Request By:
Thomas A. Nanney, Esq.
City Attorney, City of Fulton
313 Main Street
Fulton, Kentucky 42041
Opinion
Opinion By: Steven L. Beshear, Attorney General; By: Thomas R. Emerson, Assistant Attorney General
This is in reply to your letter questioning the validity of a proposed contract between the City of Fulton, Kentucky, and the United States of America, United States Army Corps of Engineers. The contract concerns the expansion and improvement of the Harris Fork Creek which runs through the city.
Attorneys for the Corps of Engineers have advised the city that certain provisions of the proposed contract have caused problems in other states. They refer specifically to subsections (b) and (d) of numerical paragraph one, providing that the city shall hold and save the United States free from damages due to the construction and subsequent maintenance of the project, except damages due to the fault or negligence of the United States or its contractors, and requiring the city to maintain and operate the project works after completion without cost to the United States in accordance with regulations prescribed by the Secretary of the Army. Attorneys for the Corps of Engineers concede that objections to those two subsections of paragraph one of the proposed contract have involved prohibitions against cities entering into indemnity agreements, contracting debts of indeterminate amounts for indefinite periods of time, entering into agreements which irrevocably bind future governing bodies and waiving sovereign immunity.
The Corps of Engineers wants the city of Fulton to provide a legal opinion as to whether the provisions of the proposed contract present a problem under Kentucky law. It was suggested that the city consult this office for guidance in the matter.
In OAG 78-452, copy enclosed, we dealt with a watershed project in a city. The United States Soil Conservation Service developed a watershed project which included floodwater retarding structures and a riprap channel. The operation and maintenance of the completed project was to be performed by the city at an estimated annual cost of $1240 which was to come from the city's general fund. The Soil Conservation Service requested that the city enter into a long-term operation and maintenance agreement. Such a proposed agreement involved a question of whether the present city legislative body could bind its successors for the operation and maintenance of the project and whether such an agreement would violate sections 157 and 158 of the Kentucky Constitution prohibiting a city from obligating itself over a period of years and thus exceeding the anticipated revenue for the initial year of the agreement.
As to the power of a city council to enter into a contract that will extend beyond the term of its members, we pointed out in OAG 78-452 that a distinction is to be made as to whether the proposed contract is legislative or governmental in nature or whether it is of a business or proprietary nature. In 56 Am.Jur.2d, Municipal Corporations, Etc., § 154, the following appears:
". . . Thus, where the contract involved relates to governmental or legislative functions of the council, or involves a matter of discretion to be exercised by the council unless the statute conferring power to contract clearly authorizes the council to make a contract extending beyond its own term, no power of the council so to do exists, since the power conferred upon municipal councils to exercise legislative or governmental functions is conferred to be exercised as often as may be found needful or politic, and the council presently holding such powers is vested with no discretion to circumscribe or limit or diminish their efficiency, but must transmit them unimpaired to their successors. But in the exercise of the business powers of a municipal corporation, the municipality and its officers are controlled by no such rule, and they may lawfully exercise these powers in the same way, and in their exercise the municipality will be governed by the same rules which control a private individual or a business corporation under like circumstances. . . ."
In McQuillin Mun.Corp. (3rd Ed.), Vol. 10, § 29.101, the following appears:
". . . Respecting the binding effect of contracts extending beyond the term of officers acting for the municipality, there exists a clear distinction in the judicial decisions between governmental and business or proprietary powers. With respect to the former, their exercise is so limited that no action taken by the governmental body is binding upon its successors, whereas the latter is not subject to such limitation, and may be exercised in a way that will be binding upon the municipality after the board exercising the power shall have ceased to exist. . . ."
As to the application of the constitutional provisions we again refer to OAG 78-452 where we said:
"Next concerning the possible constitutional objection, the courts have declared that the entire amount of the obligation for whatever number of years must be considered in the initial year in determining the total indebtedness that the city will be obligated for as opposed to its anticipated revenue for said year. Thus, if the total indebtedness exceeds the anticipated revenue in the initial year, § 157 would be violated. See Board of Education of Christian County v. Board of Trustees of Hopkinsville Public Schools, 154 Ky. 309, 157 S.W. 697 (1913). . . ."
In OAG 77-322, copy enclosed, which dealt with a proposed agreement between a county and the County Soil Conservation Service, whereby the county would maintain a flood control structure, we said that if the maintenance agreement involved expenditures of county funds over a number of years and a financial obligation beyond a fiscal year's budgeting, Section 157 of the Kentucky Constitution would be violated. The requirement of "pay-as-you-go" expressed in the Constitution means that obligations cannot be created to be paid out of revenues to be collected after the termination of the fiscal year. See also OAG 77-549, copy enclosed, involving a watershed plan agreement among various governmental entities, including a county government and the United States Soil Conservation Service.
In connection with the clause of the proposed contract that states that the city will hold and save the United States free from damages due to the construction and subsequent maintenance of the project, except damages due to the fault or negligence of the United States or its contractors, the federal government acknowledges that such a provision has been troublesome for many cities for a variety of reasons. While we have already discussed the prohibitions against entering into an agreement which irrevocably binds future governing bodies and contracting debts of indeterminate amounts for indefinite periods of time, we will now attempt to address the issues of indemnity agreements and municipal sovereign immunity.
In New York Central Railroad Co. v. General Motors Corp., 182 F.Supp. 273, 290-291 (N.D. Ohio, E.D. 1960), the Court said:
"'Indemnify against liability': The distinction between an agreement to 'indemnify against liability' and an agreement to 'idemnify against loss' is that in the former a breach of contract occurs the moment liability is imposed on the party to be indemnified and a cause of action at once arises, while in the latter there is no breach of contract on which action can be maintained until obligee has sustained loss. In re National Surety Co., Sup., 29 N.Y.S.2d 1011, 1016, 1017.
'Hold harmless' means to assume all expenses incident to the defense of any claim and to fully compensate an indemnitee for all loss or expense, undiminished by the costs of defending a claim or litigation."
In Standard Accident Insurance Company v. City of Pineville, 339 F.2d 169, 170 (6th Cir. 1964), the Court said:
". . . It is Kentucky law that although the city might be liable to travelers for failure to warn of a dangerous condition in its highways created by the negligence of another, it has a right to recover against the one who created the condition. E.g., Board of Councilmen v. Vanarsdall, 148 Ky. 507, 147 S.W. (1912); Blocker v. City of Owensboro, 129 Ky. 75, 82, 110 S.W. 369, 371 (1908); Western Union Telegraph Co. v. City of Louisville, 160 Ky. 499, 169 S.W. 994 (1914). . . ."
In 17 Am.Jur.2d, Contracts, § 188, the following appears:
"Generally, parties may agree to waive contract, statutory, or other rights unless a question of public policy is involved.
It is not the rule that any agreement by any person which assumes to place another person at the mercy of his own faulty conduct is void as against public policy. However, the law does not look with favor on provisions which relieve one from liability for his own fault or wrong. It is a well-settled general doctrine that the law will not sustain a covenant of immunity which protects against fraud or relieves one of a duty imposed by law for the public benefit. It has been held that clauses limiting liability are given rigid scrutiny by the courts, and will not be enforced unless the limitation is fairly and honestly negotiated and understandingly entered into; this is especially true where the contract involves services of a public or semipublic nature, but has also been applied in some controversies involving private contracts, particularly where, as in the case of a public or semipublic contract the private contract is the only means one of the parties has of filling an important need. . . ."
While municipalities in Kentucky are no longer immune from tort liability and the ancient doctrine of municipal sovereign immunity from tort has been abandoned, there are limitations on municipal liability. Where a city's act affects all members of the general public alike, it would be unreasonable to apply to it the broad principles of tort liability, City of Louisville v. Louisville Seed Company, Ky., 433 S.W.2d 638 (1968). Where a city undertakes measures for the protection of its citizens, it is not held to the same standards of performance that would be required of a professional organization. When a city is engaged in a municipal function affecting all members of the general public, the city owes no duty to particular individuals unless it deals with them on an individual basis, Frankfort Variety, Inc. v. City of Frankfort, Ky., 552 S.W.2d 653 (1977). See also Grogan v. Commonwealth, Ky., 577 S.W.2d 4 (1979) and Com., Dept. of Banking & Securities v. Brown, Ky., 605 S.W.2d 497 (1980).
Public funds are to be expended for public purposes and we have doubts as to the validity of a city agreeing to assume a financial obligation for which it may not be legally liable or relinquishing a right to recover funds to which it is legally entitled. See also OAG 81-418, copy enclosed.
Since the water improvement and expansion project involved in your factual situation appears to involve, as did the watershed development project dealt with in OAG 78-452, the exercise of governmental or legislative powers or the exercise of discretion, as opposed to the exercise of business or proprietary powers, the city legislative body may not enter into a contract to obligate itself to operate and maintain the project beyond the term of its members. In addition, the constitutional debt limit question could be involved where the agreement extends for many years as a city cannot become indebted in an amount exceeding in any year the income and revenue provided for such year. Perhaps the proposed agreement could be made renewable at the option of successive legislative bodies, rather than utilizing a long-term agreement, which would avoid the problems associated with a council binding its successors and creating an indebtedness in an amount exceeding in any year the income and revenue provided for that year.
Even if the city can satisfactorily resolve the matters of a contract extending beyond the term of the members of the legislative body and the constitutional debt limit requirements, the use of the so-called "hold harmless" provision in the proposed contract presents additional problems. We have serious doubts as to whether a city can agree to such a provision in this situation as the city may be agreeing to expend public funds in a situation where it has no liability and it may be relinquishing a right to recover funds from the entity who is responsible for creating the condition resulting in liability.