No Indemnification By Texas Municipalities
Municipalities in Texas regularly find themselves negotiating one agreement or another with a variety of vendors for a variety of services. Each agreement is different as it is tailored to meet the needs of that specific service, but there are certain provisions that will be present in every agreement a municipality enters into. One of these regularly used provisions is called the “No Indemnification by City” provision and is constantly questioned by vendors and their attorneys. The common language found in this provision states:
“The Parties expressly acknowledge that the City’s authority to indemnify and hold harmless any third party is governed by Article XI, Section 7 of the Texas Constitution, and any provision that purports to require indemnification by the City is invalid. Nothing in this Agreement requires that the City incur debt, assess or collect funds, or create a sinking fund.”
Strangely enough, the legality of this provision is regularly questioned by a vendor and their legal counsel. However, a simple explanation on the part of the City Attorney is usually enough to satisfy opposing counsel allowing the execution of the agreement to move forward.
The state law that a City Attorney turns to when confronted with questions concerning the legality of the indemnity provision is Article XI, Section 7 of the Texas Constitution, which provides, in pertinent part:
“No debt for any purpose shall ever be incurred in any manner by any city or county unless provision is made, at the time of creating the same, for levying and collecting a sufficient tax to pay the interest thereon and provide at least two per cent (2%) as a sinking fund…”
What this section of the Texas Constitution is saying is that a municipality’s agreement to indemnify another party for any damages that may arise from that party’s acts in relation to an agreement would in turn create a debt on behalf of the municipality. A municipality in Texas cannot incur such a debt unless the municipality makes arrangements to levy and collect a tax sufficient to pay the interest on that debt, and then create a sinking fund of at least two percent. According to the case of McNeill v. City of Waco, the term debt as used here means, “any pecuniary obligation imposed by contract, except such as are at the date of the contract within the lawful and reasonable contemplation of the parties to be satisfied out of the current revenues for the year, or out of some fund then within the immediate control of the corporation.” McNeill v. City of Waco, 89 Tex. 83, 33 S.W. 322 (1895). Additionally, a sinking fund is defined as a sum periodically put aside from the income of a government or a business for the purpose of paying off a debt.
More often than not a simple explanation citing the above information is all that is needed to satisfy the hesitation on the part of a vendor or their legal counsel. However, that is not always the case. In certain instances, a vendor may balk at such a provision and demand that the City provide indemnification under the agreement. If your municipality ever finds itself in such a quandary, the decision needs to be made as to how important the agreement with that particular vendor is. A lot of times, the municipality can just go out and find another provider for the same service who is willing to enter into the agreement without indemnification by the City. However, there are rare instances where a municipality may want to appease a vendor and provide for indemnification in the agreement. In these rare instances, all the City needs to do is follow the language in Article XI, Section 7 by assessing and collecting taxes then creating a sinking fund. Lastly, it is important to note that an indemnity agreement that is negotiated in violation of state law is void, but an invalid indemnity clause in an otherwise enforceable contract will not ordinarily invalidate the remainder of the contract.
Please do not rely on this article as legal advice. We can tell you what the law is, but until we know the facts of your given situation, we cannot provide legal guidance. This website is for informational purposes and not for the purposes of providing legal advice. Information about our municipal law practice can be found here.