CHAPTER 31
Government’s Indemnification of Seller

Occasionally, the United States Government will recognize the need to indemnify seller when the work entails substantial risk to seller. Occasionally, particularly precarious situations—such as handling nuclear waste, for which insurers are likely to deny coverage—will require the government to indemnify seller in order to gain seller’s participation. Given this occasional need to indemnify its suppliers, the U. S. Government has various indemnification provisions at its disposal. The most common clauses are discussed herein.

Each of the following provisions provides seller with some form of protection. Some offer substantial protection while others are limited. Recognize, however, that provisions negotiated with the government do not necessarily carry the same leverage as provisions negotiated with commercial buyers. Therefore, before diving into the different forms of indemnification available to seller, seller should understand the limitations the Anti-Deficiency Act imposes on the U.S. Government with regard to its ability to indemnify seller.

Section 8, Article 1 of the United States Constitution grants Congress the power to “….lay and collect taxes, duties, imposts, and excises, to pay the debts and provide for the common defense and the general welfare of the United States….” Section 9 of Article 1 dictates that money may only be withdrawn from the Treasury in consequence of “an appropriation made by law.”

Early in the twentieth century, Congress co-mingled funds, using them for purposes other than those for which they were appropriated. Once money runs out, Congress sought to shift government appropriations to resume operations. The Anti-Deficiency Act was created to curb these spending practices.

Today, misappropriation of funds by the government may lead to administrative sanctions, including possible criminal prosecution. Given that issues exist with regard to the appropriation of money, it is imperative that a government contractor understand the Anti-Deficiency Act in order to appreciate to what extent Congress may indemnify the contractor.

ANTI-DEFICIENCY ACT

The Anti-Deficiency Act is comprised of three separate statutes: (a) 31 USC 1341(a)(1)(A) and (B), (b) 31 USC 1342, and (c) 31 USC 1517(a). The basic premise behind all three statutes is to ensure that sufficient funds are available through the proper appropriations process before obligating, committing, and expending funds.

The key provision of the Anti-Deficiency Act is 31 USC 1341, which denotes (1) that an employee of the United States Government may not authorize expenditures exceeding the amount of funding available or (2) contractually obligate the government for payment of goods or services before funds have been appropriated for that purpose, unless otherwise authorized by law.

Provision 31 USC 1342 stipulates: With exception of an emergency involving the safety of human life or protection of property, the government may not accept voluntary services or employ personnel services not authorized by law; while under 31 USC 1517 the government may not make obligations or expenditures in excess of an apportionment or reapportionment, or that which is permitted by agency regulations.

How does this affect the prime contractor, subcontractor, and lower tier subcontractors when indemnified by the government? Other than for events that could not be anticipated, a government employee may not obligate funds, including indemnified actions, once funds are exhausted. Nor does the government employee have the authority to provide an upward adjustment to the contract in support of payment because this, too, is a violation of the Anti-Deficiency Act.

31 USC 1342 specifies that a government official may not accept voluntary services or employ persons in excess of the appropriated funds, provided that said services were not attributed to acts of safety for human life and public property. This means that even should seller wish to keep working on a “pay me later” basis, the government employee is not authorized to agree.

31 USC 1517 says that expenditures on a contract may not exceed the apportioned amount. Therefore, the contractor is protected up to the point of apportionment.

FAR 52.228-7 requires contractors to carry specified insurance, which includes liability, general liability, and other specified coverage as may be required under the contract. The clause further insures third parties provided that seller obtained the necessary coverage for those parties as identified in the contract. This indemnification covers bodily injury provided that the damages were not attributed to the willful misconduct or lack of good faith of buyer and seller. This provision is subject to the Anti-Deficiency Act.

Positive aspects of FAR 52.228-7 include, 1) costs may exceed the limitation of funds and limitation of cost clauses; 2) seller is protected from third party liabilities that are not covered by insurance; and 3) seller is indemnified even if negligence is realized.

The negative aspects of FAR 52.228-7 include, 1) indemnification claims are only covered under cost reimbursable contracts; 2) the Anti-Deficiency Act applies; and 3) receipt of payment may cause a relinquishment of seller’s indemnification rights.

FAR 52.250-1 INDEMNIFICATION UNDER PUBLIC LAW 85-804 (APR 1984)

Public Law 85-804 provides prime contractors with broad indemnification for catastrophic laws, indemnification which may be passed onto subcontractors and lower tier subcontractors. While the clause is advantageous to seller, this indemnification is quite difficult to obtain. It may only be granted by the secretary or administrator of an agency once the contracting officer has secured approval from the legal department of the agency.

The following issues must be addressed by a prime contractor when requesting an indemnification provision of this nature:

1) Provide a detailed account of unusually hazardous or nuclear risks. Include details of how prime contractor will be subjected to these risks.

2) Provide a statement breaking out in detail the insurance coverage obtained in support of the project. Include in the statement the amount of coverage, exclusions, and any deductibles.

If the prime contractor succeeds in obtaining coverage under this provision, the prime contractor will be covered as follows:

1) Third party claims including death, personal injury, and loss or damage of property.

2) Loss, damage or loss of use of seller’s property.

3) Loss, damage or loss of use of government furnished equipment.

Prime contractor will not be entitled to lost profit or fee under these circumstances.

Once the prime contractor successfully obtains this indemnification from the government, the prime contractor’s subcontractor (seller) may request that the same indemnity language be incorporated in their sub-contract with buyer. Seller may obtain this through mimicking the prime contractor’s language on company letterhead and requesting that the prime contractor propose it to the government for consideration.

Public Law 85-804 provides protection solely for risk involving unusually hazardous or nuclear materials whereby the prime contractor and seller are not compensated by their insurance provider. Additionally, deductibles are considered when calculating payment for damages. The prime contractor and/or seller’s willful misconduct or lack of good faith will negate any indemnification claims.

Positive aspects of this provision include the following:

1) Seller’s ability to flow it down to their subcontractors when they, too, are subjected to unusually hazardous conditions.

2) Not subject to the Anti-Deficiency Act.

3) Not subject to a limitation of cost or funds.

4) It survives contract termination.

5) It protects against uninsured third party claims.

The primary negative aspect of the provision is the difficulty of getting it.