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Under the Anti-Deficiency Act ("ADA"), "all [public]
contracts for future payments of money, in advance of or in
excess of existing appropriations, are void ab initio." For
those contractors entering into agreements with governmental
entities, it is important to ensure that the contract price has
been properly appropriated prior to commencing work. But
what happens when the contract includes an open-ended indemnity,
i.e., an uncapped indemnity? In Insurance Company
of North America v. District of Columbia, 948 A.2d 1181
(D.C. Ct. App. 2008), the D.C. Court of Appeals held that,
because it would be virtually impossible
for the legislature to appropriate
funds for an open-ended indemnity
provision, such a provision may
not be enforced against a governmental
entity.
In Insurance Company of North
America, the District of Columbia
(the "District") contracted with Kora
& Williams ("K&W"), a general
contractor, to perform certain work
on the Union Station Redevelopment
project. From the beginning, design issues delayed
K&W's performance and, when it became impractical to
complete on schedule, the District terminated the contract on
the basis that K&W failed to make sufficient progress toward
timely completion. The District then asserted a claim under
K&W's performance bond, issued by Insurance Company of
North America ("INA").
Although both K&W and INA disputed the validity of the
District's termination of K&W, INA ultimately entered into a
partial settlement agreement with the District under which
INA agreed to pay the District approximately $12.9 million
in exchange for the District's release of its bond claim. The
settlement agreement included additional language, however,
providing that, if it was determined that the District's termination
of K&W "was not justified," the District would repay
to K&W the settlement amount, plus interest, and would reimburse
INA for its costs, fees, and expenses; that is, the partial
settlement agreement included an open-ended indemnity
insofar as the indemnity provision did not cap the District's
liability as it related to the reimbursement of costs, fees, and
expenses.
Six years after entering into the partial settlement agreement,
the D.C. Contract
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Appeals Board determined that the District's
"default termination decision was arbitrary and capricious
and an abuse of discretion and should be converted into
one for the convenience of the District." Subsequently, the
District consented to a judgment for the repayment of the
$12.9 million, plus interest, but disputed that it owed INA for
the costs, fees, and expenses incurred by INA.
INA, therefore, asserted a breach of contract claim against
the District, alleging damages in the amount of $17.4 million
arising from costs, fees, and expenses incurred by INA
appealing the District's termination. The District raised the
ADA as a defense, arguing that it would be impossible "to
know at the time the contract is signed whether there are sufficient
funds in the appropriation to cover the liability if or
when it arises because no one knows in advance how much
the liability may be."
INA argued that the ADA did not apply to the indemnification
provision, but, if the ADA did apply, that the District’s
Judgment and Settlement Fund included monies appropriated
to cover liabilities incurred by the
District, such as the open-ended indemnity
contained in the partial settlement
agreement. First, the Court
of Appeals found that the ADA applied
to the instant dispute, reasoning
that, without a cap on the indemnity,
it would be impossible to know
how much to appropriate for this
indemnity.
Moving to the next argument, the
Court of Appeals declined to treat
the District's general appropriation for judgments and settlements,
D.C. Code §§2-402 to -404 (2001), as a sufficient
appropriation under the ADA to cover INA's open-ended
indemnity. The court reasoned that, because the District did
not specifically appropriate money to cover the indemnity at
the time of contracting, the partial settlement agreement was
not a "settlement" covered by the statutory appropriation for
judgments and settlements. Further, as INA did not have a
judgment providing for the recovery of costs and expenses, it
failed to prove that it should be a beneficiary of the District's
appropriation for judgments and settlements.
The lesson of Insurance Company of North America v. District
of Columbia is that, regardless of whether a contracting
officer represents that it has authority to bind a governmental
entity, the savvy contractor (or surety) will confirm that an
appropriation has been made covering the terms of the contract.
Moreover, if requesting an indemnity from a governmental
entity, it would be prudent to avoid incorporating
open-ended indemnities, as such a provision may not be enforceable.
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