Voiding Contracts, Transactions, and Permits Where There Is an Ethics Violation

In my previous blog post, the issue arose of voiding a planning and zoning commission's approval of a permit because one of the commission members had a conflict of interest. Connecticut law automatically invalidates the commission action, without any individual or body having to act. But this is unusual. In fact, most jurisdictions do not expressly provide for the avoidance of permits, contracts, or other transactions.

City Ethics Model Code §106, like the Connecticut law, does provide for automatic avoidance of a contract or other transaction resulting from an ethics violation (a violation based on a finding by the local ethics commission). But it does allow the local legislative body to ratify the contract or business transaction, effectively waiving the avoidance, as it long it's done in public and with notice. Here's the language:

Any contract, agreement, permit, or other transaction entered into by or with the city which results in or from a violation of any provision of sections 100 or 101 of this code is void, without further action taken, unless ratified by the city's legislative body in an open session held after applicable public notice. Such ratification does not affect the imposition of any penalties pursuant to this code or any other provision of law.

It is too bad that most jurisdictions do not expressly make avoidance available as a penalty, because avoidance is the best way to ensure that those doing business with local governments have an interest in protecting the public from officials' conflicting interests. No one can better police government ethics than those who have a lot to lose from others' unethical conduct. If those doing business have nothing to lose, there is no incentive to police or even cooperate with the government with respect to conflicts of interest.

Here are some ways in which ethics laws do expressly include avoidance as a penalty. Some, like Connecticut, make certain transactions automatically void when certain ethics violations occur. Houston's charter (Art. VII, § 4), for example, automatically voids any contract where a council member had a conflict of interest.

New York State's General Municipal Law Article 18 §804 is similar to Connecticut's law but, like Houston, limits its applicability to contracts:  "Any contract willfully entered into by or with a municipality in which there is an interest prohibited by this article shall be null, void and wholly unenforceable."

But allowing contracts to be voided by an individual or body is a more common approach. Windsor, CO's ethics code (Art. V of its Charter) gives the town attorney the authority to determine that it is in the public interest not to void a contract and, instead, sue the conflicted official for up to double damages.

Any contract that was the subject of any official action of the Town in which there was or is an interest prohibited by the Code of Ethics shall be voidable at the option of the Town, if legally permitted. Where the Town Attorney determines that the public interest may best be served by not voiding such contract, it may be enforced and an action or proceeding may be brought against any elected or appointed official, public body member, or employee in violation of the provisions of the Code of Ethics for damages in an amount not to exceed twice the damages suffered by the Town or twice the profit or gain realized by the elected or appointed official, public body member, or employee, whichever is greater.

More often, the local legislative body is given the job of determining whether or not to void the contract, as in the new Deerfield Beach, FL ethics code. But note here that the legislative body can void the contract only if there is a failure to disclose, not if there is any other sort of ethics violation.

Failure to disclose in compliance with this Section shall be a violation of this Ethics Code and shall be grounds for the City Commission to void or rescind any approval or contract.

There are some jurisdictions that actually give the ethics commission authority to void contracts and other government actions where there has been an ethics violation. This is true for the Louisiana board of ethics, which has jurisdiction over local government ethics. Here is the relevant section from the state's Code of Governmental Ethics, which applies not only to contracts, but also to permits and licenses. The board must consider whether the violation influenced the making of the contract or the issuing of the permit or license, and limit its cancellation so that innocent third parties are not adversely affected. This last consideration makes avoidance highly unlikely, except where it can be shown that all parties to a transaction knew about the ethics violation. Even in this case, the decision can be appealed to a court.

§1152. Rescission of action of a governmental entity
A. Subject to the limitations hereinafter set forth, the board or panel may cancel or rescind any contract of or permit or license issued by a governmental entity without liability to the governmental entity when:
(1) The board or panel has found that a violation of law within the jurisdiction of the board has influenced the issuing of the permit or license or the making of such contract.
(2) The board or panel finds under all of the circumstances that the interests of the governmental entity so require; however, such rescission is to be limited so as to not adversely affect the interests of innocent third parties.

B. The finding referred to in Subsection A of this Section shall be made in accordance with the procedures set forth in R.S. 42:1141 and shall be subject to judicial review in accordance with the provisions of R.S. 42:1142, provided that the board or panel may suspend the contract, permit, or license of the governmental entity subject to the limitations in Paragraph A(2) of this Section pending the determination of the merits of the controversy.

The knowledge of the contractor is expressly considered in San Antonio's ethics code. It's interesting that, although this provision only applies to contracts with the council, the city manager, as well as the council, has the authority to void the contract.

§2-52(a) No officer or employee of the City shall have a financial interest, direct or indirect, in any contract with the City, or shall be financially interested, directly or indirectly, in the sale to the City of any land, materials, supplies, or service, except on behalf of the City as an officer or employee. ... Any violation of this Section, with the knowledge, expressed or implied, of the person or corporation contracting with the Council shall render the contract involved voidable by the City Manager or the Council.

The San Antonio ethics code also involves the city's ethics review board in this process. Note that the knowledge of the contractor is not a consideration here. Where it is a consideration, apparently, the ethics review board need not be involved.

§2-87(f)(4) If the Ethics Review Board finds that there has been an intentional or knowing violation of any provision of the Ethics Code, or that a person has committed a violation that he or she should have known was a violation of the code that is related to the awarding of a contract, the Ethics Review Board must vote on whether to recommend to the City Council that the contract be ratified or voided. Such action shall not affect the imposition of any penalty or remedy contained in this code of ethics or any other law.

If nothing is said about avoidance, a local government that voids a contract, permit, or other transaction on the basis of an ethical violation runs the risk of a suit. It's better for everyone if this penalty is expressly stated both in ethics codes and in contracts, permit applications, and the like. Letting everyone know up front (and having everyone disclose what they know about conflicts) requires that everyone, in and out of government, consider conflicts as important and potentially damaging.

Instead of an ethics commission having to find evidence that those doing business knew about officials' conflicts, the burden shifts to the businesses to say what they know and learn what they can. Where it is clear that a business could not have known, the ethics commission or legislative body can give it a waiver. No one wants an unfair result. The goal is an ethics program that makes it in everyone's interest to be transparent and honest about conflicts. An effective ethics environment is one where transparency becomes a regular part of doing business with local government.

Robert Wechsler
Director of Research-Retired, City Ethics

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