Municipal Contracts and Purchasing: Best Practices
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1 St. Louis County Municipal League Training Academy Municipal Contracts and Purchasing: Best Practices PREPARED AND PRESENTED BY: DANIEL G. VOGEL, ESQ. CUNNINGHAM, VOGEL & ROST, P.C. legal counselors to local government 333 S. KIRKWOOD ROAD, SUITE 300 ST. LOUIS, MISSOURI January 31, 2013
2 Municipal Contracts and Purchasing: Best Practices Outline I. PUBLIC CONTRACT AND PURCHASING LEGAL REQUIREMENTS... 2 A. CONTRACTS Statutory Requirements... 2 a. Public Contract Statute of Frauds... 2 b. Immigration Status - Proof of Lawful Presence... 3 c. Federal E-Verify Law Services Contracts Over $ d. Confidentiality Provisions Constitutional Limits... 5 a. No Extra Compensation for Work Already Performed... 5 b. Annual Appropriation/debt Conflicts of Interest... 6 a. Prohibited Conflicts Public Works Contracts... 7 B. PURCHASING REQUIREMENTS Competitive Bidding Local Ordinance Requirements Bidding Procedures... 8 II. KEY CONTRACT TERMS AND NEGOTIATION TIPS Indemnification of City Indemnification by City (avoid this) Insurance Annual Appropriation Ownership of Work-product/copyrights Termination No damages against City Attorney Fees (only to the City) III. PRACTICAL RECOMMENDATIONS AND DELIVERABLES DELIVERABLES o Exhibit 1 Model Contract Form o Exhibit 2 Contracts Checklist o Exhibit 3 Form Contract Approving Ordinance o Exhibit 4 Affidavit of Citizenship o Exhibit 5 Supplemental Public Works Legal Requirements o Exhibit 6 Op. Atty. Gen. No. 138, Webster, o Exhibit 7 Purchasing Policy IV. NOTES
3 Municipal Contracts and Purchasing: Best Practices I. PUBLIC CONTRACT AND PURCHASING LEGAL REQUIREMENTS A. CONTRACTS 1. Statutory Requirements. a. Public Contract Statute of Frauds: RSMo.: No county, city, town, village, school township, school district or other municipal corporation shall make any contract, unless the same shall be within the scope of its powers or be expressly authorized by law, nor unless such contract be made upon a consideration wholly to be performed or executed subsequent to the making of the contract; and such contract, including the consideration, shall be in writing and dated when made, and shall be subscribed by the parties thereto, or their agents authorized by law and duly appointed and authorized in writing. What This Means: o All contracts must be: Within City powers or otherwise expressly authorized by law, Consideration wholly to be performed or executed subsequent to the making of the contract, In writing, including the consideration, Dated when made, Signed by all parties, and City authority to sign the contract must also be in writing. These requirements are mandatory and a contract made in violation of them is void rather than voidable. City of Fenton v. Executive Intern. Inn, Inc., 740 S.W.2d 338 (Mo. App. E.D. 1987) o Ordinance or resolution required? Generally no, but advisable: The minutes of a governing body may be part of the writing showing express authorization of governing body to execute. United Cooperatives, Inc. v. City of Smithville, 630 S.W.2d 255 (Mo. App. W.D. 1982). However, the minutes must show that the requirements of were met. City of Gainesville v. Gilliland, 718 S.W.2d 553 (Mo. App. S.D. 1986)(Contract was unenforceable where minutes did not adequately state consideration). Examples: o But see Sorkin v. City of St. Clair, 800 S.W.2d 817 (Mo. App. E.D. 1990) (Contract unenforceable where not executed by public official and no ordinance authorizing execution of contract.) o City prohibited from paying supplier of materials for road project where 2
4 amount of materials exceeded limit in its City Charter for no-bid purchases. Riney v. City of Hannibal, 712 S.W.2d 49 (Mo. App. E.D. 1986). o Cooperative contract could not be ratified where county was 12 th county signatory where statute authorized only 10 county signatories. St. Charles County v. A Joint Bd. Or Com'n, 184 S.W.3d 161 (Mo. App. E.D. 2006). o Contract was not validly authorized where no single written approval existed but rather only a piecemeal gathering of majority of the governing body. Moynihan v. City of Manchester, 265 S.W.3d 350 (Mo. App. E.D. 2008). b. Immigration Status - Proof of Lawful Presence: RSMo.: [A]t the time of application for any state or local public benefit, an applicant who is eighteen years of age or older shall provide affirmative proof that the applicant is a citizen or a permanent resident of the United States or is lawfully present in the United States. o o o Public Benefit = any grant, contract, or loan provided by an agency of state or local government; or any retirement, welfare, health, disability, housing, or food assistance benefit under which payments, assistance, credits or reduced rates, or fees are provided. Affirmative Proof = documentary evidence recognized by the department of revenue when processing an application for a driver's license, a Missouri driver's license, as well as any document issued by the federal government that confirms an alien's lawful presence in the United States. Applicant may submit affidavits of lawful presence allowing for temporary benefits for 90 days. What This Means: You must require proof of status for all contracts and benefits that City grants. o Applies to any contract, grant or loan. o Does NOT apply to: (1) any municipal permit, including business license, (2) contract with public utility providers and their customers, (3) secondary education public benefits as defined in Section RSMo. or (4) unemployment benefits. Tips: 1. Simply place copy of driver s license of applicant/signer in file for all contracts/benefits. 2. Use affidavit of citizenship form only when person cannot provide written proof (e.g., driver s license) (Exhibit 4). c. Federal E-Verify Law Service Contracts Over $5,000: RSMO: As a condition for the award of any contract or grant in excess of five thousand dollars by any political subdivision... to a business entity the business entity 3
5 shall, by sworn affidavit and provision of documentation affirm its enrollment and participation in a federal work authorization program. What This Means: o All City contracts over $5,000 must require from the contracting entity for services: Affirmation of enrollment in E-Verify = federal work authorization program; and Affirmation that it does not knowingly employ any person who is an unauthorized alien in connection with the contracted services. o Note: for repeat entities only need this affirmation on an annual basis if maintained in City files. o EXCEPTION: Does not apply to business entities that are merely providing goods or products. 15 CSR (6). Tip: use Form Affirmation to satisfy this law (See Exhibit B of Exhibit 1). d. Confidentiality Provisions: RSMo. Chapter 610: Generally, executed contracts are open records under Missouri Sunshine Law. o Therefore, City cannot agree to unqualified confidentiality agreement. A Few Exceptions to General Rule: o (1) settlements made public upon final disposition or upon signing unless closed by court order; upon finding that the adverse impact to a plaintiff(s) to the action clearly outweighs the public policy considerations of Sunshine Law (however amounts paid by or on behalf of City are always open). o (2) real estate lease and purchase agreements may be closed if consideration would be adversely affected but shall be made public upon execution. o (12) documents related to contract negotiations may be closed until the contract is executed. o (14) records protected from disclosure by law (social security numbers, trade secrets, and various other limited types of information). 4
6 2. Constitutional Limits. a. No Extra Compensation for Work Already Performed: Mo. Const., Art. III, 39(3): The general assembly shall not have power: To grant or to authorize any county or municipal authority to grant any extra compensation, fee or allowance to a public officer, agent, servant or contractor after service has been rendered or a contract has been entered into and performed in whole or in part. What This Means: o No bonuses or retroactive pay increase for past services Extra Compensation Examples: o City violated constitution by amending contract to increase compensation to corporation for same collection and disposal service already required in original contract. Kizior v. City of St. Joseph, 329 S.W.2d 605 (Mo. 1959). o A highway contractor not entitled to extra compensation for increased expense in excavating with labor instead of machinery, where contractor was paid for excavating on basis provided in contract, and condition necessitating labor could have been seen on examination of site. Sager v. State Highway Comm n, 160 S.W.2d 757 (Mo. 1942). o State board of cosmetology cannot grant bonuses to its employees because this provision prohibits granting or authorizing bonuses after service has been rendered. Op.Atty.Gen. No. 72, Pray, b. Annual Appropriation/debt: Mo. Const. Art. VI, 26(a): Prohibits cities from entering into any contract requiring the City to pay more than income and revenue provided for such year plus any unencumbered balances from previous years. What This Means: o Cannot contract to spend more than your current year revenues + unencumbered cash (without voter approval). o Multi-year contracts should generally be subject to annual appropriation by governing body. Real Examples: o Copier rental agreement between school district and bank that accelerated rent payments upon default was voidable because such accelerated payments were greater than school districts income and revenue for current year, plus unencumbered balances from previous years. Mercantile Bank of Illinois v. School Dist. of Osceola, 834 S.W.2d 737 (Mo. 1992). 5
7 o Certificates of Participation with 15-year term issued by City did not violate Mo. Const. Art. VI, 26(a) where certificates set up annual payments by City, and annual payments did not exceed City s annual income and revenue, plus unencumbered balances. Entire debt undertaken by City was not required to be counted as a single year s expenditure. Burks v. City of Licking, 980 S.W.2d 109 (Mo. App. S.D. 1998). 3. Conflicts of Interest. Example Language: Notwithstanding any provision herein to the contrary, the City is obligated only to make the payments set forth in the attached contract as may lawfully be made from funds budgeted and appropriated for that purpose during the City's then current fiscal year at the discretion of the City. If no funds are appropriated or otherwise made legally available to make the required payments for this Agreement during the next occurring fiscal year (an Event of Nonappropriation ), this Agreement will terminate at the end of the then current fiscal year as if terminated expressly. The failure or inability of the City to appropriate funds for this Agreement in any subsequent fiscal year shall not be deemed a breach of this Agreement by any party. If applicable, this Agreement may be annually renewed at each fiscal year by inclusion of specific appropriation for this Agreement, from year to year not to exceed the maximum renewal period or term as set forth in the Agreement. a. Prohibited Conflicts: There are three main statutes describing prohibited transactions: o ; ; RSMo. o The statutes apply to an elected or appointed official or employee and member of any governing body. Generally, no appointed or elected official or employee shall: o Sell, rent or lease any property, or provide services, to the City in excess of $500 per transaction or $5,000 per year unless competitively bid provided bid is the lowest received; o Use or disclose confidential information in any manner with intent to result in financial gain for himself, his spouse, his dependent child, or any business within which he is associated; o Use decision making authority for the purpose of obtaining financial gain which materially enriches himself, his spouse or dependent children; o Perform any service, act or refrain from acting or attempt to influence a decision by reason of any payment, offer to pay, promise to pay or receipt of anything of actual pecuniary value; or o Favorably act on any matter that is so specifically designed so as to 6
8 provide a special monetary benefit. Tip: WHEN IN DOUBT DISCLOSE AND RECUSE. 4. Public Works Contracts. See Exhibit 5 for supplementary legal requirements relating to Public Works construction contracts. B. PURCHASING REQUIREMENTS 1. Competitive Bidding. No general statute requirement that City s must use competitive bidding. A Few Exceptions: o Construction Management Services RSMo. o Health and Life Insurance for Employees RSMo. o Construction of Initial Waterworks RSMo. o City Depository Services (3rd class cities) RSMo. o Insurance Contracts RSMo. o Contracts with officials and employees of political subdivision over $500 per transaction or $5000 per year /.458 RSMo. o Federal and State Grants See specific grant provisions and applicable law. o Architectural, Engineering or Land Surveying Services (list of 3 on file) RSMo. o LOCAL ORDINANCE governs other requirements. 2. Local Ordinance Requirements. Typical ordinance provisions: Key Terms Providing Flexibility: Administrative Authority to contract: grant the City Administrator/Mayor authority to contract for and make purchases for goods and services on behalf of the City not to exceed a certain limit (i.e., $500 - $3,500). Small contract procedures: Vary procedures for price range of purchases (i.e., under $1,000, between $1,000 and $2,500, between $2,500 and $5,000, and over $5,000). Bid Notice options: Newspaper notice, posting, and website bid notification 7
9 options (where state law creates no bidding requirement). Emergency/Negotiations/Waiver Authority Provide exemptions for emergencies and other special circumstances; create waiver process in ordinance; where appropriate and permitted, negotiation for a better price or term can be considered: Nothing herein shall be construed to require the Board of Aldermen to accept the lowest bid and the Board of Aldermen may reject all bids, negotiate for more favorable terms or waive any purchasing requirement herein as may be determined in the public interest. Tip: See sample purchasing policy (Exhibit 7). 3. Bidding Procedures. Key Terms Providing Flexibility: Allow governing body to accept all bids, reject all bids or to negotiate and modify bids. Allow governing body to waive any technical deficiencies in any bid. Clearly state City is not required to accept lowest bid or any bid. Example clause: The City intends to award a contract for the Project based on the bid that, in the City s sole discretion, best meets the interests and requirements of the City. The City reserves the right in the City s sole discretion to reject any and all bids, to waive technicalities or deficiencies in any or all bids, to negotiate with any or all bidders or others for more favorable terms or prices, and to award a contract to other than the bidder submitting the lowest cost bid proposal, with or without negotiation. The City reserves the right not to open a sole bid. Flexibility may be prohibited where state or federal bidding requirements apply. 8
10 II. KEY CONTRACT TERMS AND NEGOTIATION TIPS 1. Indemnification of City. a. Hold Harmless: Basic indemnification: requires contractor to pay amounts awarded against City in suits by third parties. Hold harmless generally arises when damages are awarded against City; may or may not include duty to defend. b. Duty to Defend: Requires contractor to provide defense to City in suits by third parties regardless of ultimate liability. Duty to defend may arise when suit against City is filed. o If the complaint merely alleges facts that give rise to a claim potentially within the policy's coverage, the insurer has a duty to defend. McCormack Baron Mgmt. Services, Inc. v. Am. Guaranty & Liability Insurance Co., 989 S.W.2d 168, (Mo. 1999). c. Example Language: Key Terms: o Allow flexibility by demanding indemnification and payment of counsel selected by City; o Cover both attorney and expert fees; o Cover breach and enforcement of the contract; and o Cover any harm caused by contractor while performing the services of the contract. Example Clause: To the fullest extent permitted by law, the Consultant agrees to defend with counsel selected by the City, and indemnify and hold harmless the City, its officers, engineers, representatives, agents and employees from and against any and all liabilities, damages, losses, claims or suits, including costs and attorneys' fees, for or on account of any kind of injury to person, bodily or otherwise, or death, or damage to or destruction of property, or any other circumstances, sustained by the City or others, arising from breach of the Contract or out of services and operations negligently performed hereunder by the Consultant, or claims relating thereto, and including but not limited to the City's reliance on or use of the services or products provided by the Consultant under the terms of this agreement. The Consultant shall not be liable for any loss or damage attributable solely to the negligence of the City. To the extent required by law to enforce this provision, Consultant agrees that this indemnification requires Consultant to obtain insurance in amounts specified herein and that Consultant has had the opportunity to recover the costs of such insurance in the Compensation set forth in this Agreement. 9
11 2. Indemnification By City. NO Authority for City Indemnification of private parties. Avoid this Use Exhibit 6 (AG Opinion). o Agreements to indemnify are waivers of sovereign immunity and only the General Assembly may enact such waivers; Op. Atty. Gen. No. 138, Webster, ( To agree to the underlined terms [defend, indemnify and hold harmless], is to waive the state s sovereign immunity, that is, the legal prohibition against the state being sued in its own courts for damages from the torts of its officers and agents. Only the legislature can waive this immunity. )(emphasis added). 3. Insurance. Seek to receive not less than Sovereign Immunity Limit: RSMo sets sovereign immunity limit. City may contract to purchase insurance that shall not exceed: o Currently, single event: $398,638; aggregate claim: $2,657,587. o Available at: City can require private parties to obtain any reasonable amount. Tips: 1. MAKE SURE YOU ACTUALLY GET THE CERTIFICATE. 2. Contract for insurance at $ but at no time less than the sovereign immunity limits as set forth in RSMo. 4. Annual Appropriation. 5. Ownership of Work-Product/Copyrights. 6. Termination. 7. No Damages against City. 8. Attorney Fees (only to the City). 10
12 III. PRACTICAL RECOMMENDATIONS AND DELIVERABLES 1. Form contracts: Use solely a form contract when possible. Use City Form on top and attach vendor contract where necessary. 2. Checklists: Use the attached checklist or one of your own. Date. Signatures. Where is the written authority to sign? DO NOT FORGET THE ATTACHMENTS (posting and signed version). 3. Timing: Vendors sign first (ensures attachments are final). 4. Approval: Resolution/Ordinance Approval Language (see Exhibit 3). Approve contract substantially in form as attached. Authorize not direct signature, when appropriate. Authorize such other actions as necessary to effect. Authorize $ limit for contracts; change orders. 5. Indemnification: use the AG opinion to avoid indemnification of private parties. 6. Purchasing Policy: Administrative contract approval - Establish clear and useful administrator authority to contract (2,500 5,000 limit). Establish authorized waiver policy to allow Board exceptions to bidding. 7. Changes: Do not make changes after the Board approves limited exceptions. A. DELIVERABLES Exhibit 1 Model Contract Form with Immigration Forms Exhibit 2 Contracts Checklist Exhibit 3 Form Contract Approving Ordinance Exhibit 4 Affidavit of Citizenship Exhibit 5 Supplemental Public Works Legal Requirements Exhibit 6 Op. Atty. Gen. No. 138, Webster, (Indemnification is waiver of sovereign immunity prohibited without express legislature authority) Exhibit 7 Purchasing Policy 11
13 NOTES: NOTICE & DISCLAIMER These seminar materials and the related presentation are intended for discussion purposes and to provide those attending the seminar with useful ideas and guidance on the topics and issues covered. Although we have made every effort to ensure the accuracy of these materials and the presentation, neither the attorney presenting this seminar nor Cunningham, Vogel & Rost, P.C. assumes any responsibility for any individual s reliance on the written or oral information presented. Materials and presentations do not constitute legal advice and information provided may require consultation with applicable professionals to appropriately apply to specific circumstances. 12
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