Key Clauses to Focus on in Local Government Contracts

When drafting and reviewing local government contracts, it’s imperative that legal counsel understand what language to focus on.  There are a number of terms and conditions which political subdivisions cannot agree to under Ohio law.  Leaving one of those terms in a contract can have major consequences—even causing the entire agreement to be void.  Additionally, there are a few important protections that should be considered.  This article focuses on three key terms of for local government contracts—Indemnification, Subrogation, and Confidentiality. 

Indemnification

An indemnification clause is a contractual provision that imposes a financial obligation upon one party to a contract for the benefit of another party to the contract.  It essentially means that one party promises to reimburse another party for any loss it may suffer because of a contract default or third-party act related to the contract.

The Ohio Constitution, Article XII Section 11 prohibits the state and its political subdivisions from incurring a debt without first formally appropriating sufficient funds to pay that debt.  An indemnification clause is essentially a promise to secure an open-ended debt which may arise from some unknown act that might occur at some point during the contract term.  With so many “unknowns,” it’s impossible to appropriate public funds to cover the unforeseeable debt with any degree of certainty.

It is possible to put a monetary cap on an indemnification promise—i.e. the local government promises it will indemnify another contracting party up to, but not exceeding, a certain amount.  However, be aware that the Ohio Constitution provides that governmental appropriations may not be made for a period longer than two years.[1]  If you choose to retain a governmental indemnification obligation in a contract, it must be framed as a two-year (or less) promise to reimburse the other party up to a specified maximum dollar amount.

The take-away here is that indemnification clauses imposing financial burden on political subdivisions should generally be struck entirely from the contract.  Most indemnification clauses will be prominently labeled as such, but keep an eye out for indemnification obligations cloaked in “hold harmless” language.  The Ohio Attorney General has interpreted a promise to hold another party harmless from a loss as the equivalent to an agreement to indemnify that party.[2]   A couple of alternatives to indemnification/hold harmless clauses you might consider are specific insurance requirements or covenants not to sue.

Subrogation

The Ohio Revised Code prohibits subrogation claims against political subdivisions.  “Subrogation” in a contractual context generally means, if a contracting party’s insurance company covers any loss occurring in connection with the contract, the insurer is entitled to “step into the insured party’s shoes” and recoup its costs from the party at fault for the covered loss.  Ohio law states that insurance companies are restricted from bringing actions under subrogation contract provisions against political subdivisions in order to recover costs associated with injury, death, or loss to person or property resulting from an act or omission in connection with a government or proprietary function of a political subdivision.  R.C. 2744.05(B)(1).  Governmental functions are those which the political subdivision must perform under applicable law, and involve activities that are not customarily engaged in by nongovernmental persons.[3]  Proprietary functions are those that are not considered governmental (i.e., a private entity could perform the same act).[4]

There’s no way to “contract around” Ohio’s statutory bar against the type of subrogation clauses discussed above.  These provisions should be struck completely from local government contracts. 

Confidentiality

As used in this article, a confidentiality contract provision obligates a party to keep another party’s information and records private, and not disclose them to any third-party.  Local governments are held to a high standard of public transparency.  Subject to certain limited exceptions, R.C. 149.43 requires political subdivisions to make tangible records within their possession available to the public for inspection and copying.  This duty cannot be limited by agreement.  In other words, public records laws prevail over a contract clause which states the contract itself, or other tangible documentation received by the government in connection with the contract, is confidential and not subject to disclosure to third parties.  If the contract or related documentation doesn’t fall within one of the public records exceptions enumerated in R.C. 149.43, the records will be subject to public disclosure.  Where a confidentiality provision appears in a contract, it’s beneficial to add a statement that the clause is subject to Ohio public records laws so that all parties are on notice of governmental transparency obligations which may impact the contract.

The above being said, there are options to protect a contracting party’s information to the fullest extent possible. For example, a statement could be included in the confidentiality clause that, if the political subdivision receives a public records request which requires disclosure of the contract or related documentation, the political subdivision will notify the other party of this request prior to disclosing the records.  This prior notice may allow the other party time to attempt to “block” the disclosure through legal action (e.g. by seeking a protective order against the disclosure in court).  We do not advise, however, that the political subdivision agree to take any steps beyond providing the prior notice to actually assist the other party in protecting its information.

Conclusion

The three contract clauses discussed in this article are a few of the most important clauses to flag when reviewing local government contracts, but they’re certainly not the only terms to scrutinize.  Other clauses we often omit or revise when reviewing government contracts include arbitration provisions, attorneys’ fee provisions, governing law and venue, automatic renewal clauses, disclaimer of warranties, and the list continues.  It’s imperative that political subdivisions run each contract they’re considering entering into—no matter how small—by qualified legal counsel for review.

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[1] Ohio Const. Art. II, Section 22; see 1996 Op. Att’y Gen. No. 96-060.

[2] 1999 Op. Att’y Gen. No. 99-049.

[3] See R.C. 2744.01(C)(1).

[4] See R.C. 2744.01(G)(1).