Copied From the Website of the Office of the Attorney General : (http://ag.ca.gov/ethics/accessible/contract.php)
Following is a list of topics we’ll cover in this lesson.
- What does Government Code section 1090 prohibit?
- Contract requirement
- Most officials covered
- Participation in the making of a contract
- Financial interest broadly defined
- Timing is crucial
- Harsh penalties and remedies
Here’s Jessica Carrington speaking with Dennis Lowery, the ethics officer for her agency. Follow along to learn more about Government Code section 1090.
Jessica: “Hi Dennis, as the ethics officer for our department, I have a question for you. Although the Political Reform Act covers a lot of ground, apparently, it is not the only conflict of interest law in this state. I’ve heard something about section 1090. What does it cover?”
Dennis: “Well Jessica, section 1090 deals specifically with conflicts of interest in the contract-making process. It does not supplant the Political Reform Act, but acts in tandem with it. Here’s what it does. It provides that an officer or employee may not make a contract in which he or she is financially interested.”
Jessica: “Does that mean a public official cannot be involved with such a contract process at all?”
Dennis: “That’s right. 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. Also, there are situations where a board member’s participation is attributed even where the board member does not actually participate.”
Jessica: “Now let me make sure that I am following you. Did you say that section 1090 applies only to contracts or does it apply to other types of governmental action?”
Dennis: “For the prohibition of section 1090 to apply, there must be a contract. Section 1090 does not apply to other types of governmental action such as adopting regulations, issuing permits or licenses, conducting investigations or issuing reports.”
Jessica: “Does section 1090 apply only to written contracts?”
Dennis: “No. In addition to written contracts, section 1090 applies to all contracts, including oral contracts and purchases made outside the formal contract process.”
Jessica: “What about grants? Are grants considered separately from contracts?”
Dennis: “No. Jessica, grants generally qualify as contracts for purposes of section 1090.”
Jessica: “What happens if I discover that I have a conflict of interest under section 1090 at some point in the contract-making process.”
Dennis: “You’d want to discontinue the contract process at once. Fortunately, if a contract in which an officer or employee has a financial interest is not ultimately executed, no violation exists.”
Jessica: “Thank you, Dennis, for helping me understand a little bit about section 1090.”
Let’s Review
The Department of Technology is considering adopting regulations that would restrict access to the Internet, and thereby adversely affect stocks owned by the director. Does section 1090 apply? Yes or No.
- Answer: No. Section 1090 does not apply to regulations. Section 1090 pertains only to contracts.
The prohibition of section 1090 applies to virtually all state and local officers, employees and multi-member bodies, such as boards or commissions, whether elected or appointed, at both the state and local levels.
General Rule
An official participates in the making of a contract if the official is involved with its preparation at any stage in the process. The contract-making process begins at the time the idea for the contract is conceived and continues through the actual execution of the contract. That means that planning, determining the scope of the contract, drafting plans and specifications, setting contract terms, evaluating applicants, and negotiating are all included.
Under the general rule, officials may avoid a violation of section 1090 by disqualifying themselves from participation in the making of the contract whenever they have a financial interest in the contract. There are limited exceptions to the general rule that are strictly interpreted.
The Rule as Applied to Multi-member Bodies
Members of bodies with contracting power are conclusively presumed to participate in the making of all contracts under the body’s jurisdiction.
If a member of a multi-member body with contracting power has a financial interest in a contract, section 1090 generally provides that the contract cannot be made even if the member has disqualified himself or herself from actually participating in the contract.
The law does provide several limited exceptions that will permit a financially interested board member to disqualify himself or herself and allow the remaining members of the body to enter into the contract.
These exceptions are termed “remote interest exceptions.” They are quite limited and are strictly interpreted.
Let’s Review
Armando is an employee in the Network Technology Division of the department. He discussed with his supervisor recent problems encountered by the department and the benefits of contracting with a private vendor for certain services. Subsequently, the department approved the Network Technology Division’s proposal to solicit bids from vendors for the performance of such services. Did Armando’s conversation with his supervisor constitute “participating in the making of a contract” according to section 1090? Yes or No.
- Answer: Yes. Armando participated in the early idea development and reasoning stages of the contract-making process.
Financial Interest Broadly Defined
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 courts have continually reiterated that no matter how twisted and winding the trail may be, if the connection between the financial interest of the official and the contract can be made, a violation of section 1090 will be found.
Under section 1090, financial interests are often defined in terms of relationships. For example, if you have an employment relationship with the person or entity that seeks to contract with your agency, you are deemed to have a financial interest in the contract. Other examples are listed below.
- Attorney, agent or broker of a contracting party;
- Supplier of services or goods to a contracting party;
- Landlord or tenant of a contracting party; and
- Officer or employee of a nonprofit corporation that is a contracting party.
The official’s interest also includes the community property and separate property interests of the official’s spouse.
Let’s Review
TRUE or FALSE: Under section 1090, the term “financial interest” is specifically defined in statutes and regulations.
- Answer: False. The term “financial interest” is not defined in section 1090 or in regulations, but rather has been given broad construction by court decisions.
TRUE or FALSE: The separate property of an official’s spouse is not a financial interest under section 1090.
- Answer: False. The separate property of an official’s spouse is a financial interest under section 1090.
As you know by now, section 1090 prohibits officials with financial interests from making contracts in their official capacity. If a person has previously entered into a contract with the state prior to appointment or employment with a government agency, the contract is unaffected by section 1090. However, section 1090 would apply to any modification, option, renewal or extension of the contract.
Harsh Penalties and Remedies
Any contract made in violation of section 1090 is void and cannot be enforced. An official who commits a violation of section 1090 is subject to criminal, civil and administrative sanctions.
A person convicted of violating section 1090 is also forever disqualified from holding any office in this state.
Thomson v. Call
A city council member had sold a parcel of land to a third party, which in turn re-sold the property to the city. Despite the fact that the council member had abstained from the council vote that authorized the city’s acquisition of the property, and had acted throughout in good faith, the California Supreme Court concluded that he had violated section 1090.
As a sanction, the Court required the council member to forfeit the entire sales price of $258,000, while the city was permitted to retain the property. Thus, where section 1090 is violated, the government can get its money back without having to restore any of the benefits received under the contract.
The fact that the contract is fair, or even highly advantageous to the government, is irrelevant.
People v. Honig
The State Superintendent of Public Instruction was found guilty of violating section 1090 by entering into official contracts in which he had a financial interest. Superintendent Honig was criminally convicted of this offense, and eventually was required to relinquish his public office as a result.
Let’s Review
Violation of section 1090 can lead to which of the following? Select all that apply. There may be more than one correct answer.
- Avoid contract
- State retains benefit; any payment received must be returned
- Felony conviction
- Permanent loss of office in California
- Answer: a, b, c, and d. All of the above answers are correct.
Remember These Points
Remember that section 1090 applies to contracts. Following is a list of important points to remember about section 1090.
- Participation at any stage of the process counts
- Financial interests broadly defined
- Violation voids contract, but government keeps the benefits
- Felony and permanent ban from holding office
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