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Foster Wheeler Passaic Inc. v. County of Passaic

Decided: July 14, 1993.


On appeal from the Superior Court of New Jersey, Chancery Division, Passaic County.

Shebell, A.m. Stein and Conley. The opinion of the court was delivered by Conley, J.A.D.


[266 NJSuper Page 431] Defendants appeal an order enforcing an arbitration provision contained in a "service agreement" between the County of Passaic and plaintiff. The agreement was for the construction and operation of a resource recovery facility. The County*fn1 procured the agreement pursuant to the "McEnroe Act", N.J.S.A. 13:1E-136 to -168, which requires, among other things, review and approval by several State agencies. Before the review process was completed, the County terminated the agreement, triggering plaintiff's request for arbitration on its claim for reimbursement of preconstruction costs. The trial Judge concluded that although the agreement was terminated and was never approved by the State

agencies, an arbitration clause in the agreement was, nonetheless, enforceable. We hold that the arbitration provision of the terminated agreement does not apply to plaintiff's claim. However, we reject the contention of the State and the County that provisions of the agreement concerning the rights and obligations of the parties in the event of termination under the particular circumstances here are not viable absent agency approval. We caution that our holding that the parties may bind themselves to such provisions, notwithstanding that the McEnroe Act approval process was never completed, is limited solely to preconstruction provisions triggered under the peculiar circumstances that occurred here. We vacate the order enforcing arbitration and remand to permit the filing of an amended complaint*fn2 and further proceedings.

Enacted in 1985 as an amendment to the original State Solid Waste Management Act, N.J.S.A. 13:1E-1 to -135, the McEnroe Act was envisioned as a legislative measure to facilitate and encourage planning, construction and operation of resource recovery facilities (RRF) as part of the state solid waste management plan. As such, the Legislature recognized:

[T]hat to attract private investment capital for these waste-to-energy projects it is necessary to establish a favorable regulatory climate, which will at the same time insure safe, adequate and proper solid waste disposal service at just and reasonable rates; and that to encourage these joint public-private sector cooperative ventures it is also necessary to attain the most advantageous financial and programmatic scrutiny by the Legislature and agencies of State government. [ N.J.S.A. 13:1E-136.]

There are two components of the Act. The first, N.J.S.A. 13:1E-138 to -152, establishes three new taxes on the disposal of solid waste at sanitary landfills in order to provide revenues for counties to shift from landfills to resource recovery facilities. The second part of the Act, N.J.S.A. 13:1E-153 to -168, establishes a

procurement procedure which "contracting units"*fn3 may use to enter into long-term contracts with private vendors for resource recovery services. See Senate Energy and Environment Committee Statement, A. 1778 (enacted as L. 1985, c. 38). See also Pollution Control Fin. Auth. v. Department of Envtl. Protection, 237 N.J. Super. 163, 167-68, 567 A.2d 243 (App.Div.1989), aff'd, 123 N.J. 356, 587 A.2d 626 (1991).

It is the second prong of the Act that we here focus upon. Procurement of a contract under the Act does not require the competitive bidding strictures of the Local Public Contracts Law, N.J.S.A. 40A:11-1 to -49. To ensure, however, protection of the public interest, the Act establishes an extensive procedure that must be followed. The contracting unit must publish a "request for qualifications" which contains specific areas of inquiry, N.J.S.A. 13:1E-154, and interested vendors must satisfy such qualifications. Ibid. A request for proposals from qualified vendor must then be issued and must include certain mandated items. N.J.S.A. 13:1E-155. The contracting unit may then designate a vendor, or vendors, whose proposal is "the most advantageous to the public, taking into consideration price and the evaluation factors set forth in the request for proposals," N.J.S.A. 13:1E-157, and may begin negotiations with such vendor for a "proposed contract." Ibid. Certain contractual provisions are mandated. N.J.S.A. 13:1E-164.

After the contracting unit accepts a proposed contract, it must be reviewed by the Division of Rate Counsel, and reviewed and

approved by the Board of Public Utilities (now the Board of Regulatory Commissioners), the Division of Local Government Services, and the Department of Environmental Protection and Energy. N.J.S.A. 13:1E-158. In addition and simultaneous with such review, the proposed contract must also be submitted to a public hearing. N.J.S.A. 13:1E-161. The Act sets forth specific time frames for such review, approvals and public hearing. See N.J.S.A. 13:1E-160 to -163. As far as we can decipher, the review and approval process envisioned by the Legislature was intended to be accomplished within 120 days with additional time for further negotiations and addition public hearing in the event of a "conditional approval." See N.J.S.A. 13:1E-163.

Proceeding under the Act, in October 1985, the County issued a request for qualifications of interested vendors and proposals for the planning, construction, operation and management of a RRF. In July 1986, plaintiff was selected by the County as its "preferred vendor." A proposed service agreement was executed in September 1986 and submitted to the State agencies for approval in January 1987. It was originally agreed that construction would occur by July 1, 1989 and if it had not, either party could terminate.

From that time until the County terminated the agreement in July 1991, and for reasons that are not entirely clear to us, State agency approval was never obtained. Indeed it is not clear that any review required under N.J.S.A. 13:1E-163 was ever performed until after plaintiff filed its complaint and after the trial Judge initially determined on June 26, 1991 that the matter should proceed to arbitration but stayed his order for 135 days to permit agency review. What does appear is that as permitted by N.J.S.A. 13:1E-160, certain discovery was initially requested by the reviewing agencies and responded to. In July 1990 BPU and DEPE requested supplemental discovery. Responses to these requests were provided in December 1990 and May 1991.

Meanwhile, plaintiff, for its part and by April 1989, had obtained from DEPE all of the necessary environmental permits to construct

and operate the RRF. One of those permits was a Prevention of Significant Deterioration (PSD) permit. The permit, required by federal law, was granted by DEPE pursuant to a delegation of authority from the U.S. Environmental Protection Agency (EPA). In doing so, DEPE determined that combustion controls, rather than EPA-required selective non-catalytic reduction of NO emissions, would be adequate. Pursuant to 40 C.F.R. § 124.19, this determination was reviewed by the EPA administrator and rejected. By the time the County terminated the agreement in July 1991, this issue still had not been resolved, as far as we can tell.

Other events as well transpired, including, we are told, a shift in DEPE policy from resource recovery mass burn incinerators to recycling. As a result, solid waste management districts were required to increase their recycling obligations from 25% to 60% of their waste stream. Resource recovery facilities were to be considered as a disposal method of last resort and they were to be regionalized. This change in policy, in part, formed the basis for the concerns over the agreement here expressed by BPU when it finally did review the proposal in August 1991.

In any event, the original construction date of July 1, 1989 was not met and the parties agreed to an extended date of July 1, 1991. By May 1991, it was apparent that date would also not be met. At the very least plaintiff still did not have a PSD permit and the State agencies had not yet approved the agreement. Plaintiff, then, requested a further extension of the construction date to February 1, 1993.

When the County's positive response did not appear to be forthcoming, plaintiff demanded reimbursement for millions of dollars it claimed it had expended in preconstruction costs. The County declined and on June 10, 1991 plaintiff then filed its complaint and order to show cause seeking arbitration pursuant to Section 9.03 of the service agreement on its claim for preconstruction costs which it contended the County owed under Section 3.06(d) of the agreement.

On June 19, 1991 the County adopted a resolution incorporating its intent to terminate the proposed agreement by July 1, 1991 pursuant to Section 2.04 of the service agreement, unless all of the required conditions precedent were ...

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