CONFLICTS OF INTERESTS IN CONTRACTS
Government Code Section 1090 Et Seq.*
The common law prohibition against "self-dealing" has long been established in California law. (City of Oakland v. California Const. Co. (1940) 15 Cal.2d 573, 576.) The present Government Code section 1090, footnote No. 9 which codifies the prohibition as to contracts, can be traced back to an act passed originally in 1851 (Stats. 1851, ch. 136, § 1, p. 522) and has been characterized as "merely express legislative declarations of the common-law doctrine upon the subject." (Stockton P. & S. Co. v. Wheeler (1924) 68 Cal.App. 592, 597.)
Frequently amended in its details, the concept of the prohibition has remained unchanged. In fact, this office and the courts often refer to very early cases when discussing possible violations of this fundamental precept of conflict of interests law. (See, for example, Berka v. Woodward (1899) 125 Cal. 119.)
In 59 Ops.Cal.Atty.Gen. 604 (1976), this office specifically concluded that the Political Reform Act (hereinafter "PRA" or "act") did not repeal section 1090 et seq. ". . . but that the PRA will control over section 1090 et seq. where the PRA would prohibit a contract otherwise allowable under section 1090 et seq."
Government Code section 1090 basically prohibits the public official from being financially interested in a contract or sale in both his or her public and private capacities. In Thomson v. Call (1985) 38 Cal.3d 633, 649, the California Supreme Court reiterated the long-standing purpose and framework of section 1090. The purpose of section 1090 is to make certain that ". . . every public officer be guided solely by the public interest, rather than by personal interest, when dealing with contracts in an official capacity. Resulting in a substantial forfeiture, this remedy provides public officials with a strong incentive to avoid conflict-of-interest situations scrupulously." (Id. at p. 650.) The Court also stated:
". . . the principal has in fact bargained for the exercise of all the skill, ability and industry of the agent, and he is entitled to demand the exertion of all of this in his own favor.' [Citation.]" (Thomson v. Call, supra, 35 Cal. 3d at p. 648; see also Campagna v. City of Sanger (1996) 42 Cal.App.4th 533, 542.)". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
*Selected statutory materials appear in appendix G.
"It follows from the goals of eliminating temptation, avoiding theappearance of impropriety, and assuring the city of the officer's undivided and uncompromised allegiance that the violation of section 1090 cannot turnon the question of whether actual fraud or dishonesty was involved. Nor is an actual loss to the city or public agency necessary for a section 1090 violation. . . ." (Id. at p. 648; emphasis in original.)". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
"In short, if the interest of a public officer is shown, the contract cannot be sustained by showing that it is fair, just and equitable as to the public entity. Nor does the fact that the forbidden contract would be more advantageous to the public entity than others might be have any bearing upon the question of validity. (Capron v. Hitchcock (1893) 98 Cal. 427.) . . ." (Id. at p. 649.)
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Section 1090 provides that an officer or employee may not make a contract in which he or she is financially interested. Any participation by an officer or an employee in the process by which such a contract is developed, negotiated and executed is a violation of section 1090. If the governmental discussion in question does not involve a contract, or if a contract in which an officer or employee has a financial interest is not ultimately executed, no violation exists. A board member is conclusively presumed to have made any contract executed by the board or an agency under its jurisdiction, even if the board member has disqualified himself or herself from any and all participation in the making of the contract.
The prohibition applies to virtually all state and local officers, employees and multimember bodies, whether elected or appointed, at both the state and local level. Section 1090 does not define when an official is financially interested in a contract. However, the courts have applied the prohibition to include a broad range of interests. The remote interest exception set forth in section 1091 enumerates specific interests which trigger abstention for board members but which do not prevent the board from making a contract. The interests set forth in section 1091.5 are labeled "non-interests" in that, once disclosed, they do not prevent an officer, employee or board member from participating in a contract.
Any contract made in violation of section 1090 is void and cannot be enforced. In addition, an official who commits a violation may be subject to criminal, civil and administrative sanctions.
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Virtually all board members, officers, employees and consultants are public officials
within the meaning of section 1090. (Thomson v. Call, supra, 38 Cal.3d 633,
Board members are conclusively presumed to be involved in the making of all contracts under their board's jurisdiction. (Thomson v. Call, supra, 38 Cal.3d at p. 649.) With respect to all other public officials, it is a question of fact as to whether they were involved in the making of the contract.
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In People v. Sobel, supra, 40 Cal.App.3d at p. 1052, the court outlined the broad reach of section 1090:
"The decisional law, therefore, has not interpreted section 1090 in a hypertechnical manner but holds that an official (or a public employee) may be convicted of violation no matter whether he actually participated personally in the execution of the questioned contract, if it is established that he had the opportunity to, and did, influence execution directly or indirectly to promote his personal interests."
In determining whether a decision involves a contract, one should refer to general contract principles. Two situations which were not readily apparent have been analyzed by this office. In 78 Ops.Cal.Atty.Gen. 230 (1995) this office determined that a development agreement between a city and a developer was a contract for purposes of section 1090. In 75 Ops.Cal.Atty.Gen. 20 (1992), section 1090 was interpreted to prohibit a hospital district from paying the expenses for a board member's spouse to accompany the board member to a conference. The opinion concluded that the board member had a financial interest in the payment of his or her spouse's expenses and that the payment itself constituted a contract.
Participation in a decision to modify, extend or renegotiate a contract constitutes involvement in the making of a contract under section 1090. In City of Imperial Beach v. Bailey (1980) 103 Cal.App.3d 191, the city entered into a contract for construction and operation of a concession stand on a pier. Later, one of the owners was elected to the city council. Under the contract, the provider had an option to renew the contract and seek an adjustment of rates. The court concluded that exercise of this option would require the city council to affirm the contract and negotiate a rate structure. In so doing, the city would be making a contract within the meaning of section 1090.
With respect to the making of a contract, the court in Millbrae Assn. for Residential Survival v. City of Millbrae, supra, 262 Cal.App.2d 222, held that the test is whether the officer or employee participated in the making of the contract in his or her official capacity. The court defined the making of the contract to include preliminary discussions, negotiations, compromises, reasoning, planning, drawing of plans and specifications and solicitation for bids. (See also Stigall v. City of Taft (1962) 58 Cal.2d 565; People v. Sobel, supra, 40 Cal.App.3d at p. 1052.)
These, and similar interpretations, make it clear that the prohibition contained in section 1090 also applies to persons in advisory positions to contracting agencies. (Schaefer v. Berinstein (1956) 140 Cal.App.2d 278; City Council v. McKinley, supra, 80 Cal.App.3d 204.) This is because such individuals can influence the development of a contract during preliminary discussions, negotiations, etc., even though they have no actual power to execute the final contract.
If an official is a member of a board or commission which executes the contract, he or she is conclusively presumed to be involved in the making of his or her agency's contracts. (Thomson v. Call, supra, 38 Cal.3d at pp. 645, 649.) This absolute prohibition applies regardless of whether the contract is found to be fair and equitable (Thomson v. Call, supra, 38 Cal.3d 633; People v. Sobel, supra, 40 Cal.App.3d 1046) or the official abstains from all participation in the decision. (Fraser-Yamor Agency, Inc. v. County of Del Norte (1977) 68 Cal.App.3d 201.)
In I.L. 92-407 the issue concerned whether a water district could enter into an employment contract with a member of the board of trustees on the proviso that the individual would not be paid any compensation until he resigned his position on the board. The board member in question would disqualify himself from any participation in the board's decision. This office concluded that the proposed contract would violate Government Code section 1090 since board members are conclusively presumed to make all contracts made by the district. Once the board member retires, the district may enter into an employment contract with the former board member, so long as no discussions concerning such employment took place between the board member and his or her colleagues or staff prior to the date of retirement. See also I.L. 91-210 in which Government Code section 1090 was interpreted to prohibit a contract between the school district and a member of its governing board to serve as a substitute school teacher. (See also Gov. Code, § 53227, which prohibits an employee of a local agency from simultaneously serving on the legislative body of the local agency; Ed. Code, § 35107(b), which specifically applies the same prohibition to school employees. These code sections were enacted subsequent to Eldridge v. Sierra View Local Hospital Dist. (1990) 224 Cal.App.3d 311 (in which a hospital employee was permitted to hold office as anelected member of the hospital board of directors).
This office has applied Government Code section 1090 to a city airport commission's award of a contract for the construction of a new airport terminal. (77 Ops.Cal.Atty.Gen. 112 (1994).) The design of the terminal also had to be approved by the city arts commission, and all modifications ordered by the arts commission had to be made free of charge to the city. Under these circumstances, this office concluded that the contract was made by both the airport commission and the arts commission.
The question posed was whether the contract could be awarded to an architectural firm where a member of the firm simultaneously was a member of the arts commission. The opinion concluded that a member of the firm who sat as a member of the arts commission would have a financial interest in the contract because each modification ordered by the arts commission would impose costs on the architectural firm which could not be recouped from the city. Accordingly, the opinion concluded that the contract could not be awarded to an architectural firm where a member of the firm simultaneously was a member of the arts commission.
In Stigall v. City of Taft, supra, 58 Cal.2d 565, the court concluded that where a councilmember had been involved in the preliminary stages of the planning and negotiating process, but had resigned from the council prior to its vote on the contract, the councilmember had been involved in the making of the contract. In City Council v. McKinley, supra, 80 Cal.App.3d at p. 212, the court followed this reasoning and stated:
". . . the negotiations, discussions, reasoning, planning, and give and take which go beforehand in the making of a decision to commit oneself must all be deemed to be a part of the making of an agreement in the broad sense [citation] . . . . If the date of final execution were the only time at which a conflict might occur, a city councilman could do all the work negotiating and effecting a final contract which would be available only to himself and then present the matter to the council, resigning his office immediately before the contract was executed. He would reap the benefits of his work without being on the council when the final act was completed. This is not the spirit nor the intent of the law which precludes an officer from involving himself in the making of a contract."
In 66 Ops.Cal.Atty.Gen. 156 (1983), this office concluded that county employees who proposed that their functions be accomplished through private consulting contracts were barred from contracting with the county to perform such services. This office stated:
"We are told that the persons involved, while employees of the county, and as employees of the county, have provided input in the formulation of the contract. . . . By that participation in the give and take that went into such `embodiments' of the contract as the negotiations, discussions, reasoning, planning, and drawing of plans and specifications, the county employees had the opportunity to, and did bring their influence to bear on the ultimate contract itself. While no fraud or dishonesty may have been involved, we are nonetheless satisfied that in so doing they participated, not in their personal capacities but in their official ones as county employees, in the `making of the contract' within the meaning of section 1090. . . ." (Id. at 160.)
(See also 63 Ops.Cal.Atty.Gen. 19 (1980), where county officials were prohibited from bidding on surplus county land because of participation in the land sale process in their official capacity.)
In I.L. 92-1212 the issue was whether a former planning commissioner could contract with the city to perform consulting services in connection with revisions of the general plan. The policy decisions, including budgetary considerations, were discussed by the commission prior to the former member's resignation. This office's informal opinion concluded:
"In short, the former commissioner was an active
participant in the overall city policy decision to `contract-out'
much of the general plan revision. Accordingly, he cannot now
benefit from such participation. (Cf. 66 Ops.Cal.Atty.Gen. 156
(county employees could not propose agreement for consultant
services, then resign, and provide such consulting services).)"
In Santa Clara Valley Water Dist. v. Gross (1988) 200 Cal.App.3d 1363, at 1369 and 1370, the court concluded that participation in a statutorily mandated process in connection with the sale of property through eminent domain did not constitute involvement in the making of a contract. In that case, a water district initiated eminent domain proceedings against a landowner who was a member of the water district's board of directors. In order to recover litigation expenses, Code of Civil Procedure section 1250.410 requires the parties to file a final demand and offer respectively. Believing they were barred from participating in the demand and offer process by section 1090, the parties failed to file the required documents.
The court concluded that participation in the demand and offer process was mandated by statute and did not violate section 1090 and therefore refused to allow litigation expenses. The court stated:
". . . Once a condemnation action has been filed, however, the
property owner and his agency become adversaries, subject to the rules of
court and civil procedure which govern the course of litigation. A
settlement achieved pursuant to these rules can be supervised by the court
and receive the imprimatur of court confirmation. Government Code
section 1090 is directed at dishonest conduct and at `"`conduct that
tempts dishonor'"' (Thomson v. Call (1985) 38 Cal.3d 633, 648 [214
Cal.Rptr. 139, 699 P.2d 316]
); it has no force in the context of a
condemnation action where the sale of property is accomplished by
operation of law and each side is ordinarily represented by counsel.
". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
"`The Legislature [in §1250.410] did not direct the parties to "apprise" each other or "communicate" with each other about an offer or demand.' (City of San Leandro v. Highsmith, supra, 123 Cal.App.3d at p.155.) Rather it directed that each file with the court, and serve upon the other, a formal offer and demand, as an absolute prerequisite to an award of attorney's fees. This procedure is not the equivalent of negotiations between the parties and consequently does not run afoul of section 1090."
When an employee, rather than a board member, is financially interested in a contract, the employee's agency is prohibited from making the contract only if the official was involved in the contract-making process. So long as the employee plays no role whatsoever in the contracting process (either because such participation is outside the scope of the employee's duties or because the employee has disqualified himself or herself from all such participation) the employee's agency is not prohibited from contracting with the employee or the business entity in which the official is interested.
In 80 Ops.Cal.Atty.Gen 41 (1997), firefighters were permitted to sell a product, which they invented in their private capacity, to their fire department so long as they did not participate in the sale in their official capacity. In 63 Ops.Cal.Atty.Gen. 868 (1980), a real estate tax appraiser could purchase property within the county at a tax deeded land sale where he did not participate in or influence the appraisal. (See I.L. 72-143 re disqualification of advisory board member.) (See I.L. 73-146, re state employee; but see Pub. Contract Code, § 10410, prohibiting contracts between state employees and state agencies; see also chapter VII of this pamphlet.)
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For section 1090 to apply, the public official in question must have a financial interest in the contract in question. Although the term "financial interest" is not specifically defined in the statute, an examination of case law and the statutory exceptions to the basic prohibition indicate that the term is to be liberally interpreted. In Thomson v. Call, supra, 38 Cal.3d at p. 645, the court stated that the term financial interest included both direct and indirect interests in a contract. As an example of an indirect interest, the court cited Moody v. Shuffleton (1928) 203 Cal. 100, in which a county supervisor sold his business to his son in return for a promissory note secured by the business. Because the business helped to secure the value of the official's mortgage, a conflict existed when county printing contracts were awarded to the son. The court also stated that an official who was a stockholder in a corporation had an indirect interest in the contracts of the corporation.
Although special statutory exemptions may negate the full effect of the section 1090 prohibition, the following economic relationships generally constitute a financial interest: employee of a contracting party; attorney, agent or broker of a contracting party; supplier of services or goods to a contracting party; landlord or tenant of a contracting party; officer or employee of a nonprofit corporation which is a contracting party.
Prior to 1963, section 1090 applied to all interests, not merely financial ones. However, since most reported cases prior to 1963 involved financial interests, these older cases still represent viable interpretations of the law. Even where these cases do not involve a financial interest, they are still instructive on the issue of whether there is a sufficient connection between the contract and the interest held by the official in order to bring the transaction under the coverage of the prohibition.
In People v. Deysher (1934) 2 Cal.2d 141, 146, the court stated that:
"`However devious and winding the chain may be which connects
the officer with the forbidden contract, if it can be followed and the
connection made, the contract is void.'" (See also People v. Honig (1996)
48 Cal.App.4th 289, 315.)
"The legislation with which we are here concerned seeks to prohibit a situation wherein a man purports to deal at arm's length with himself and any construction which condones such activity is to be avoided. . . ."
Below is a discussion of several decisions and opinions in which public officials in question have possessed the requisite financial interest.
(Complex multi-party transaction) -- In the 1985 California Supreme Court case of Thomson v. Call, supra, 38 Cal.3d 633, the court found that a complex multi-party transaction involving the sale of property from a city councilmember through an intermediary corporation to the city constituted a violation of section 1090. The corporate intermediary obtained the land to convey to the city for use as a park and the corporation was to be issued a use permit for construction of a high rise building on adjacent property. If the corporation failed to obtain the councilmember's property, the corporation was to pay to the city a sum of money with which it could acquire the land through eminent domain. Had there been no discussions between the city and the corporation regarding the property to be acquired for the park prior to the corporation's acquisition of the councilmember's property, the section 1090 prohibition might not have been invoked. However, in Thomson, the court found that the purchase by the corporation of the councilmember's land was part of a pre-arranged agreement with the city. Under these circumstances, the court concluded that the city councilmember was financially interested in the contract that conveyed the land to the city.
(Shareholder insulated from contract payments) -- In Fraser-Yamor Agency, Inc. v. County of Del Norte, supra, 68 Cal.App.3d 201, the court concluded that a public official, who was a shareholder in an insurance brokerage firm, had a financial interest in the firm despite the creation of a financial arrangement which would assure that payments under an insurance contract with a county would not be used to pay the shareholder's compensation or the business expenses of the brokerage firm. The court concluded that the volume of business to the firm affected the value of the interested official's investment in the firm. Thus, to the extent that the firm benefited by increased business, so did the official, despite the fact that the benefit was in some way indirect. footnote No. 10
(Contingent payment) -- In People v. Vallerga, supra, 67 Cal.App.3d 847, the court found that a county employee had a financial interest in a contract where his private consulting contract was contingent upon the execution of the county's contract with the city. The court found that the requisite financial interest existed where the contracting entity is in a position to render actual or potential pecuniary gain to the official by virtue of the award of the contract.
(Primary shareholder in contracting party) -- In People v. Sobel, supra, 40 Cal.App.3d 1046, section 1090 was applied to remedy a classic self-dealing situation. There, a city employee, involved in purchasing books, awarded contracts to a corporation in which, unknown to the city, he and his wife were the primary shareholders.
(Debtor-creditor relationship) -- In People v. Watson (1971) 15 Cal.App.3d 28, the court concluded that a debtor-creditor relationship constituted a financial interest within the meaning of section 1090. (See also Moody v. Shuffleton, supra, 203 Cal. 100.)
In People v. Watson, supra, the defendant was a harbor commissioner whose corporation had loaned money to a corporation which subsequently was attempting to negotiate a lease with the commission. While the loan was still outstanding, defendant voted as a commissioner to approve the proposed lease, thereby violating section 1090.
(Spousal property) -- An official also has an interest in the community and separate property income of his or her spouse. (Nielsen v. Richards (1925) 75 Cal.App. 680.) In 78 Ops.Cal.Atty.Gen. 230 (1995), this office concluded that an city councilmember had a financial interest in a contracting party by virtue of the fact that the councilmember's spouse was a partner in a law firm which represented the contracting party on matters unrelated to the contract. Since the spouse's property is attributed to the official, exemptions which would be applicable if the official possessed the interest directly are also attributed to the spouse's property. (See section I of this Chapter for a discussion of remote interests.)
In 69 Ops.Cal.Atty.Gen. 255 (1986), this office discussed this interest and the application of the exemption in section 1091.5(a)(6) to a school board member and a teacher who were married. (See 65 Ops.Cal.Atty.Gen. 305 (1982), regarding an interested superintendent's participation in labor negotiations; see also section J, subsection (6) of this chapter for further discussion.)
In 69 Ops.Cal.Atty.Gen. 102 (1986), this office discussed participation of a school board member in a collective bargaining agreement with the union which represented the member's spouse who was a tenured teacher.
75 Ops.Cal.Atty.Gen. 20 (1992), was interpreted to prohibit a hospital district from paying the expenses for a board member's spouse to accompany the board member to a conference. The opinion concluded that the board member had a financial interest in the payment of his or her spouse's expenses.
(Public officers to receive commission) -- In 66 Ops.Cal.Atty.Gen. 376 (1983), this office concluded that the terms of the compensation package for the city attorney and other city personnel made them financially interested in all land development contracts to which the city was a party. Compensation for these officials was tied to increases in land value, based on the approval of land developments. The opinion pointed out that in approving land developments, a number of policy issues, aside from land value, must be considered, e.g., the ratio between commercial and residential development, density factors, etc. In basing compensation solely on land values, there was an incentive to consider only land value factors.
(Employee of contract provider) -- In 58 Ops.Cal.Atty.Gen. 670, supra, this office advised that a local mental health director was in violation of section 1090 where he also was employed by the contract provider of mental health services to the county. In his official position, he was required to advise the county board of supervisors regarding contracts for mental health services, and in his private capacity he received a fixed yearly salary from the contract provider. Thus, he was interested in the county's contracts for mental health services in both his public and private capacities.
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The essence of the 1090 prohibition is to prevent self-dealing in the making of public contracts. In determining whether self-dealing has occurred, the timing of events may be crucial. Factors such as the date that the official assumed or resigned from office, the date the contract was executed and the duration of the contract are important and may prove to be dispositive.
Thus, an official who has contracted in his or her private capacity with the government before the official is elected or appointed does not violate the section, and the official may continue in his or her position as such contracting party for the duration of that contract. The official's election or appointment does not void it. (Beaudry v. Valdez (1867) 32 Cal. 269.) When the time comes for the contract to be renegotiated, the official faces a new set of problems.
In the case of a board member, the official must resign from office or eliminate the private interest to avoid the proscription of section 1090. (City of Imperial Beach v. Bailey, supra, 103 Cal.App.3d 191; see also I.L. 92-407, I.L. 75-170.) A new contract between the board member and the city, county or district, which the board member represents, may not be executed. (But see Pub. Contract Code, § 10410, §10411 regarding state employees discussed in chapter VII of this pamphlet.)
However, simply resigning a public post may not cure a conflict in all situations. Timing is essential. In Stigall v. City of Taft, supra, 58 Cal.2d 565, the court ruled that a public official may not resign from office at the last minute in order to take private advantage of a contract in whose formation the official had participated in his or her public capacity. In that case, a city councilmember owned a plumbing business which was awarded a plumbing subcontract in connection with construction of a city civic center. The official had taken part in the planning, preliminary discussions, compromises, drawing of plans and specifications, and solicitation of bids for the civic center project. The court held that this councilmember had participated in the "making" of the contract within the meaning of section 1090, even though the official resigned from office before the contract was finally awarded. (See City Council v. McKinley, supra, 80 Cal.App.3d 204; 66 Cal.Ops.Atty.Gen. 156, supra; I.L. 92-1212, supra.)
Since board members are conclusively presumed to have made all contracts under their jurisdiction, it is possible that a court could conclude that a board member had, as a matter of law, participated in the making of any contract, the planning for which had been commenced during the board member's time in office.
In the case of an employee, a contract may be renegotiated, so long as the employee totally disqualifies himself or herself from any participation, in his or her public capacity, in the making of the contract. In the past, this office has issued oral advice concerning the manner in which a contract consultant, e.g., a city attorney, may renegotiate a contract without violating section 1090. In general, this office advised that such contractors retain another individual to conduct all negotiations. In so doing, the official would minimize the possibility for a misunderstanding to arise concerning whether the contractor's statements were made in the performance of the contractor's public duties or in the course of the contractual negotiations. In the absence of special circumstances, the fact that a contract city attorney's advice to initiate or defend litigation would increase the amount of payments under an existing contract, generally would not violate section 1090.
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Some statutes contain special provisions which alter or eliminate the general rule set forth in section 1090 in a specific situation. For example, in Old Town Dev. Corp. v. Urban Renewal Agency (1967) 249 Cal.App.2d 313, an individual was employed both as a consultant with the redevelopment corporation and as a member of an advisory panel reviewing redevelopment bids and making recommendations to the city regarding them. The court seemed to say that this duality of interests did not, in and of itself, create a conflict of interests vitiating the resulting contract for redevelopment which the city made with the individual's private employer. (Id., at 328-329.)
However, the case involved a special conflict of interests code section (Health & Saf. Code, § 33130) which is directed to government officers and employees involved in redevelopment planning. That section directs such an individual with property or some other interest in an area slated for redevelopment immediately to disclose such interests to his or her governmental agency. He or she may then participate in redevelopment planning regardless of his or her interest. Since the advisor in Old Town disclosed his interest in accordance with section 33130, it was assumed that the city took his advice with that relationship in mind. The special law took precedence over the more general law of section 1090.
Similarly, in 51 Ops.Cal.Atty.Gen. 30 (1968), this office advised that "when the organic act under which a particular commission has been formed contains a very specific conflict of interest rule, neither general statutes nor the common law need be consulted." (Ibid.)
Education Code section 35239 provides that governing board members of school districts with an average daily attendance of 70 or less may contract with their districts under specified circumstances.
For special rules concerning hospitals and health care districts, see section 37625 (municipal hospitals), Health and Safety Code section 1441.5 (county hospitals), and Health and Safety Code section 32111 (health care districts).
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Section 1092 provides that every contract made in violation of section 1090 may be avoided by any party except the official with the conflict of interests. (See § 1092.5 for exception concerning good faith parties involved in the lease, sale or encumbrance of real property.)
Courts often give public policy reasons for this holding (see City of Oakland v. California Const. Co., supra, 15 Cal.2d 573), and note the general rule that a contract made in violation of an express statutory provision is always void. (Stockton P. & S. Co. v. Wheeler, supra, 68 Cal.App. 592; Smith v. Bach (1920) 183 Cal. 259.) In Stockton,the court said, "`where a statute provides a penalty for an act, a contract founded on such act is void, although the statute does not pronounce it void, nor expressly prohibit it.'" (Id., at 601.)
A contract can be rendered void even if made without the participation of the official with the conflicting interest if he or she is a member of the contracting body. (§ 1092; Thomson v. Call, supra, 38 Cal.3d 633.) Contracts made in violation of section 1090 are unenforceable, and no recovery will be afforded the contracting party for services rendered under the contract. (Thomson v. Call, supra, 38 Cal.3d 633; County of Shastav. moody (1928) 90 Cal.App. 519, 523-524.) In Shasta, the court said, "The contracts being void under the express provisions of the statute, and also being against public policy, there is no ground for any equitable considerations, presumptions or estoppels." (Id., at 523; see also County of San Diego v. Cal. Water ETC. Co. (1947) 30 Cal.2d 817,830.)
In addition to the contract being void under section 1092, section 1095 provides that payment of any evidence of indebtedness against the state, city, or county which has been purchased, sold, received, or transferred contrary to section 1090 or section 1093 is specifically disallowed. Any entitlement to payment pursuant to a contract, made in violation of section 1090, is effectively rendered worthless by this section.
In Thomson v. Call, supra, 38 Cal.3d 633, the court stated:
"Clearly, no recovery could be had for goods delivered or services rendered to the city or public agency pursuant to a contract violative of section 1090 or similar conflict-of-interest statutes. (Moody v. Shuffleton, supra, 203 Cal. 100; Berka v. Woodward, supra, 125 Cal. at pp. 121, 123-124; Domingos v. Supervisors of Sacramento Co. (1877) 51 Cal. 608; Salada Beach ETC. Dist. v. Anderson (1942) 50 Cal.App.2d 306, 310 [123 P.2d 86]; Miller v. City of Martinez, supra, 28 Cal.App.2d at pp. 370-371; Hobbs, Wall & Co. v. Moran, supra, 109 Cal.App. at p. 320; County of Shasta v. Moody, supra, 90 Cal.App. at pp. 523-525.) Moreover, the city or agency is entitled to recover any consideration which it has paid, without restoring the benefits received under the contract. (Berka, supra, at pp. 123-124; Miller, supra, at p. 370; County of Shasta , supra, at pp. 523-524.) . . .". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
"Mitigating factors--such as Call's disclosure of his interest in the transaction, and the absence of fraud--cannot shield Call from liability. Moreover, the trial court's remedy--allowing the city to keep the land and imposing a money judgment against the Calls--is consistent with California law and with the primary policy concern that every public officer be guided solely by the public interest, rather than by personal interest, when dealing with contracts in an official capacity." (Id. at 646-647, 650.)
In Campagna v. City of Sanger, supra, 42 Cal.App.4th 533, a city attorney was required to forfeit a finder's fee which he received in connection with a contract between the city and a private law firm.
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When an official claims a remote interest, the board or agency may take action on the sale, purchase, or other contract involved if it acts in good faith and if the vote to authorize, approve, or ratify is sufficient without counting the vote or votes of those with remote interests. The provision which requires the action to be taken, without counting the interested official's vote, has been interpreted by this office to require complete disqualification of the interested officials. (78 Ops.Cal.Atty.Gen. 230, 237 (1995); 67 Ops.Cal.Atty.Gen. 369, 377, fn. 8 (1984); 65 Ops.Cal.Atty.Gen. 305, supra.) If an official with a remote interest in a contract fails to disqualify himself or herself or if the official influences or attempts to influence a colleague's vote on the matter, the official may not utilize the remote interest exception. (§ 1091(c).)
The term "remote" has a special statutory meaning in the context of section 1090 et seq. When the terms "remote" or "speculative" are used in other contexts, they are general terms concerning the potentiality of whether certain effects will occur. Use of these terms in the general context should not be confused with the term "remote" in the specific context of section 1090.
As used in this section, the concept of "remote interests" is not vague or general; rather "remote interests" are carefully defined in the statutes. Set forth below is a brief description of the remote interest exceptions.
An officer or employee of a nonprofit corporation has only a remote interest in the contracts, purchases, and sales of that corporation. (§ 1091(b)(1).) By adopting this exception, the Legislature made it clear that corporate officers had a financial interest in their corporations even if the corporations were nonprofit. This exception indicates that an official can legally, under section 1090, have a financial interest even though the official does not have a personal interest in the contract.
See also § 1091.5(a)(8) concerning "noncompensated officers" of specified tax exempt corporations.)
An employee or agent of a private contracting party may have only a remote interest in its contracts when (1) the private party has 10 or more other employees and (2) the official/employee has been an employee or agent of that party for at least three years. Some latitude is allowed in computing the three-year period, to permit an employee of a business, which has gone through a reorganization or some other metamorphosis, to count time employed before the change, as long as the "real or ultimate ownership of the contracting party" remains substantially unchanged. "Real or ultimate ownership" is further defined to include "stockholders, bondholders, partners, or other persons holding an interest. . . . " (§ 1091(b)(2).) (See Fraser-Yamor Agency, Inc. v. County of Del Norte, supra, 68 Cal.App.3d 201, for a discussion of agent relationship.)
Section 1091(b)(3) provides that an official who is an employee or agent of a contracting party has a remote interest in the contract if all of the enumerated factors set forth in the subsection are present. First, the official must be an officer in the local agency located in a county with a population of 400,000 or less. Second, the contract must be competitively bid, and the contracting party must be the lowest bidder. Third, the official must not hold a primary management position with the contracting party, the official must not be an officer or director of the contracting party, and the official must not hold any ownership interest in the contracting party. In addition, the official may not have directly participated in formulating the bid of the contracting party. Fourth, the contracting party must have at least 10 other employees.
A parent has only a remote interest in the earnings of his or her minor child for personal services. (§ 1091(b)(4).)
A landlord or tenant of a contracting party has a remote interest in the contracts of that party. (§ 1091(b)(5).) Formerly the landlord/tenant relationship had been held to create an interest within the meaning of section 1090. (People v. Darby (1952) 114 Cal.App.2d 412.)
Under specified conditions set forth in § 1091(b)(6), the remote interest exception may apply to:
For the remote interest exception to apply, two conditions must be present. First, these individuals may not receive any remuneration, consideration, or a commission as a result of the contract. Second, these individuals must have an ownership interest of 10 percent or more in the law practice or firm, stock brokerage firm, insurance firm, or real estate firm.
In 78 Ops.Cal.Atty.Gen. 230 (1995), a city councilmember was found to have an interest in the client of a law firm in which his spouse was a partner. However, since the representation was on matters unrelated to the contract, the remote interest exception applied to the spouse's interest as attributed to the official. This opinion was issued prior to the addition of the 10 per cent ownership provision in § 1091(b)(6).
An official who enters into a contract or agreement under the California Land Conservation Act of 1965 (The Williamson Act) is deemed to have only a remote interest in that contract for the purposes of section 1090. (§ 1091(b)(9).) This allows land-owning supervisors to enter into such contracts with their own counties in accordance with the purpose of the Land Conservation Act. But note I.L. 73-197 in which this office advised that county supervisors who had previously made land conservation contracts were ineligible to vote on a motion to abolish future use of the Land Conservation Act in their county because of the common law prohibition against conflicts of interests.
An official who is a director, or holds a 10 percent interest or greater in a bank or savings and loan has only a remote interest in the contracts of parties who are depositors or borrowers at the official's institution. (§ 1091(b)(10).) (For officers, employees and persons holding less than a 10 per cent interest, see 1091.5(a)(11); for competitively bid banking contracts, see 1091.5(b).)
It should be noted here that a private loan can, however, create an interest which is not remote. In People v. Watson, supra, 15 Cal.App.3d 28, the court determined that a loan by a corporation, controlled by a public official, to another corporation created a financial interest for the official in the contract activities of the second corporation.
Subsection (b)(12) provides a limited exception from the 1090 prohibition in connection with housing assistance contracts. This exception provides that an elected officer has a remote interest in a housing assistance contract, which is entered into pursuant to section 8 of the United States Housing Act of 1937, provided that the officer was elected after November 1, 1986, and the contract was in existence prior to the officer's assumption of office. The exemption for housing assistance contracts extends only to the renewal or extension of an existing tenant's contract or to new tenants, where the unit was previously under a housing assistance contract and the rental vacancy rate for the jurisdiction is less than five percent.
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Section 1091.5 delineates situations which might technically create conflicts of interests under section 1090, but which the Legislature has decided as a matter of policy are exempt from its operation. Unlike the "remote interest" exception, the interest which falls into one of these categories is treated as no interest at all, and holding such an interest does not require abstention and generally does not require disclosure.
The interests which fall into the section 1091.5 exception are as follows:
An official has a noninterest in a business corporation, in which he or she owns less than three percent of its shares, as long as the official's total annual income from dividends and stock dividends from the corporation amounts to less than five percent of his or her income and any other income he or she receives from the corporation also amounts to less than five percent. In other words, it is a three-part test, and the official who fails any of the three parts cannot qualify for the noninterest exemption with regard to that corporation. (§ 1091.5(a)(1).)
An official has a noninterest in reimbursement for his or her actual and necessary expenses incurred in the performance of his or her official duties. (§ 1091.5(a)(2).)
An official has a noninterest in the receipt of public services provided by his or her agency or board as long as he or she receives them in the same manner as if he or she were not a public official. (§ 1091.5(a)(3).)
Public officials who are landlords or tenants of the local, state, or federal government or any arm thereof, have a noninterest in the government entities contracts unless the subject matter of the contract is the very land regarding which he or she is either the landlord or tenant. In the latter case, he or she has a remote interest rather than a noninterest, and is subject to the provisions of section 1091. (§ 1091.5(a)(4).)
A tenant in public housing, created pursuant to the provisions of the Health and Safety Code, has a noninterest in agreements regarding that housing if he or she is serving as a member of the board of commissioners overseeing it. This provision was passed in response to the situation illustrated in I.L. 70-64, in which a public housing tenant who was also a member of the Housing Authority Commission was advised he or she would have a remote interest in most of the regulatory activities of the commission and would have to abstain from participating in many decisions pursuant to section 1091, thus making his or her appointment almost a nullity. The subsequent passage of this subsection shows clear legislative intent that public housing tenants are to be allowed to serve as housing authority commissioners. The exemption was extended further in 1975 to a tenant serving on a community development commission. (§ 1091.5(a)(5).)
A noninterest exists when both spouses in a family are public officials. One spouse has a noninterest in the other's office holding if it has existed for at least one year prior to his or her election or appointment to office. (§ 1091.5(a)(6).)
Pursuant to section 1091.5(a)(6), this office concluded in 69 Ops.Cal.Atty.Gen. 255, supra, that the spouse of a school board member could have his or her teaching contract annually renewed so long as the spouse was not promoted or appointed to a new position.
In 69 Ops.Cal.Atty.Gen. 102, supra, this office concluded that the "rule of necessity" permitted a school district to contract on an annual basis with a tenured teacher who was the spouse of a member of the school district board, until the board member could qualify for an exemption under section 1091.5(a)(6). Pending qualification, this office concluded that the board member was prohibited from participating in the collective bargaining agreement. The "rule of necessity" might not have been applicable had the spouse not been a tenured teacher who, barring special circumstances, was required to be offered a new contract annually.
In 65 Ops.Cal.Atty.Gen. 305, supra, this office reached a similar conclusion with respect to a superintendent who was interested in his or her spouse's school employment. However, because the superintendent is an individual officer rather than a member of a board, the rule of necessity permits both the contract to be made and the superintendent's participation in its making.
Although there are no cases or opinions concerning application of this section, this office believes that the reference to "members" refers to persons who constitute the membership of an organization rather than to persons who serve as members of the board of directors of such organizations. (See Legislative History, Stats. 1977, ch. 706 (Sen. Bill No. 711).) For the exception to apply, the person, who is a member of the organization, may not simultaneously hold a salaried position with the organization.
(See § 1091(b)(1) and § 1091.5(a)(8) concerning "officers" as opposed to "unsalaried members" of nonprofit corporations.)
A noninterest exists when a public official is a noncompensated officer of a nonprofit, tax exempt corporation which, as a primary purpose, supports the functions of a public body or board, or to which the public body has a legal obligation to give particular consideration. Such interest, if any, must be noted in the official records of the public body. An officer is noncompensated even though he or she receives reimbursement for travel or other actual expenses incurred in performing the duties of his or her office. (§ 1091.5(a)(8).) For example, a nonprofit symphony association may be organized to support the publicly operated symphony hall and symphony orchestra.
(Compare with § 1091(b)(1) concerning "officers of nonprofit corporations" and § 1091.5(a)(7) concerning "unsalaried members of nonprofit corporations.")
Subdivision (a)(9) of section 1091.5 deals expressly with contracts between two public agencies. It provides that an officer or employee is not interested in a contract if his or her interest is:
"That of compensation for employment with a governmental agency, other than the governmental agency that employs the officer or employee, provided that the interest is disclosed to the body or board at the time of consideration of the contract, and provided further that the interest is noted in its official record."
The scope of subdivision (a)(9) is not readily apparent. Here the legislative history of the 1991 amendment of section 1091.5 (Stats. 1991, ch. 382, § 1), which added subdivision (a)(9), is helpful in construing the amendment's language. In the report of the Assembly Committee on Elections, Reapportionment and Constitutional Amendments dated May 9, 1991, the background information supplied for the proposed legislation was as follows:
"According to the author, government employees who also serve as local elected officials are often prohibited from voting on a broad range of issues, rather than just those bills that affect their employers. For example, a peace officer who is also an elected official may be prohibited from voting on contracts dealing with any city agency, rather than only those contracts affecting the police department."
This background information was also contained in the report of the Senate Committee on Governmental Organization for its hearing on June 25, 1991, and in the report of the Senate Rules Committee dated July 17, 1991.
If the contract does involve the employee's particular unit, see 78 Ops.Cal.Atty.Gen. 362, supra, for a discussion of whether the contract may be made without the participation of the interested individual.
Under specified conditions set forth in § 1091.5(a)(10), the noninterest exception may apply to:
For the noninterest exception to apply, two conditions must be present. First, these individuals may not receive any remuneration, consideration, or a commission as a result of the contract. Second, these individuals must have an ownership interest of less than 10 percent in the law practice or firm, stock brokerage firm, insurance firm, or real estate firm.
A government official who also is an officer or employee, or who owns less than 10 percent of a bank or savings and loan, has a noninterest in the contracts of parties who are depositors or borrowers at the official's institution. (§ 1091.5(a)(11).) A narrower exemption relating only to competitively bid contracts is set forth in 1091.5(b), and appears to be subsumed within the exemption added to 1091.5 in subdivision (a)(11). (For directors or persons holding more than a 10 per cent interest, see 1091(b)(10).)
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Section 1091.1 provides a special exemption from the prohibition of section 1090 for public officials who must deal with state and local government entities regarding subdivision of land which they own. This section provides that such an official may subdivide lands which he or she owns, or has an interest in, without violating section 1090. He or she must, however, fully disclose the nature of his or her interest in such lands to the body which has jurisdiction over his or her subdivision (§ 1091.1(a)) and abstain from voting on any matter concerning it. (§ 1091.1(b).)
Section 1091.2 provides that section 1090 does not apply to any contract or grant made by private industry councils established pursuant to the Unemployment Insurance Code, unless both of the following conditions are met:
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This office and the courts have applied a limited rule of necessity to the application of section 1090. In 69 Ops.Cal.Atty.Gen. 102, 109, supra, this office described the rule of necessity as follows:
"`With respect to contractual conflicts of interest the "rule of necessity" may be said to have two facets. The first, . . . to permit a governmental agency to acquire an essential supply or service despite a conflict of interest. The contracting officer, or a public board upon which he serves, would be the sole source of supply of such essential supply or service, and also would be the only official or board permitted by law to execute the contract. Public policy would authorize the contract despite this conflict of interest. [Citation.] The second facet of the doctrine, . . . [citation] arises in nonprocurement situations and permits a public officer to carry out the essential duties of his office despite a conflict of interest where he is the only one who may legally act. It ensures that essential governmental functions are performed even where a conflict of interest exists." (Fn. omitted.)
The first facet of the rule of necessity concerns situations where a board must contract for essential services and no source other than that which triggers the conflict is available. In 4 Ops.Cal.Atty.Gen. 264 (1944), a city was advised that it could obtain nighttime service from a service station owned by a member of the city council, where the town was isolated and his station was the only one open. This office cautioned that "An event that can be reasonably anticipated, such as the repeated failure of a battery or the necessity for periodic service, would not be considered an emergency" so as to give rise to the rule of necessity. Other arrangements would be required in such cases. (But see Gov. Code, § 29708, which flatly prohibits a county officer or employee from presenting a claim to the county for other than his or her official salary.)
The second facet of the rule of necessity focuses on the performance of official duties rather than upon the procurement of goods and services. In 69 Ops.Cal.Atty.Gen. 102, supra, this office applied the rule of necessity to permit a school board to enter into a memorandum of understanding with a teachers' association despite the fact that a member of the school district board was married to a tenured teacher. A similar conclusion was reached in 65 Ops.Cal.Atty.Gen. 305, supra, where this office concluded that the Superintendent of Education could enter into a memorandum of understanding with school employees, despite the fact that he was married to a permanent civil service school employee. Both opinions concluded that the labor agreements with the teachers' association were necessary and that there was nothing in the history of section 1090 that suggested a person should be required to resign his or her employment because of marital status. Accordingly, to the extent that the noninterest exception for public official spouses set forth in section 1091.5(a)(6) was not applicable, this office advised that the rule of necessity would permit issuance of a memorandum of understanding.
When the rule of necessity is applied to a member of a multimember board, as opposed to a single official or employee, this office has concluded that the board member must abstain from any participation in the decision. In other words, the effect of the rule of necessity is to permit the board with a substantially interested member to nevertheless make a contract, but the board member is still prohibited from participating in its making. In the case of a single official or employee, application of the rule of necessity permits the official or employee to participate in the making of the contract. (69Ops.Cal.Atty.Gen. 102, supra, at p. 112, school board trustee abstention; 67Ops.Cal.Atty.Gen. 369, supra, at p. 378, board member abstention; 65Ops.Cal.Atty.Gen. 305, supra, at p. 310, superintendent of schools permitted to participate.)
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Any officer or person, who is found guilty of willfully violating any of the provisions of section 1090 et seq., is punishable by a fine of not more than $1,000 or imprisonment in state prison. (§ 1097.) For an official to act "willfully," his or her actions concerning the contract must be purposeful and with knowledge of his or her financial interest in the contract. (People v. Honig, supra, 48 Cal.App.4th 289, 334-339.) The statute of limitations for 1090 prosecutions is three years after discovery of the violation. (Id., at p.304, fn. 1; Penal Code, §§ 801 and 803.) Additionally, such an individual is forever disqualified from holding any office in this state. (§ 1097.) When a state or local government agency is informed by affidavit that a board member or employee has violated section 1090, the agency may withhold payment of funds under the contract pending adjudication of the violation. (§ 1096.)
One example of a conviction under section 1097 is People v. Sobel, supra, 40 Cal.App.3d 1046. In that case, a deputy purchasing agent for a county had a financial interest in a book seller which sold books to the county pursuant to contracts made by that agent. His conviction was based on the prosecution having established that he had the opportunity to and did influence execution of purchase contracts, directly or indirectly, to promote his personal interests.
For a discussion of other consequences which may result from a violation of section 1090, see section H (contract made in violation of § 1090 is void and unenforceable) of this chapter.
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