CCIT Meeting March 19, 2013 RaLea Sluga

1. CCU Frequently Asked Questions Security interests in State property; Binding versus non-binding; Liability levels in the indemnification provision CCIT Meeting March 19, 2013 RaLea Sluga Office of the State Controller (OSC), Central Contracts Unit (CCU) Manager

2. Security Interests in State Property • Issue: Can you give a vendor a security interest in State property to secure payment by the State? • Answer: It depends upon who holds title to the property and when title will be transferred (if applicable).

3. Security Interests in State Property • Existing State-owned property: Generally, the pledging of existing State-owned property is considered the creation of debt and is prohibited, unless you have: • Specific legislative approval for the pledge; or • An AG opinion approving the debt.

4. Security Interests in State Property • Property not owned by State: Generally, it is permissible for the owner of the property to retain a security interest in the property until it has been fully paid. • This applies to property to which title has not been transferred to the State. • For example, lease-purchase agreements with transfer of title to equipment to the State upon full payment.

5. Security Interests in State Property • Property not owned by State cont. • After full payment, the security interest should be relinquished and title transferred to the State. • Please note that this answer does not address any GASB Statement No. 62 or CRS §24-82-801 (if applicable) issues related to capital leases.

6. Binding versus Non-binding • Why is this important? • Because CRS §24-30-202 (“Controller Statute”) imposes certain requirements and compliance with the Controller Statute, Fiscal Rules, Controller Policies and other Controller requirements for all State expenditure contracts. • Fiscal Rule 2-2-4 lists the approved forms (purchase order, contract, small purchase documentation or alternate commitment voucher

7. Binding versus Non-binding • Remember: An expenditure contract can take a few different forms. • Fiscal Rule 2-2-4 lists the approved forms and the limits for the use of each one. • Example, purchase order, contract, small purchase documentation. • One can also request a fiscal rule waiver for an alternate commitment voucher. • An expenditure contract can involve the payment of money by the State, which is the most typical.

8. Binding versus Non-binding • An expenditure contract exists if the State incurs or accepts an obligation or risk that it would not otherwise have incurred (which will or may require funds or State resources). • See slides 70- 72 of my CCIT FAQ presentation from 7/18/12 for a greater description.

9. Binding versus Non-binding • The Controller statute will only apply when there is a binding expenditure contract. • A document is “binding” when it obligates a party or brings or places a party under definite duties or legal obligations.

10. Binding versus Non-binding • Example of a non-binding document: • Letter of Intent (“LOI”) – an expression of the intentions of the parties that summarizes the major terms of a proposed transaction, including, but not limited to, price, payment method and important dates. • Generally, it is an agreement to agree.

11. Binding versus Non-binding • Please note that the OSC does not recommend the use of LOIs. • They are an exception and there is not an approved OSC template. • Used primarily for financing and mergers/acquisitions. • Use of LOIs can be tricky and commit you when you do not want it.

12. Binding versus Non-binding • Important! - To be non-binding, the document must specifically state: • It is non-binding; and • That the document will be superseded by a definitive contract that will be binding.

13. Binding versus Non-binding • Do NOT include a statement that the parties will negotiate in “good faith” toward a final definitive contract. • This allows one party to only request reasonable terms in order to meet the good faith requirement and makes it very difficult to get out of the transaction.

14. Binding versus Non-binding • Just because you include contingencies in a Letter of Intent does not ensure that it is non-binding to the State. • Example, contingencies related to obtaining financing or agreement with another party. • This is especially important when the contingencies are beyond the control of the State.

15. Binding versus Non-binding • For example, • Your agency executes a Letter of Intent in which the State agrees to pay a company 10% of its construction costs for a new facility if the company pays 10% of the costs and obtains financing for the other 80%. • The company obtains financing.

16. Binding versus Non-binding • Is this binding to the State? • If yes, then when you executed the Letter of Intent it needed to comply with the requirements of FR 2-2 for a commitment voucher and you needed an encumbrance for the State’s obligations. • When was it binding?

17. Binding versus Non-binding • Argument - But if the company never obtains the financing, the State does not have to pay the 10%. Why is this considered binding? • Answer – It is binding because you have committed the State to an expenditure based upon a series of events the State cannot control and the Letter of Intent is the only required document between the State and the company to obligate the State to the payment.

18. Liability levels in the Indemnification provision • Standard provision (Example 1): • “Contractor shall indemnify, save and hold harmless the State, its employees and agents, against any and all claims, damages, liability and court awards including costs, expenses and attorney fees and related costs, incurred as a result of any act or omission by Contractor, or its employees, agents, Subcontracts or assignees pursuant to the terms of this Contract . . .”

19. Liability levels in the Indemnification provision • Modified provision (Example 2): • “Contractor shall indemnify, save and hold harmless the State, its employees and agents, against any and all claims, damages, liability and court awards including costs, expenses and attorney fees and related costs, incurred as a result of any negligent or willful act or omission by Contractor, or its employees, agents, Subcontracts or assignees pursuant to the terms of this Contract . . .”

20. Liability levels in the Indemnification provision • Example 1 provides the best protection for the State. It does not limit the liability of the vendor to the State for the vendor’s actions or omissions or those of its employees, agents, subcontracts or assignees.

21. Liability levels in the Indemnification provision • Example 2 is a limitation of liability. It limits the liability of the vendor to the State for those actions or omissions that are negligent or willful. • What is missing?

22. Liability levels in the Indemnification provision • One can have liability for 3 primary types of actions/omissions: • Accidents; • Negligent acts/omissions; or • Willful or wanton (aka intentional) acts/omissions.

23. Liability levels in the Indemnification provision • By its commonly accepted meaning, “accidental” means: • an event happening without human agency or if happening wholly or partly through human agency, an event which under the circumstances is unusual and unexpected by the person to whom it happens. • Accidents are characterized as unexpected, unusual or unforeseen.

24. Liability levels in the Indemnification provision • Example 2 excludes liability for damages arising from accidents. • This is a limitation of liability. • See slides 27 through 29 from the PowerPoint presentation at the 7/20/11 CCIT meeting, Updates from OIT and CCU, for a description of how to process a contract with a limitation of liability. • Remember – A limitation of liability makes the contract high risk!

25. Liability levels in the Indemnification provision • Generally, “negligence” is: • The failure to use such care as a reasonably prudent and careful person would use under similar circumstances. • This could be taking an action which a person of ordinary prudence would not have done under similar circumstances or failing to do what a person of ordinary prudence would have done under similar circumstances. • Negligence is characterized by inattention or inadvertence.

26. Liability levels in the Indemnification provision • Generally, “intention” means: • The determination to act in a certain way or to do a certain thing. • A person acts “intentionally” if he desires to cause consequences of his act or he believes consequences are substantially certain to result. • Intentional acts are not accidental or involuntary.

27. Liability levels in the Indemnification provision • Intentional acts are the hardest to prove and require proof of a state of mind existing at the time a person commits an offense, which may be shown by acts, circumstances and inferences deducible therefrom.

28. Liability levels in the Indemnification provision • Be aware of what you are accepting when agreeing to a limitation of liability! • An agency must accept the consequences from resulting damages which are excluded from payment by a vendor as a result of a limitation of liability. • Consider the likelihood of such an occurrence and the magnitude of the damages.

29. Questions? Office of the State Controller Central Contracts Unit 633 17th Street, Suite 1500 Denver, Colorado 80202 • RaLea Sluga, Central Contracts Unit Manager (303) 866-2127 ralea.sluga@state.co.us • Clark Bolser, Contract Specialist (303) 866-4759 clark.bolser@state.co.us • Greg Garner, Contracts Administrator (303) 866-2862 greg.garner@state.co.us

30. Problems Emailing CCU • Since the implementation of Google email, if you are having problems emailing members of the CCU, please take the following actions: • Type the first and last name of the person with a period in the middle (Ex. ralea.sluga) • Type “@galias.state.co.us” after the name