By Amy Davidson
First Assistant County Attorney, and
Bushra F. Khan
Assistant County Attorney, both in Montgomery County
The county purchasing agent calls and has a request for an “urgent” contract review matter. Your first thought is “I’m a trial lawyer. Why is he calling me?” Then you remember the transactional attorneys are out of the office this week. You’re his last resort. Your second thought is, “How can anything be ‘urgent’ when it comes to contract review?” Nevertheless, you decide to pour yourself a cup of coffee and tackle this review. This article will give you a few tips on common provisions and pitfalls for government contracts.
Government contracts come with a minefield of rules, and compliance requires drafting terms in a manner that not only sets out mutual expectations but also demonstrates an intent to conform with governing laws. Admittedly, neither all contracts nor all circumstances are created equal, but familiarity with certain general and specific provisions can provide a helpful backdrop when negotiating, drafting, or reviewing government agreements.
There are certain standard provisions in any agreement addressing, for example, term or duration, a procedure describing termination for cause and for convenience, monetary or other consideration, a description of subject services or items, and a description of mutual obligations. These provisions are all fairly routine in commercial bargains, but there are certain other generally included clauses that warrant close attention in relation to government contracts:
Non-appropriation or funding out. Cities and counties are subject to Art. XI §7 of the Texas Constitution, which provides that no debt for any purpose shall ever be incurred in any manner unless provision is made, at the time of creating the debt, for levying and collecting a tax sufficient to pay the interest on that debt and provide at least 2 percent as a sinking fund. (A sinking fund is a fund established by a municipality or county to make interest payments and retire the principal on a long-term debt or bond, thereby sinking the debt.) However, a contract does not create a “debt” if the parties lawfully and reasonably contemplate, when the contract is made, that the obligation will be satisfied out of current revenues for the year, or out of some fund then within the immediate control of the governmental unit.[1] This constitutional requirement is further codified under Local Gov’t Code §271.903. Essentially, absent the city or county establishing such a sinking fund, if a contract is anticipated to exceed a one-year term and its correlating budget, then inclusion of a non-appropriation provision that allows the city or county to terminate the contract at the end of each budget year is critical.
General provisions
Venue and governing law. In this current era, there is a significant likelihood that certain procurement sources, in particular IT software and hardware providers, whether contracted directly or ancillary to another purchase, will proffer contracts that limit governing law and venue to the jurisdictions where those providers are headquartered—often not in Texas. In fact, software licensing agreements are notoriously adhesion contracts, and there may not be an option to negotiate either governing law or venue. In the rare instance when a vendor happens to be feeling magnanimous, a federal district court located within the local government entity’s geographic region might be proposed as venue (but a successful negotiation outcome is not guaranteed).
Texas Public Information Act. With maddening frequency, private contractors will demand that everything they have ever provided or ever will provide a governmental body, including the very documents being discussed, be kept confidential. Some will go so far as to require, unsuccessfully, the execution of an ancillary non-disclosure agreement (NDA) by the government client. While such confidentiality terms and NDAs might be a matter of routine in the corporate world, it is critical to point out both to opposing counsel and within the body of the agreement that government contracts in Texas are subject to release under Chapter 552 of the Government Code and associated rules prescribed by the Office of the Attorney General. This may not thrill counsel, but at least an explanation affords a party the opportunity to identify particular proprietary or confidential material within the document set, whereby such material could later be forwarded to the Attorney General for an opinion, should a public information request be received later by the government client. “To the extent allowable under Texas law …” can sometimes be an appropriate compromise if at an impasse with opposing counsel.
Indemnity. An often-overlooked provision, the indemnity clause must be reviewed carefully to ensure that the governmental client is not somehow committed to indemnifying a third party for damages arising from that third party’s acts, in contravention of Art. XI, §7 of the Texas Constitution and any other applicable statutes.[2] Likewise, a contract term that ostensibly seeks to exceed a local government entity’s authority may be found void and unenforceable, for instance when seeking indemnification beyond the limits granted under Local Gov’t Code §271.904 in relation to procurement of architectural or engineering services. In terms of bolstering protections for a government client, the indemnity or insurance clause within the document can require the other contracting party to carry appropriate insurance coverages, including workers compensation coverage, and to agree to a waiver of subrogation.
Specific provisions
Certain recitals, inclusions, or addendums are specific to the type of agreement at hand, and these are highlighted below:
The procurement contract. The famous astronaut Alan B. Shepard once said, “It’s a very sobering feeling to be up in space and realize that one’s safety factor was determined by the lowest bidder on a government contract.” Truly, procurement contracts should not be taken lightly; they invariably prove to be that delicate branch upon which a crucial project finds itself resting.
Local Gov’t Code Chapters 252 (for municipalities) and 262 and 263 (for counties), and Government Code Chapters 2254 (for professional and consulting services) and 2269 (for construction-related projects), are the primary authorities in relation to procurement, competitive bidding, and any exemptions or alternatives thereto. An agreement finalized after the bidding process is complete and the winning bid awarded would ordinarily incorporate the Request for Proposal (RFP) or Request for Qualifications (RFQ), as well as the responsive proposal within the document. Given that not all areas of concern might be covered by such incorporation alone, the agreement’s language should specifically address any outstanding topics, such as desired quality, milestones, or benchmarks; required safeguards against fraud or criminal activity; situations warranting procedural deviation; controlling exhibits in the event of a conflict; and perhaps even liquidated damages in the event of a dispute, especially for procurements involving a high dollar value.
Procurement contracts reached via the Texas Department of Information Resources (DIR) or authorized purchasing cooperatives may legally bypass the competitive bid process but typically carry pre-set terms for end-user entities. A government body may have no option but to submit to such terms as controlling when procuring via these means, and the conflict resolution provisions within the end-user purchase agreement would accordingly need to reflect that.
The Interlocal Agreement (ILA). These agreements typically derive their authority from Chapter 791 of the Government Code, the Interlocal Cooperation Act, which lays out certain functions and services that may be the subject of ILAs. On occasion, ILAs may be impacted by specific statutory authorities, for example, the Health & Safety Code, Chapter 421 of the Gov’t Code, or the Code of Federal Regulations (CFR). As part of the review, a quick confirmation is needed that the agreement’s envisaged purposes reasonably fall within Chapter 791 or other applicable body of statutes, and the identified public purposes are reflected within the recitals.
Commonly encountered ILAs involve law enforcement services, leases, service sharing, and emergency assistance or mutual aid, and frequently one finds that the agreement is grant funded. If an ILA (or for that matter a procurement agreement between the local government entity and a private vendor, or a welfare services agreement with a nonprofit) is grant funded, or one that involves a federal or state program, the language must incorporate by reference all grant or program requirements as well as any governing statutory authorities implicated thereby. For instance, the American Rescue Plan Act of 2021 (ARPA) provides for payments to state, local, and tribal governments that are navigating the widespread impact of COVID-19 on communities; therefore, an ILA or other contract involving such funds would need to refer to the Act, as well as the body of associated rules, as a mutual obligation. FEMA (and pass-through state grants) additionally require express inclusion of certain contractual terms imposed on all tiers of non-federal sub-recipients (whether they are vendors, nonprofits, or governmental bodies).[3] A missing provision, or a provision that overtly contradicts a statute or grant, may potentially subject the ILA or other grant-funded agreement to audit-related challenges later.
Mutual aid agreements generally, including their terminology and provisions, must be viewed in light of Gov’t Code Chapters 418 (Texas Disaster Act of 1975) and 421 (Homeland Security) and Code of Federal Regulations, Stafford Act Title 44, Chapter 1, Part 201 (44 CFR Part 201). Government Code §421.062, for instance, offers certain immunity from civil liability in relation to a homeland security activity, provided that requisite language is included in the agreement. Because local government entities may eventually seek FEMA reimbursement or other recovery assistance following a declared disaster or emergency, both the language and substantive provisions of a mutual aid agreement must remain consistent with applicable state and federal requirements.
Ancillary agreements. Ancillary agreements are mandatory when entering into certain types of primary agreements. For example, contracts related to medical or behavioral services involving the use or disclosure of protected health information (PHI) must be accompanied by a separate Business Associate Agreement (BAA), as mandated by the Health Insurance Portability and Accountability Act of 1996 (HIPAA); prosecutors can be thankful the U.S. Department of Health and Human Services has provided sample BAA provisions for ease of drafting.[4] In certain circumstances, an ancillary agreement may be advisable if not otherwise mandatory, e.g., for continuity of operations in relation to transition of services when the government entity anticipates a turnover of providers. When not otherwise limited by HIPAA or other governing regulations, the draft of an ancillary agreement should follow the same overarching guidelines that govern the primary agreement.
Conclusion
Government contracts may not always be riveting, but they remain an inevitable reality for a practitioner in the civil arena. The many cups of coffee downed during this process are probably unavoidable, but maybe the above suggestions will help with the resulting heartburn.
Endnotes
[1] McNeill v. City of Waco, 33 S.W. 322, 323 (Tex. 1895), as cited in Tex. Att’y Gen. Op. No. GA-0652 (2008).
[2] Tex. Att’y Gen. Op. No. GA-0176 (2004).
[3] Contract Provisions Template by FEMA Office of Chief Counsel Procurement Disaster Assistance Team is available at www.fema.gov/sites/default/files/2020-07/fema_procurement_contract-provisions-template.pdf; and Contract Provisions Guide, Navigating Appendix II to Part 200- Contract Provisions for Non-Federal Entity Contracts under Federal Awards, by Procurement Disaster Assistance Team (PDAT) June 2021, is available at www.fema.gov/sites/default/files/documents/ fema_contract-provisions-guide_6-14-2021.pdf.
[4] Sample Business Associate Contracts are available at www.hhs.gov/hipaa/for-professionals/covered-entities/sample-business-associate-agreement-provisions/index.html.