Poseidon Town: Santa Ana Mayor Warned of Legal Troubles Over OCWD Desal Partnership
Vincent Sarmiento: 'When something is non-binding, you always have to look behind that definition,' he told OCWD board during 2018 term sheet vote
What has the Orange County Water District gotten its ratepayers into by seriously playing along with Poseidon Water for the past 10 years?
Last week (Partnership Binding?), I established that the 2018 term sheet signed by Poseidon Water and OCWD to create a framework for a potential “Water Reliability Contract” (to build and operate a $1.4 billion ocean desalination plant) is “non-binding.”
But, I also explained, the term sheet is not the problem.
The problem is that a legally binding contract can also derive from the conduct, not just explicitly written and spoken words, of the involved parties.
Vincent Sarmiento, current mayor of the City of Santa Ana, spoke out on that issue twice in 2018 at OCWD meetings while acting as an appointed director representing the city council.
He worried about the legal doctrine of “detrimental reliance,” which means that one party suffers financially after reasonably acting upon an inferred promise from the other party:
So, you know what was said earlier about this being a non-binding commitment; as an attorney and as some of my colleagues who are up here are also attorneys, realize that, you know, there’s loaded words in terms of the art that we use. And when something is non-binding you always have to look behind that definition. I think what happened is that even though this isn’t a commitment that we’re bound by, it gives an expectation to the person that you’re agreeing with and sometimes that acquiescence makes them believe that, ‘Hey, we’re going down this path with you.’ And that concerns me because I think we've deal in good faith with one another with Poseidon and I would have to have that expectation given, especially when there’s so many variables and assumptions I think we’re still trying to figure out. My own, you know, concern, as an attorney: there’s a doctrine in the law called detrimental reliance—is that when somebody relies on maybe just acquiescence or, you know, not saying that we should commit to something, makes a person continue to expend time, expend money, and that could become a problem for use in the future if we just mislead somebody [into] believing that everything is fine.
OCWD legal counsel, Joel Kuperberg, assured Sarmiento that there would be no consequences for OCWD if it backed out of the proposed project that Poseidon Water claimed it had spent $60 million on as of ten years ago.
The nine other board members ignored Sarmiento’s comments.
Legal Doctrines
The detrimental reliance doctrine is based on the law doctrine of promissory estoppel.
To get a better understanding of OCWD’s potential obligations to Poseidon, I contacted an experienced business lawyer, Aaron Hall, by email.
Without mentioning Poseidon and OCWD, or the proposed desalination plant, I gave him the following description of the nature of their relationship based on my own observations over the past eight years:
What if, despite the fact that the term sheet makes clear, or seems to, that it is absolutely non-binding, the behavior of the seller and the buyer is such that they act as partners, even call themselves partners? Say, to the extent, for example, that they appear before a permit hearing (for a water treatment plant, for example) as one entity (the president of the water board and some of its members stand side by side with the developer and give a joint presentation in favor of the project), or that the buyer literally and public declares that they are partners by virtue of the term sheet and even calls it “almost an engagement”? And/or, they state, “Practically [the term sheet] commits the District to fully consider the project and work towards developing a Water Purchase Contract.”
This was attorney Hall’s response:
"The term sheet wouldn’t create a contract, but the other circumstances could. This is called an ‘implied contract.’ For example, it could be a contract ‘implied in fact.’
Some further research revealed that in the case of PharmAthene vs. SIGA (2013) the former sued the latter when it terminated merger and licensing-agreement negotiations guided by a non-binding term sheet.
A lower court ruled that SIGA violated the doctrine of promissory estoppel (broke its promise) and had to pay the plaintiff accordingly.
Then the Delaware Supreme Court went further, ruling that SIGA was guilty of breach of contract. In either case (.i.e., promise or contract violation) the court can award financial damages.
The doctrine of promissory estoppel, according to the Corporate Finance Institute, “stops a person from going back on a promise even if a legal contract does not exist.”
In a 1991 case, the U.S. Supreme Court “recognized promissory estoppel is a ‘state law doctrine creating legal obligations never explicitly assumed by the parties that are enforceable,’” (emphasis added) according to Cornell University’s law website.
Also, as attorney Hall indicated, a promise can become a “contract implied in fact,” even without written or spoken words, based on conduct of the involved parties alone, if there is “an unambiguous offer, unambiguous acceptance, mutual intent to be bound, and consideration,” according to Cornell.
Next in this series: The evolution of the Poseidon-OCWD partnership