News & Resources

Legal Developments

Excessive Gifts and Contributions Can Be Grounds to Invalidate Construction Contracts

  • Vol. 2016, No. 4
  • March 10, 2016

Vol. 2016,No. 4 | March 10, 2016

A California appellate court recently found that where payments for dinners, tickets, travel, and campaign contributions from contractors influenced school district officials’ contracting decisions, the contracts themselves may be void and contractors required to refund payments made pursuant to those contracts.  The contractors involved in the case challenged a school district’s attempt to declare certain contracts void where the contractors had engaged in “pay-to-play” with several former district officials.  The Court of Appeal rejected the contractors’ arguments, concluding that the evidence developed in the criminal prosecution of the contractors was sufficient to establish that the public officials who made the contracts likely had a financial interest in the contracts, and in accordance with Government Code section 1090, such contracts would be void.

Background

A school district filed suit to invalidate construction contracts with three contractors and obtain a return of the funds paid (i.e. “disgorgement”), based on the contractors’ “pay-to-play” scheme with several school district officials.  The district alleged that the contractors had purchased dinners, tickets, and travel and had made campaign contributions in an effort to influence the award of contracts to the three contractors.  Two contractors brought a motion to strike the lawsuit on the grounds that their actions were protected by the First Amendment.  The trial court denied this motion, finding that the actions were illegal as a matter of law and therefore the school district could seek to invalidate the contracts and obtain a refund for payments made to the contractors.

Decision

The Court of Appeal affirmed.  (Sweetwater Union High School District v. Gilbane Building Company et al. (2016) ___ Cal.App.4th ___ [2016 WL 741642].)  While it did not agree that all of the activity was per se illegal, the Court held that evidence provided by the school district, which included records from criminal prosecutions of the contractors and their employees, sufficiently demonstrated that the school district was likely to prevail on the merits.  Therefore, the school district could continue with its case to invalidate the contracts and obtain repayment of the funds paid to the contractors.

The opinion stressed that the school district was likely to prevail in showing that the contracts were made in violation of Government Code section 1090.  Section 1090 prohibits a public official from participating in the making of a contract in which he or she has a financial interest.  The Court of Appeal held that excessive gifts and campaign contributions to a public official could create the type of “financial interest” prohibited by section 1090.  Accordingly, by providing evidence which suggested that former school district officials took action on the contracts as a result of the gifts and contributions, the school district could argue that the contracts were made in violation of section 1090 and could continue to seek reimbursement.

Impact

A violation of Government Code section 1090 can have significant impacts on a contract, as a contract entered into by a district in which one or more public officials has a financial interest will void the contract and permit the public agency to seek disgorgement of any funds it paid under the contract.  This decision is the strongest statement yet by a court that a prohibited financial interest under Government Code section 1090 may include a relationship with a company in which that company provided gifts to an official or campaign contributions in circumstances where one could reasonably infer a quid pro quo arrangement.  While the procedural posture of this case did not allow the Court of Appeal to deem the contracts void and order disgorgement, its holding is a clear sign that public officials, agencies, and contractors need to be aware of the impacts of excessive gifts and contributions on the ability to subsequently contract with a public agency.

Please contact us if you have questions about gifts, contributions, or other ethical concerns with procurement procedures.

PRACTICE AREAS
  • Board Ethics, Transparency and Accountability
  • Litigation

COVID-19 Information: For the latest news on the impact of COVID-19 and how it may affect California schools, visit our COVID-19 resources page.

X