Title: ARA Health v. Dept. of Public Safety

State: maryland

Issuer: Maryland Supreme Court

Document:

ARA Health Services, Inc., d/b/a Correctional Medical Services v.
Department of Public Safety and Correctional Services - No. 138,
1995 Term
SOVEREIGN IMMUNITY - CONTRACTS -- Sovereign immunity precludes
contractor, under contract approved by Board of Public Works, to
recover for alleged modifications that were not approved by Board
of Public Works.
IN THE COURT OF APPEALS OF MARYLAND
No. 138
  September Term, 1995
___________________________________
ARA HEALTH SERVICES, INC., D/B/A
  CORRECTIONAL MEDICAL SYSTEMS
v.
DEPARTMENT OF PUBLIC SAFETY AND    
      CORRECTIONAL SERVICES
___________________________________
    *Murphy, C.J.
Eldridge
Rodowsky
Chasanow
Karwacki
Bell
Raker
JJ.
___________________________________
Per Curiam
___________________________________
      Filed:  November 26, 1996    
            
*Murphy, 
C.J., 
now 
retired,
participated in the hearing and
conference of this case while an
active member of this Court, after
being recalled pursuant to the
Constitution, Article IV, Section
3A, he also participated in the
decision and the adoption of the
opinion.
     All references to § 12-201(a) infra are codified at
1
Maryland Code (1984, 1995 Repl. Vol.), State Government Article.
 
This case involves a contract dispute between the State,
acting through the Department of Public Safety and Correctional
Services (the Department), and ARA Health Services Inc., d/b/a
Correctional Medical Systems (CMS).  The question presented is
whether CMS's claim for additional compensation under a health
services contract with the Department is barred by the doctrine of
sovereign immunity.  CMS contends that the waiver of immunity
codified at Maryland Code (1984, 1995 Repl. Vol.), State Government
Article, § 12-201(a)  prevents the Department from asserting
1
immunity as a defense to this claim.  We conclude, however, that
CMS's claim does not satisfy the requirements of § 12-201(a) and
that the Department is immune from liability.
I.
The specific dispute between the parties is whether CMS is
entitled to reimbursement for AIDS medication provided to non-
hospitalized prison inmates during the initial 18-month term of its
contract with the Department.  The facts giving rise to this claim
for additional compensation are essentially undisputed.  
In September 1988, the Division of Correction (DOC) of the
Department of Public Safety and Correctional Services solicited
bids from contractors for the provision of medical services to
State prison inmates.  CMS responded to the solicitation and was
subsequently awarded the health services contract at issue in this
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case.  Prior to execution, State procurement law requires review
and approval of this type of procurement contract by the Board of
Public Works.  See Code of Maryland Regulations (COMAR)
21.02.01.05A(1). 
The initial term of the contract was from January 1, 1989 to
June 30, 1990.  The DOC was contractually required to remit monthly
payments to CMS for four categories of expenses: (1) primary care
services; (2) secondary care services; (3) operating costs; and (4)
a management fee.  The category relevant to this case is secondary
care services, which included hospital services and specialty
services, such as radiological, obstetric, and dental procedures.
Secondary care services also included "[t]he cost for the
medication AZT, also known as Retrovir, and the cost for any newly
developed medication for AIDS/ARC patients...."  The monthly
payment for these services was not based on actual cost, but rather
was calculated on a fixed rate per capita basis.  The amount of
compensation due CMS each month for AIDS medication and other
secondary care services, therefore, was fixed by the contract
terms. 
Notwithstanding the cap on secondary care services, however,
CMS was entitled to additional compensation for "the price of
eligible AIDS related ... hospital services costs," provided that
certain conditions were satisfied; namely, CMS must have expended
more on secondary care services than was due under the monthly
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fixed fee.  If this overexpenditure requirement were satisfied, CMS
would be entitled to reimbursement for either the actual cost of
AIDS related hospital services, or the difference between the
secondary care services fixed fee and the actual cost of providing
secondary care services, whichever was less.  The effect of this
provision was that CMS was eligible to receive additional
compensation for AIDS medication provided to inmates during
hospitalization.   
In sum, the express terms of the contract indicated that CMS
was not entitled to compensation on a dollar-for-dollar basis for
AIDS medication administered to inmates at correctional facilities.
However, CMS would receive reimbursement, in the appropriate
circumstance, for the actual cost of AIDS medication furnished to
inmates at hospitals, in that medication dispensed at hospitals is
a "hospital services cost."  Despite the different treatment of
hospitalized and non-hospitalized inmates prescribed by the
contract, CMS submitted invoices to the DOC for the actual cost of
AIDS medication provided to inmates at correctional facilities.  In
contravention to the express terms of the contract and without
Board of Public Works approval, the DOC paid these invoices, and
from January 1, 1989 to June 30, 1990, reimbursed CMS a total of
$135,446.00 for the cost of non-hospital related AIDS medication.
The DOC's payment without objection of CMS's invoices for AIDS
medication administered at correctional facilities is the course of
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conduct that forms the basis of CMS's claim. 
In April 1991, CMS and the DOC executed a written modification
(Modification H) of the original contract provisions pertaining to
AIDS medication reimbursement.  Modification H provides in
pertinent part:
"Beginning July 1, 1990, the [DOC] will
reimburse the Contractor for 100% of the cost
of AZT and of any other similar medications
developed for the treatment of AIDS patients
which are approved for use by the appropriate
federal government agencies."
This modification obligated the DOC to compensate CMS without limit
for costs incurred in providing AIDS medication to all inmates,
including those who were not hospitalized.  Although the
modification was approved by the Board of Public Works, the
effective date was July 1, 1990.  Therefore, it did not
retroactively validate the AIDS medication reimbursements from
January 1, 1989 to June 30, 1990.
The erroneous payments during the initial contract term
perhaps would have gone unredressed but for a legislative audit of
the State's inmate health care services system in November 1991.
The report issued by the General Assembly's Division of Audits
noted the discrepancy between the contract terms and the parties'
conduct as follows:  
"During the initial contract period ..., the
cost of AIDS medication provided to inmates at
the institutions (as opposed to medication
provided at hospitals) was paid for as part of
the secondary care services payment.  ***
However, the [DOC] separately reimbursed the
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contractor 
$135,446 
related 
to 
the
contractor's cost for medication (e.g., AZT)
which, we were advised by the [DOC], was
provided at the institutions to inmates for
the treatment of AIDS....  According to the
contract in effect during that period, the
reimbursement for this AIDS medication was
already 
included 
in 
the 
secondary 
care
payments.  Therefore, the [DOC] should not
have separately reimbursed the contractor the
$135,446 for the cost of the AIDS medication."
Accordingly, the auditors recommended that the DOC recover the
$135,446.00 overpayment from CMS.  The DOC initially disagreed with
the auditors' recommendation; in its response to the auditors'
report, the DOC stated that the understanding between the parties
was that CMS would be reimbursed for all AIDS medication costs in
excess of the secondary care services cap.  After legislative
hearings on the matter, however, the DOC complied with the
auditors' recommendation by withholding $135,446.00 from the
payment of CMS's April 1992 invoice. 
CMS submitted a claim to the Department for the $135,446.00
withheld by the DOC.  The Department denied the claim and CMS
appealed to the Board of Contract Appeals.  The Board of Contract
Appeals similarly rejected the claim on the ground that the plain
and unambiguous language of the contract did not provide for the
reimbursement sought by CMS.  Both the Department and the Board of
Contract Appeals placed particular emphasis on the fact that
Modification H of the contract did not have retroactive effect.
The Circuit Court for Baltimore City, however, reversed the Board
of Contract Appeals' decision, reasoning that the Board of Contract
-6-
Appeals' failure to consider the possibility of an oral
modification to the contract was erroneous as a matter of law.  The
Court of Special Appeals then reversed the circuit court ruling
based on its conclusion that CMS's claim was barred by the doctrine
of sovereign immunity.  We granted certiorari to consider whether
sovereign immunity is a valid defense to CMS's claim.
 
II.
Maryland courts have long applied the doctrine of sovereign
immunity in actions against the State.  See Katz v. Washington Sub.
San. Comm'n, 284 Md. 503, 507, 397 A.2d 1027, 1030 (1979)(observing
that "[t]he doctrine of sovereign immunity from suit, rooted in the
ancient common law, is firmly embedded in the law of Maryland");
Board v. John K. Ruff, Inc., 278 Md. 580, 584, 366 A.2d 360, 362
(1976)(stating that the Court of Appeals has "applied the doctrine
for over a century").  Derived from the ancient view of the
sovereign as infallible, Katz, 284 Md. at 507, 397 A.2d at 1030,
this doctrine precludes suit against governmental entities absent
the State's consent.  Dep't of Natural Resources v. Welsh, 308 Md.
54, 58-59, 521 A.2d 313, 315 (1986).  While the General Assembly
may waive sovereign immunity either directly or by necessary
implication, this Court has emphasized that dilution of the
doctrine should not be accomplished by "judicial fiat."  Welsh, 308
Md. at 59, 521 A.2d at 315.  The applicability of sovereign
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immunity in a particular case, therefore, turns on: (1) whether the
entity asserting immunity qualifies for its protection; and, if so,
(2) whether the legislature has waived immunity, either directly or
by necessary implication, in a manner that would render the defense
of immunity unavailable.  Ruff, 278 Md. at 586, 366 A.2d at 363. 
The Department of Public Safety and Correctional Services is
"a principal department of the State government."  Md. Code (1957,
1993 Repl. Vol.), Art. 41, § 4-101.  As such, it enjoys the
protective cloak of sovereign immunity.  CMS argues that immunity
has been waived in this case, however, pursuant to Md. Code (1984,
1995 Repl. Vol.), State Government Art., § 12-201(a).  Section 12-
201(a) provides: 
"Except as otherwise expressly provided by a
law of the State, the State, its officers, and
its units may not raise the defense of
sovereign immunity in a contract action, in a
court of the State, based on a written
contract that an official or employee executed
for the State or 1 of its units while the
official or employee was acting within the
scope of the authority of the official or
employee."
Although § 12-201(a) indeed constitutes a partial waiver of
sovereign immunity, its application is limited to actions where:
(1) the contract upon which the claim is based was reduced to
writing; and (2) the State employee or official acted within the
scope of his or her authority in executing the contract.  The Court
of Special Appeals concluded that neither requirement was satisfied
in this case, and held that CMS's claim was barred as a result. 
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See Dept. of Public Safety v. ARA, 107 Md. App. 445, 463-64, 668
A.2d 960, 969-70 (1995).  For the reasons set forth below, we also
conclude that CMS's claim is barred by the doctrine of sovereign
immunity.
Preliminarily, we note that the original contract affords CMS
no relief in that its plain terms indicate that reimbursement was
due only for hospital-related AIDS services.  Modification H is
similarly unhelpful in that its effective date was subsequent to
the period relevant to this dispute.  The basis of CMS's claim,
therefore, is the contract as modified by the parties' conduct
during the initial 18-month term of the contract. In order for the
waiver of immunity in § 12-201(a) to apply, therefore, the
modification by conduct must satisfy the requirements set forth in
this statute.
An express requirement of § 12-201(a) is that the claim must
be based on a contract executed within the scope of authority of
the State employee or official.  In determining whether the DOC
would have acted within the scope of its authority if it modified
by conduct the payment terms of the contract with CMS, it is
necessary to examine the procurement procedures with which the DOC
must comply.  
A.
The terms of the contract clearly state that the parties to
-9-
the contract were CMS and the State of Maryland, "acting through"
the DOC. In executing the contract on the State's behalf, the DOC
acted merely as an agent of the State and, in this capacity,
enjoyed only limited powers.  Specifically, the DOC's authority to
modify the contract with CMS was circumscribed not only by the
contract terms, but also by the statutes and regulations applicable
to State procurement. 
The legislature has empowered the Board of Public Works with
control over procurement by State agencies.  See Md. Code, (1985,
1995 Repl. Vol., 1996 Supp.), State Finance & Procurement Art., §
12-101(b)(1) et seq.  Procurement is broadly defined, in relevant
part, as "buying or otherwise obtaining supplies, services,
construction, 
construction 
related 
services, 
architectural
services, engineering services, or services provided under an
energy performance contract," and a procurement contract is "an
agreement in any form entered into by a unit for procurement."  Md.
Code (1985, 1995 Repl. Vol., 1996 Supp.), State Finance and
Procurement Art., § 11-101(m), (n).  The Board has the statutory
authority both to "require prior Board approval for specified
procurement actions," as well as to dispense with the requirement
of Board approval.  See Md. Code (1985, 1995 Repl. Vol., 1996
Supp.), State Finance and Procurement Art., §§ 10-204, 12-101.
Furthermore, the statutory and regulatory scheme which governs
State procurement contemplates Board approval of not only initial
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procurement contracts, but also of modifications to these
contracts.
The Board has delegated contracting authority to various
governmental units.  See, e.g., COMAR 21.02.01.04A-D (delegating
authority to the Secretaries of the Department of Budget and Fiscal
Planning, the Department of General Services, the Department of
Transportation; the Maryland Transportation Authority; and the
Chancellor of the University of Maryland System for the approval
and award of certain contracts and contract modifications under
limited conditions).  Often included in these delegations is the
authority to execute contract modifications, provided certain
conditions are met.  For example, the Department of Public Safety
and 
Correctional 
Services 
has 
the 
authority 
to 
execute
modifications to contracts for construction and construction-
related services that, among other things, do not exceed $50,000 or
materially change the scope of the original contract.  COMAR
21.02.01.04H(5).  
Where there has been no delegation of authority, however, the
procurement regulations expressly provide that Board approval must
precede the procurement action.  COMAR 21.02.01.05A(1)(providing
that "the Board shall review and approve the award of those
procurement contracts not delegated under this chapter, before
execution").  It is conceded that the Board has not delegated to
the Department procurement authority with respect to the service
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contract at issue in the instant case.  The absence of this
delegation necessarily means that the Department must obtain Board
approval prior to executing such a contract or any modification
thereto.  
As we have already mentioned, the modification at issue in
this case was purportedly accomplished by the parties' conduct.
Moreover, while Board approval was procured for Modification H, the
modification by conduct that forms the basis of CMS's claim did not
receive Board approval.  As a result, the DOC's failure to follow
the requirements of the statutory and regulatory scheme with which
it must comply amounts to an ultra vires act and fails to satisfy
the second requirement of § 12-201(a).  
B.
We agree with the Court of Special Appeals that the scope of
a State official's authority is co-extensive with his or her actual
authority.  Dept. of Public Safety v. ARA, 107 Md. App. 445, 462,
668 A.2d 960, 969 (1995).  As we have previously observed in the
context of municipal corporations, "`[a]lthough a private agent,
acting in violation of specific instructions, yet within the scope
of a general authority, may bind his principal, the rule, as to the
effect of a like act of a public agent, is otherwise.'"  Gontrum v.
City of Baltimore, 182 Md. 370, 375, 35 A.2d 128, 130
(1943)(quoting Baltimore v. Eschbach, 18 Md. 276, 282 (1862)).
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Those who contract with a public agency, therefore, are presumed to
know the limitations on that agency's authority and bear the risk
of loss resulting from unauthorized conduct by that agency.  Id;
see also Schaefer v. Anne Arundel County, Md., 17 F.3d 711, 714
(4th Cir. 1994)(applying Maryland law and observing that "persons
who contract with the government do so at their peril when they
fail to take notice of the limits of the agent's authority").
Accordingly, the "scope of authority" to which reference is
made in § 12-201(a) is synonymous with the State agent's actual
authority.  It matters not that the DOC, though lacking in actual
authority, might have acted with apparent authority to modify the
contract.  Public policy demands that the State cannot be bound by
the unauthorized acts of its agents. 
III.  
Finally, CMS argues that the Department should nevertheless be
estopped, on equitable grounds, from denying the validity of the
contract modification.  Ordinarily, the doctrine of estoppel does
not apply against the State, and this would seem to be particularly
the case where, as here, an estoppel is sought with respect to
State correctional services.  See Salisbury Beauty Schools v. State
Bd. of Cosmetologists, 268 Md. 32, 63, 300 A.2d 367, 385 (1973);
Agnew v. State, 51 Md. App. 614, 657, 446 A.2d 425, 448 (1982);
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Cuppert & Weeks Nursing Home v. Department of Health & Mental
Hygiene, 49 Md. App. 199, 209, 430 A.2d 875, 880 (1981).  
Further, CMS's estoppel contention is predicated on the
conduct of those State employees and officials in the DOC, in the
Comptroller's Office, and in the TreasurerUs Office who processed
and paid CMS's invoices or requests for payment.  Viewed in this
light, the estoppel argument becomes indistinguishable from the
argument that those persons had apparent authority to pay the funds
at issue here.  We have rejected CMS's apparent authority argument
in Part II.B, supra.
IV.
In sum, we find that CMS's claim fails to satisfy the
requirements for the waiver of immunity contained in § 12-201(a).
The purported modification was not approved by the Board of Public
Works, and thus exceeded the scope of the DOC's authority.
Furthermore, as between CMS and the public generally, CMS bears the
risk of injury posed by the unauthorized conduct of a public agent.
See Gontrum, 182 Md. at 376, 35 A.2d at 130.  For these reasons,
CMS's claim for reimbursement for the cost of AIDS medication
dispensed at correctional facilities is barred by the doctrine of
sovereign immunity.
JUDGMENT 
OF 
THE 
COURT 
OF
SPECIAL 
APPEALS 
AFFIRMED.
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COSTS IN THIS COURT AND IN THE
COURT OF SPECIAL APPEALS TO BE
PAID BY PETITIONER.
CHASANOW, J., concurring:
I concur in the judgment in this case for the reasons stated
by Judge Hollander in her excellent opinion in Dept. of Public
Safety v. ARA, 107 Md. App. 445, 668 A.2d 960 (1995).