of reasonable notice is required. Grandview

Hts. v. Columbus, 174 Ohio St. 473, 190 N.E.2d 453 (1963), paragraph two of the

syllabus. What constitutes reasonable notice is a question of fact, Davis v. Loopco

Indus., Inc., 66 Ohio St.3d 64, 66, 609 N.E.2d 144 (1993).

{¶42} Having concluded that the agreement now exists year to year and that either

party may chose not to renew it after reasonable notice, we next consider the court’s

ruling that Cleveland was not entitled to recover “stranded costs” from Westlake based on

Cleveland’s determination that Westlake took steps toward leaving the Cleveland water

system. The court found that Westlake did not give Cleveland notice of its intent to

terminate the agreement, but merely informed Cleveland that it “cannot and will not

continue with the purchase of water from the City of Cleveland after the expiration of the

25 year period[.]” It concluded that Westlake’s letter did not constitute “progressive

actions towards leaving the system,” but was a “recurring reminder[ ] * * * that Westlake

was not contractually obligated to purchase water from Cleveland after the established

termination of the agreement on March 19, 2015.” {¶43} Cleveland maintains that Westlake gave notice of intent to terminate the

agreement, an act that allowed Cleveland to increase its water rates to allow it to recover

certain stranded costs. And in addition to arguing that it could recoup these costs,

Cleveland maintains that after Westlake gave notice of intent to terminate the agreement,

it had an unfettered right to set water rates — that it could adjust water rates for any

reason, at any time, and for any price it desired.

{¶44} Article 4.01 of the agreement states that “[n]o increase shall be made in the

rate for any customer without simultaneously increasing the rates for all other customers *

* *.” That provision, however, does not apply to any customer or classes of customers

“taking steps toward leaving the Cleveland water system[.]” See Article 4.02(1).3

{¶45} The phrase “taken steps toward leaving the Cleveland water system” is not a

model of clarity. Giving those words their ordinary meaning, Lager v. Miller-Gonzalez,

120 Ohio St.3d 47, 2008-Ohio-4838, 896 N.E.2d 666, ¶ 15, we conclude that Article

4.02(1) can be invoked only if Westlake took concrete, affirmative action to terminate the

agreement. To read the phrase more broadly would engender speculation and ambiguity,

particularly since the agreement between the parties entails a non-exclusive franchise.

Used in context, the phrase “customer” or “classes of customers”appears to refer to 3

individual end-users and not the “Municipality” as defined in the recitals to the agreement. Nevertheless, applying Section 4.02(1) to individual end-users would arguably be absurd because Cleveland cannot seek to invalidate the established water rate structure on the basis that an end-user moved out of the Cleveland water system. The parties appear to agree for purposes of this case that the word “customer” in Section 4.02(1) refers to Westlake and not individual Westlake end-users. {¶46} The broad interpretation urged by Cleveland as to what constitutes “steps”

to leave its water system is belied by its own actions in this case. Cleveland states that as

early as April 2007, it became aware that Westlake was exploring its water service

options. Appellant’s brief at 17-18. And Cleveland states that by September 2011,

Westlake’s mayor told Cleveland’s mayor that “they were going to leave the system.” Id.

at 20. Yet Cleveland did not invoke Article 4.02(1), even though the court found that

“any effort by Westlake to investigate alternatives is viewed by Cleveland as a concrete

step towards leaving the water system.” Had Cleveland understood the phrase “taking

steps” in the manner in which it now argues, one wonders why it did not invoke Article

4.02(1) long ago.

{¶47} To be sure, giving actual notice of intent to terminate the agreement would

be taking steps toward leaving the water system. Cleveland argues that Westlake did just

that in a May 2013 letter it received from Westlake in which it claims that Westlake

“officially and unequivocally” informed Cleveland that “Westlake cannot and will not

continue with the purchase of water from the City of Cleveland * * *[.]”

{¶48} Cleveland’s partial quote is misleading. The Westlake letter stated:

Westlake cannot and will not continue with the purchase of water from the

City of Cleveland after the expiration of the 25 year period referenced in the

Westlake Charter and the Memorandum of Understanding, all as the same

relates to agreement #42180, fully executed on 3-19-1990 and entitled “City

of Cleveland Water Service Agreement” with the City of Westlake. The full quote makes it clear that Westlake believed that it was “prohibited from having a

water supply agreement with Cleveland that exceeds the 25-year limitation established in

the Westlake Charter.” The letter memorialized Westlake’s assertion that the agreement

would terminate on its own on March 19, 2015. Thinking that an agreement was to

expire on its own terms and acknowledging as much, is not the same as taking an

affirmative step to terminate the agreement. And as further evidence that the letter was

not a clear step to leave the Cleveland water system, Westlake wrote in the letter that “we

would certainly entertain a competitive proposal and a new agreement to purchase potable

water in bulk from the City of Cleveland.” This statement could certainly be viewed as

Westlake’s interest in remaining a part of the Cleveland water system.

{¶49} Even if we were to construe the May 2013 letter as an unequivocal notice of

Westlake’s intent to leave the Cleveland water system, we agree with the trial court that

Article 4.02(1) does not entitle Cleveland to recover stranded costs.

{¶50} After receiving Westlake’s letter, Cleveland determined that under Article

4.02(1) the rate covenants in the agreement were no longer in force and that it could raise

Westlake’s water rates at its discretion. Cleveland’s city council then enacted Cleveland

Ordinances No. 1354-13, codifying Cleveland Codified Ordinances 535.041, effective

January 1, 2014, stating that “in addition to the fixed and water consumption charges”

assessed to direct service accounts, “all accounts for direct water service to the City of

Westlake shall contain a fixed charge based on meter size to cover costs associated with

the separation of Westlake from the Cleveland Water System * * *.” Those increases were based on Cleveland having a total of 65 points of connection, 37 of which are where

Westlake is connected to Cleveland water mains, and 28 of which are connections to the

four communities surrounding Westlake: Fairview Park, North Olmsted, Bay Village, and

Rocky River. Cleveland maintained that those connection points would need to be

disconnected and rerouted at a cost of $19 million. In addition, Cleveland claimed a

right to recover $39 million in uncollected operating costs and uncollected capital costs.

The surcharge was to be applied in 17 quarterly installments at a rate of $291 for most

residential customers and as much as $5,272 for larger commercial customers.

{¶51} The court found that Cleveland was not entitled to recover stranded costs

from Westlake because there was no provision in the agreement providing for the

recovery of stranded costs. Additionally, the court found that even if there was such a

provision, it would only apply if Westlake gave actual notice of its intent to terminate the

agreement. Having found that Westlake did nothing more than repeatedly remind

Cleveland that the agreement would expire on its own terms, the court concluded that the

termination provisions of the agreement were never triggered.

{¶52} When granting Westlake’s motion for a preliminary injunction, the court

found as a matter of law that Cleveland Ordinances No. 1354-13 “does not convey proper

authority to the City of Cleveland to impose the fixed water charges on the citizens of

Westlake.” The court reached this conclusion by making several observations regarding

Cleveland’s right to assess Westlake water users to cover costs associated with

Westlake’s separation from the Cleveland water system — notably that the agreement contains no definition of “stranded” costs, that there were discrepancies regarding

Cleveland’s methodology for determining the amount of stranded costs, and that it would

be “shocking” that Cleveland’s water rates had not already factored in the costs that could

potentially arise were a municipality to leave the water system.

{¶53} We agree with the trial court that nothing in the agreement allows Cleveland

to recoup stranded costs by special assessment to the citizens of Westlake. Article 4 of

the agreement comprehensively addresses “water” rates — it says nothing about

surcharges. And there is no question that Cleveland was imposing a surcharge on

Westlake water customers. The ordinance plainly states that the amounts to be derived

were “in addition to” established water rates. By characterizing the surcharge as a

“fixed” charge, Cleveland proved the point that the surcharge had nothing to do with

actual consumption — all direct billing customers were to be assessed a surcharge even if

they did not use a single drop of water. Cleveland Ordinances No. 1354-13 provided for

a surcharge that bore no relation to Westlake customers’ actual usage, so the surcharge

was beyond the scope of what was permitted under Article 4.02(1).

{¶54} In summary, we conclude that the water service agreement was a

non-exclusive agreement for a minimum period of ten years, with annual renewals that

constitute new agreements each year. As annual agreements, they do not violate the

terms of the Westlake charter that limit the term of non-exclusive franchises to 25 years.

With the five-year notice of termination inapplicable to a yearly agreement, a question of fact exists as to how much notice should be provided. Cleveland has no contractual right

to enact surcharges to recover stranded costs.

{¶55} Judgment reversed and remanded for proceedings consistent with this

opinion.

It is ordered that appellant recover from appellee costs herein taxed.

The court finds there were reasonable grounds for this appeal.

It is ordered that a special mandate issue out of this court directing the common

pleas court to carry this judgment into execution.

A certified copy of this entry shall constitute the mandate pursuant to Rule 27 of

the Rules of Appellate Procedure.

______________________________________________ MELODY J. STEWART, PRESIDING JUDGE

FRANK D. CELEBREZZE, JR., J., CONCURS IN JUDGMENT ONLY; SEAN C. GALLAGHER, J., CONCURS IN PART AND DISSENTS IN PART (WITH SEPARATE OPINION) SEAN C. GALLAGHER, J., CONCURRING IN PART AND DISSENTING IN PART:

{¶56} I respectfully concur in part and dissent in part with the majority opinion.

In this case, both sides are arguing that the other “wants to eat their cake and have it too.”

Westlake received the benefit of quality water and infrastructure maintenance and

improvements, built into water rates for 25 years, but now wants to walk away free and

clear of any costs to Cleveland or other suburban communities that would be incurred

with that departure. On the other side, Cleveland wants to compel Westlake to remain in

its system, seemingly forever, or pay a hefty penalty to terminate the WSA.

{¶57} Westlake sought five declarations in its complaint: (1) that Westlake had the

right to obtain a secondary source of water without breaching the WSA; (2) that the WSA

does not require the purchase of a definable amount of water; (3) that the five-year notice

provision is unenforceable; (4) that the WSA automatically expires after 25 years; and (5)

that Cleveland cannot recover stranded costs or costs to cure from Westlake or its

inhabitants.

{¶58} Initially, the parties might have explored whether the complaint in this case

is entirely grounded as a declaratory judgment action on the contract at issue. It would

seem that Westlake requested the trial court to determine the general rights of the parties

following the termination of the WSA, at this point a hypothetical event. “The purpose

of a declaratory judgment action is to dispose of ‘uncertain or disputed obligations

quickly and conclusively,’ and to achieve that end, the declaratory judgment statutes are

to be construed ‘liberally’” to a certain extent. Mid-Am. Fire & Cas. Co. v. Heasley, 113 Ohio St.3d 133, 2007-Ohio-1248, 863 N.E.2d 142, ¶ 8, quoting Ohio Farmers Indemn.

Co. v. Chames, 170 Ohio St. 209, 213, 163 N.E.2d 367 (1959). Declaratory relief

cannot circumvent the prohibition against advisory opinions: they are only to decide an

actual controversy to confer rights or status upon the litigants based on interpreting

contractual rights. Id. at ¶ 9, quoting Corron v. Corron, 40 Ohio St.3d 75, 79, 531

N.E.2d 708 (1988). The possibility of hypothetical events or a future contingency is not

sufficient to create an actual controversy. Id., quoting League for Preservation of Civ.

Rights v. Cincinnati, 64 Ohio App. 195, 197, 28 N.E.2d 660 (1st Dist.1940). The WSA

unambiguously provides that either party may terminate the WSA, and the effect of that

decision is beyond the scope of a declaratory judgment action.

{¶59} The contract in this case is problematic, but beyond seeking injunctive relief

precluding Cleveland from hiking the water rates upon Westlake and its inhabitants and

seeking a determination as to whether the WSA was still in force and effect, no other

relief was sought from an actual controversy. Much of the discussion focused on what

would occur should Westlake seek to divorce itself from Cleveland. In my view, the

WSA does not address the ultimate issue this court is being asked to resolve: that is, what

is the effect of Westlake as a municipality terminating the WSA and leaving the

Cleveland water system? The parties do not appear to be concerned with the scope of

the declaratory judgment being sought, so that issue is simply noted.

{¶60} Although I agree that Westlake’s charter precludes exclusive-franchise

contracts and the MOU must modify the contract provision under Article 5, in my view, eliminating the exclusive nature of the original contract does not get Westlake off the

hook. For years, Cleveland was the only water option, and now Westlake has a potential

second option in Avon Lake. Despite this new reality, under the terms of the contract,

Cleveland remains the sole provider. Cleveland provided water and maintained and

improved Westlake’s infrastructure based on their reliance on the contract and the

contract’s assurance they would be the sole provider for its duration. Both sides

benefitted over the life of the agreement. Cleveland had a consistent revenue stream,

and the Westlake government had the guarantee of safe, quality water for its citizens with

maintenance and infrastructure costs, at least for consumers, absorbed into the price of the

water. As long as the contract is in force, Cleveland remains the sole provider.

{¶61} I agree with the majority that (1) the trial court erred in finding that

Westlake ordinance 1989-7 amended the agreement; (2) the initial contract term was ten

years followed by a series of self-renewing year-to-year contracts; (3) these year-to-year

renewals do not violate the 25-year preclusion against nonexclusive franchises (this

eliminates any concerns that the WSA violated Westlake’s Charter — even if Cleveland

is considered a non-exclusive franchise under the MOU); (4) because the parties are

operating under a year-to-year agreement, the five-year notice provision is unenforceable;

(5) the case should be remanded to the trial court for a determination on what constitutes

reasonable notice; and (6) the phrase “taking steps toward leaving the Cleveland water

system” requires a concrete, affirmative act to terminate the agreement. {¶62} Thus, I agree with the majority that the trial court erred in finding the

contract expired on March 19, 2015. With respect to the meaning of Westlake’s letter to

Cleveland dated May 2, 2013, unlike the majority, I would find it was a clear notice of

Westlake’s intent to terminate the agreement. Nevertheless, I believe this letter was

premised on a mistake of fact by Westlake officials. That is, the Westlake officials

mistakenly thought the contract expired after 25 years with an ending date of March 19,

2015. Because this letter was grounded on a fact that was erroneous, I would find it to

be a nullity. In my view, the parties remain in the same positions they were in prior to

the letter, albeit now under a year-to-year agreement.

{¶63} Unlike the majority, I would not foreclose the prospect of Cleveland seeking

recovery of so-called “stranded” costs or separation costs, whether they be for the 65

points of connection or the rerouting requirements that would occur should

disconnections be required, or even the claimed uncollected operating or capital

improvement costs, if these are found to be viable. These costs would have to be

proven; but in any event, I believe the question of Cleveland being able to recover these

costs, and from whom, is premature.

{¶64} To this point, under the WSA, Westlake is defined as the “municipality” and

Cleveland is defined as the “purveyor.” Article 4.02 states that Cleveland may institute

a rate increase on “all customers or class of customers who have taken steps toward

leaving” the water system. Under the WSA, a Westlake homeowner is a “direct service

customer,” which is defined as “an owner of premises located outside purveyor’s municipal boundaries who receives water and water related services from purveyor and

who is billed by and pays to purveyor directly for such water and water services.”

Westlake as a municipality attempted to give notice of its intent to end the agreement.

{¶65} If damages occur as a result of disconnection and rerouting or because of

uncollected operating or capital improvement costs, those will have to be addressed in a

separate cause of action — the only claims advanced in the complaint are for declaratory

and injunctive relief. If Cleveland feels aggrieved by a breach or termination of the

WSA, the likely remedy is a separately presented cause of action that would necessarily

include any dispute over the amount of water that must be purchased following the

termination of the WSA. We can make no determination of the rights between the

parties following the termination of an agreement, only those rights as in existence during

the operative period of the contract. At this stage of the proceedings, any discussion of

the damages caused by Westlake and Cleveland’s divorce would be premature.