|
Printer Friendly
Municipal Research News - Contractual Conflict of Interest - A Discussion of Chapter 42.23
Contractual Conflict of Interest - A Discussion of Chapter 42.23
The following article is intended to provide guidance regarding conflict of interest issues that arise with respect to contracts between a city, town, county, or special district and their municipal officers in the context of chapter 42.23 RCW. The intent is to provide some examples and practical guidance on what to look for and how to approach circumstances in which this chapter may be implicated. For a general overview of statutory conflicts of interest, see our "Conflicts of Interest" web page at http://www.mrsc.org/subjects/legal/conflict/conflweb.aspx.
Chapter 42.23 RCW establishes a baseline with regard to prohibiting certain types of contract interests and addressing other conflict of interest issues. RCW 42.23.030 establishes the basic prohibition, stating, in relevant part, that no municipal officer shall be:
beneficially interested, directly or indirectly, in any contract which may be made by, through or under the supervision of such officer, in whole or in part, or which may be made for the benefit of his or her office, or accept, directly or indirectly, any compensation, gratuity or reward in connection with such contract from any other person beneficially interested therein. …
To be "beneficially interested" in a contract is to benefit financially from that contract. So, the following key questions must be considered with respect to potential contractual conflicts of interest under chapter 42.23 RCW:
(1) Is the contract interest one through which the municipal officer would benefit financially?
(2) Is the contract made by, through, or under the supervision of the municipal officer?
(3) If the municipal officer will not benefit financially, does the municipal officer nevertheless have what would be considered a "remote interest" in the contract under RCW 42.23.040?
If a municipal officer enters into a contract that is prohibited by chapter 42.23 RCW, the consequences can be severe: the contract is void; the officer is penalized $500; and the officer could potentially forfeit his or her office. The officer also could possibly be exposed to other civil or criminal liability. Thus, it is important to understand how this law works. We hope the scenarios discussed below will help you with that understanding.
Scenario One: It's 3:00 a.m., you are the owner of a consulting firm, and you get a call from one of your employees who can't sleep and wants to talk about an exciting contract opportunity that is available to the firm. In addition to owning the firm, you are a councilmember in a noncharter code city with a population under 10,000. Your firm is seeking to enter into a professional services contract with the city for an amount that will not exceed $18,000 in any calendar year. The contract will come before the council for approval. What should you do?
Response: Councilmembers clearly are "municipal officers" under the definition of that term in RCW 42.23.020(2). Because you are the owner of the firm, you would benefit financially from the contract. And, because the council has general authority over all contracts and must approve them, the contract will be made by and through your office. However, even though you would benefit financially from the contract, a statutory exception applies here because the city's population is less than 10,000 and the dollar amount of the contract is less than $18,000 in any calendar year. See RCW 42.23.030(6)(b), (6)(d)(ii). So, you may enter into this contract, but you may not vote on the contract, you must disclose your contract interest to the council, and the interest must be noted in the council minutes "before the formation of the contract." See RCW 42.23.030 (last paragraph).
Further Discussion: RCW 42.23.030 provides some exceptions that allow affected municipal officers to have certain contract interests with their municipality. As above referenced, an exception applies to cities with a population of less than 10,000 and counties with a population of less than 125,000 (and irrigation districts encompassing 50,000 acres or less). Under this exception, a municipal officer may have a financial interest in a contract with the municipality that would be made by, through, or under the supervision of his or her office if the total amount received under the contract by the municipal officer or his or her business does not exceed $1,500 in any calendar month. See RCW 42.23.030(6)(a), (d)(ii). For towns, second class cities, and noncharter code cities with a population less than 10,000, and certain county fair boards, the exception applies as long as the total amount does not exceed $18,000 in any calendar year. See RCW 42.23.030(6)(b), (d)(ii). The exception does not apply to a sale or lease of municipal property to a municipal officer, nor to contracts for legal services (except for reimbursement of expenditures); such transactions are prohibited, regardless of the monetary amount. See RCW 42.23.030(6)(d)(i), (iii).
Other statutory exceptions and requirements are provided. Some of the exceptions apply to certain types of activities (e.g., furnishing of utility services, publication of legal notices); others apply based upon the type and population of the municipality (e.g., second class cities, noncharter code cities, county fair boards, port districts, school districts, public hospital districts). Given that some of the exceptions apply to different types of municipalities differently, it is important to become familiar with the details in RCW 42.23.030.
Also, as above stated, keep in mind that even if an exception under RCW 42.23.030 applies, the subject municipal officer may not vote on the contract, the officer must disclose his or her contract interest to the governing body of the municipality, and the interest must be noted in the governing body's official minutes or similar records "before the formation of the contract." See RCW 42.23.030 (last paragraph).
Key Points: A key issue here is whether the contract is "made by, through or under the supervision" of the officer. The state supreme court has emphasized that it is the making of the contract that implicates chapter 42.23 RCW. Many municipal officers do not have any authority with respect to the making (entering into) of contracts on behalf of their municipality. So, it is only certain officers who are prohibited by state law from entering into contracts with their municipality. Local codes of ethics may, however, be broader in their prohibitions. Note that a municipal officer with such authority over the making of the contract may not simply delegate that authority to another officer and then enter into the contract.
It also should be pointed out that a contract is not prohibited by this chapter if it was entered into prior to the contracting party becoming a municipal officer with the authority to make or supervise the making of the contract. However, future amendments and/or revisions (e.g., change orders) to the contract would violate RCW 42.23.030 because, in effect, the contract would be "re-made" under the officer's supervision or by or through his or her office.
Scenario Two: The same as Scenario One, except this time the firm is a corporation in which you own ten percent of the shares and the city's population is more than 10,000.
Response: The contract would be prohibited because no exceptions apply. Because the city's population is 10,000 or more, the exception regarding the dollar amount of the contract is inapplicable. Because you own ten percent of the shares of the corporation, you are considered to be financially interested in the contract. That is because your interest in the contract would not qualify as a "remote interest." RCW 42.23.040 deems certain involvements in contracts not to be beneficial interests under RCW 42.23.030, but rather considers them to be "remote interests." A "remote interest" is defined as:
(1) That of a nonsalaried officer of a nonprofit corporation;
(2) That of an employee or agent of a contracting party where the compensation of such employee or agent consists entirely of fixed wages or salary;
(3) That of a landlord or tenant of a contracting party; [or]
(4) That of a holder of less than one percent of the shares of a corporation or cooperative which is a contracting party.
If a municipal officer with authority over the making of a contract has a remote interest, he or she must disclose the contract interest to the governing body, the interest must be noted in the body's minutes before entering into the contract, and the body must approve the contract "in good faith." The officer with the remote interest is not to vote on the contract, or, as the statute puts it, the officer's vote cannot be counted. (We prefer the former approach.) If the officer influences or attempts to influence any other officer of the municipality on the matter, the exception does not apply.
In the above scenario, you have a beneficial interest because you own more than one percent of the shares of the corporation. You would now be faced with a decision. One option would be for your company not to pursue the contract with the city. Another option would be for you to resign your council position so that your company can enter into the contract. It would not be sufficient to simply recuse yourself from consideration of and voting on the contract.
Scenario Three: The same as Scenario Two, except that it is your spouse who owns ten percent of the shares in the corporation seeking to contract with the city.
Response: Because Washington is a community property state and you have a legal interest in the financial earnings of your spouse, the result is the same.
Scenario Four: The same as Scenario Two, except this time you are a county commissioner in a county with a population over 125,000, the contract is for less than $1,500 per month, and you are a non-shareholding employee of the firm earning a fixed salary.
Response: Your contract interest would be considered a remote interest based upon two of the remote interest exceptions (i.e., employee on fixed salary or wages, holder of less than one percent of shares). As such, you would not be regarded as an officer "interested" in the contract and the contract would not be prohibited by this chapter, presuming you don't vote on the contract and don't influence or attempt to influence the other commissioners regarding the matter.
Scenario Five: This time you're a county commissioner in a county with a population over 125,000 and you're also an unpaid officer for a nonprofit organization seeking to contract with the county for an amount less than $1,500 per month.
Response: Because you are a "nonsalaried officer of a nonprofit corporation," your contract interest would be regarded as a remote interest. Thus, you would not be regarded as being "interested" in the contract and the contract would not be prohibited by this chapter, again presuming you don't vote on the contract and don't influence or attempt to influence the other commissioners regarding the matter.
Scenario Six: The same as Scenario Five, except this time you're an unpaid member (not an officer) of a local nonprofit organization (e.g., the Lion's Club, Rotary) and the organization is seeking to contract with the county.
Response: What is statutorily prohibited are contract interests in which the municipal officer is financially interested, whether directly or indirectly. Here, as a mere member of the organization, you would have no legally recognized financial interest in the contract - not even a remote interest. Consequently, you may advocate regarding entering into the contract and you may vote on it.
Scenario Seven: You are the planning director of a city with a population over 10,000 and are also the part-owner of a local hardware store. The city would like to buy tools from the hardware store for the city maintenance department.
Response: While you would be considered a municipal officer, you would presumably have no say in purchases by the maintenance department, and so the contract for purchase of the tools would not be made "by, through or under your supervision." The city may enter into the contract.
In summary, this article has addressed a specific aspect of conflict of interest doctrine that applies to municipal officers - contractual conflicts of interest under chapter 42.23 RCW. Keep in mind that there are other important ethical and conflict of interest principles that are beyond the scope of this article but which also govern the conduct of municipal officers. Such principles include the prohibited acts set forth in RCW 42.23.070 (e.g., using one's position to secure special privileges or exemptions for himself, herself, or others), as well as common law (i.e., law made through court decisions) conflict of interest (i.e., judging one's own cause), and the appearance of fairness doctrine (see chapter 42.36 RCW).
The prohibitions in chapter 42.23 RCW are broad in scope and may surprise you. Good faith is not a defense, so, if you are a municipal officer, it is important you take seriously and act in accordance with the requirements of this chapter. If you have any doubts or questions about these issues, consult with your municipality's attorney. Also, please feel free to discuss these issues with a MRSC legal consultant.
|
