Legal Aspects Relevant to Outsourcing Transit Functions Not Traditionally Outsourced (2011)

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21 need to comply with applicable third-party procurement requirements and does not specifically mention as- signability clauses. When asked about this, FTA legal staff informally emphasized that the FTA recipients’ practice of assigning their contract rights has been and continues to be of serious concern to FTA, to the extent that FTA may refrain from participating in the costs of contracts having unfair assignment arrangements. In their view, an assignment clause can arguably be seen as an indication that the recipient is knowingly arrang- ing to acquire an excessive quantity of property and services. This provision does not apply to outsourcing contracts. SECTION IV. OUTSOURCING CONTRACT TERMS AND CONDITIONS In addition to the federal terms and conditions dis- cussed in Section IV that must be in each outsourcing contract to address and protect the federal interest in matters funded with federal financial assistance, there are a significant number of general terms and condi- tions that should be used in each such contract. This section identifies and discusses key terms and condi- tions that may be included in outsourcing contracts. Terms and conditions may vary depending on the mat- ter outsourced. Because of this, we include a broad range of terms and conditions to cover as many situa- tions as possible. For example, we include terms cover- ing transit service outsourcings, recognizing that some nontraditional outsourcings may involve contracting out services for a smaller size of a particular service. We first discuss general principles that should guide every outsourcing contract. In general, terms and conditions should address such fundamental issues as names and addresses of the par- ties; the nature of the relationship that will be estab- lished; statement of consideration; description of the duties and obligations of the parties; the term of the contract; assignability of contract; date of contract; plan and schedule; acceptance and payment; procedures to control changes; disputes resolution; ownership of rights and intellectual property; and termination.141 Many agreements begin with a recitation or back- ground provision that establishes the general basis and purpose of the contract. This is often done with “whereas” clauses, which provide, for example, in the case of an outsourcing: • What services or functions the transit system is seeking. • That the transit system’s personnel needed for such services are not available to provide such services. • That the contractor is qualified and capable of per- forming the services. 141 RICHARD A. LORD, 1 A TREATISE ON THE LAW OF CONTRACTS, FORMS § 3F:1 (4th ed., Thomson West 2001). Immediately after the whereas clauses, it may be useful to note what comprises the complete and exclu- sive contract or agreement in the matter—the agree- ment and its attachments (if any)—and that it super- sedes any and all prior representations, communications, and understandings. (Such a provision is sometimes placed at the end of a contract.) A. Definitions In many larger contracts, an early section includes definitions of important terms. Depending on the non- traditional outsourcing involved, definitions may not be necessary if the contract is straightforward and essen- tially focused on a narrow function to be outsourced. B. General Obligation of the Parties Depending on the type of outsourcing involved, this can be a very extensive part of the contract. In general, a clause should require the contractor to perform the services in accordance with the scope of services and to the reasonable satisfaction of the grantee within the terms of the agreement. In an operational outsourcing, it can involve a general overview, a discussion of project management by the contractor, and a very lengthy de- scription of the contractor’s responsibilities. Similarly, the responsibilities of the transit system should be de- tailed, and these can be numerous as well. In a nontra- ditional outsourcing, the general obligations of the par- ties are likely to be limited to very specific matters. C. Scope of Services In lieu of a “General Obligation of the Parties” sec- tion or in addition to it, a “Scope of Services” provision provides specifically what is to be done under the con- tract: What does the contract comprise, what is the scope of work it involves, what is included in the pro- ject, and what is excluded from it. It generally does not involve the term of the contract or its cost structure. Often it can be expressed in terms of the deliverables expected under the contract. If the scope is lengthy, it is not uncommon to include it as an attachment to the contract. D. Contract Type and Amount; Term of Contract; Change Orders; Notices Early on the type of contract should be specified (cost plus fixed fee, for example), and its amount (which may be repeated in another section). The term establishes the length of the contract, which is the period of time when the contract is in effect. For example, “the term of this Contract is from the date of execution by both par- ties through December 31, 2005.” The section may allow for an extension, usually at the discretion of the grantee for some specified period, for example, 3 years. Provi- sions often note that time is of the essence for perform- ance of the contract, and the contractor is to provide sufficient resources to perform the services in accor- dance with the scope of services in a timely manner.

22 This may also be the place to address options and change orders and how they will be implemented, as well as notices and communications in connection with the contract, specifying how communications are to be made and to whom. Some contracts include notice pro- visions separately, and some describe change orders in a separate provision. E. Compliance with Laws and Regulations The contractor should be required to adhere to appli- cable federal, state, and local laws, regulations, orders, and ordinances applicable to the work under the con- tract. F. Confidentiality The contractor’s employees, agents, or subcontrac- tors may need to have access to confidential data main- tained by the transit system to carry out its responsi- bilities under the contract. This could especially be the case in nontraditional outsourcings involving informa- tion technology work or human resources work. If so, the contract should require the contractor to provide a written description of its procedures to safeguard confi- dential information which, among other things, should designate one individual as the responsible authority over all data collected or used by the contractor in car- rying out the contract and assure adequate supervision and training of those who will have access to any confi- dential data. Such private or confidential data should remain the property of the transit system. The contractor may also be required to sign a non- disclosure agreement depending on the sensitivity of the data involved. A clause should be included to the effect that no con- fidential data used in connection with the contract may be disseminated except as authorized by law and with the written consent of the transit system during the period of the contract or thereafter. Such confidential data must be returned to the transit system. If legal process is served upon the contractor for re- cords containing confidential information, the contrac- tor should promptly notify the transit system and coop- erate with it in any lawful effort to protect the confidential information. G. Transition and Startup In some outsourcing agreements, there is likely to be provision for a transition and startup period because of the significance of the work to be performed. If security work is outsourced, for example, it may be useful to have a transition and startup period both for the out- side contractors to begin to implement their require- ments and for the transit agency workforce to under- stand what the outside contractors will be doing. Training is likely to be involved, and compensation for this transition period may be addressed in this section. If plans are to be submitted during this period, they also should be addressed in this section. H. Compensation and Payment The section on compensation can take many forms, but at its most basic it should involve the following. 1. Fees or Rates. If a fixed fee is involved, a contract amount section should specify that the contract amount shall not exceed a stated fixed amount. 2. Invoices and Payments. A contract should include a provision on the timely submission of invoices; timely review of them by the grantee; and a process to resolve any disputes. 3. Final Payment. Provision is often made for the fi- nal payment, by which the transit system may not pay the final amount until the contractor shall have com- pleted all of its obligations under the agreement. 4. Prompt Payment. It is important to include a clause requiring the contractor to make prompt pay- ments to its subcontractors, but nothing in this regard shall provide a basis for a subcontractor to bring a claim against the recipient. 5. Provision for Inspection and Audits. If a prompt payment provision is included, the transit system also would want to have the right to inspect and audit the contractor’s compliance with the provision. I. General Requirements for Contractor Personnel The contractor generally would be expected to pro- vide qualified personnel capable of carrying out all of the contractor’s responsibilities and requirements un- der the contract—in short, the contractor shall provide the personnel necessary to provide the services. Generally there is a concern about the specific per- sonnel used, particularly “key personnel,” and it is common to provide that the contractor may not substi- tute key personnel without the prior written consent of the transit system. Provision can be made for events such as termination or temporary unavailability of key personnel. Similarly, subletting, assignment, and transfer of re- sponsibilities by other than the contractor should be prohibited without the express prior written approval of the transit agency. This may be a useful place in the contract to stress that the contractor and its personnel operate in an in- dependent contractor relationship with the transit sys- tem, and that the contractor’s work shall be under the contractor’s exclusive direction and control. Further, consistent with the independent contractor relation- ship, it is useful to state that the contractor’s workers are its employees and not employees of the transit sys- tem. J. Vehicles/Facilities/Equipment/Handback In the case of an outsourcing involving transit ser- vices—and paratransit services are outsourced fre- quently by transit systems—the contract should ad- dress in detail the specifics of the services provided, including the items noted below. Even nontraditional outsourcings may involve vehicles and other assets in

23 the case of outsourcing a specific and limited type of service. Provisions should address, for example: 1. Operators/Personnel—Screening and selection of, training, personnel standards, performers of safety sen- sitive functions subject to drug and alcohol testing (see Section III.C at item 20). 2. Proper Maintenance of Vehicles. 3. Cleaning and Appearance of Vehicles. 4. Proper Maintenance of Facilities and Equipment. Equipment to be used should also be addressed in de- tail, and an inventory should be included. Fares, fare collection, and security of such resources need to be addressed in operations outsourcing. 5. Handback Requirements. Equally important to ensuring that the assets are properly used and maintained during the course of the contract is the condition they are in when handed back to the transit agency at the end of the contract. Hand- back provisions should require vehicles or assets to be turned back in good condition subject to routine wear and tear with any environmental issues resolved to the satisfaction of the transit agency. Thus contract provi- sions should require audit of the condition of vehicles, equipment, and assets at the beginning of the contract; proper maintenance during the term of the contract with liquidated damages for failure to do so; audit at the end or termination of the contract to assess the con- dition of the assets with provision for the contractor’s liability for failure to return assets in good handback condition. K. System Security and Emergency Preparedness System security and emergency preparedness are key issues, particularly for operational contracts and for other outsourcing contracts as well. Indeed, in the case of outsourcing security work, it is important to make certain that the outsourced work is meshed and coordi- nated with the transit system’s overall system security and emergency preparedness. L. Reports/Accident Reporting Accident reporting is a key issue to be discussed for operational contracts. M. Performance Standards; Professional Standards Regardless of what is being outsourced, it is useful to develop performance standards in the contract that the contractor is to comply with. Standards are the criteria against which performance is judged. In operational contracts, the standards cover such things as on-time performance, trip completions, adherence to schedules, and the like. In general, standards should be attainable, specific, meaningful, and measurable. In the case of nontraditional outsourcings involving professional services, there may be industry standards or certifications that would be useful to reference in this section. For example, in the case of outsourcing human resource functions, the Society for Human Resource Management has a certification program, best practices information, and a comprehensive program on ethics and sustainability.142 Some of these may be useful to reference for compliance purposes, or a provision could be drafted more broadly stating that the professional services work performed shall be completed in accor- dance with appropriate professional practice standards. N. Liquidated Damages and Performance Incentives Liquidated damages are monetary damages that the parties identify during the negotiation of the contract and that the injured party may collect in the case of a specific breach. They are not typically used in profes- sional services contracts but are used rather in opera- tional outsourcings. A contract will often include per- formance standards and identify the liquidated damages that will be assessed for the contractor’s fail- ure to meet those standards. It is common in opera- tional contracts to include a process for the assessment of liquidated damages on a monthly or other basis with provisions for response by the contractor. Specific liqui- dated damages can be established for a variety of activi- ties—for example, incomplete or missed trips, failure to provide acceptable customer service, Americans with Disabilities Act (ADA) compliance, vehicle mainte- nance, failure to report mechanical breakdowns, im- proper vehicle appearance, failure to enforce fare poli- cies, and failure to meet security requirements. These could be used as well in a nontraditional outsourcing. Note, moreover, the longstanding public policy against liquidated damages provisions that are in- tended to punish. Damages agreed upon in the contract can be designed to compensate the nonbreaching party for the other party’s failure to perform; [o]n the other hand, a liquidated damages provision will be held to violate public policy, and hence will not be en- forced, when it is intended to punish, or has the effect of punishing, a party for breaching the contract, or when there is a large disparity between the amount payable under the provision and the actual damages likely to be caused by a breach, so that it in effect seeks to coerce per- formance of the underlying agreement by penalizing non- performance and making a breach prohibitively and un- reasonably costly.143 To address this issue, a contract may include a clause in which the contractor agrees that amounts payable as liquidated damages are not a penalty but rather are deemed reasonable in light of the actual or anticipated harm incurred and the difficulties of proof of actual loss. 142 See the Society’s Web site at http://www.shrm.org/Pages/ default.aspx. 143 RICHARD A. LORD, A TREATISE ON THE LAW OF CONTRACTS, 24 § 65.1 (4th ed., Thomson West 2002).

24 O. Risk of Loss or Damage This clause deals with who is responsible in the event of loss or damage of items covered under the con- tract. Typically, liability is transferred to the contrac- tor. P. Insurance The contractor is expected to carry insurance, and this section specifies the policies and requirements, usually both with respect to the transit system and the contractor. Insurance could cover, on the part of the transit system, bodily injury and property damage li- ability and property insurance; and on the part of the contractor, required insurance policies, including work- ers’ compensation and employers’ liability insurance, automobile liability insurance, and the like. Q. Indemnification Subject to negotiation, the transit system should want to have a clause in which the contractor agrees to indemnify and hold it harmless against any and all li- abilities of any kind arising out of the contract, whether or not it is alleged the contractor was negligent. More- over, the contractor might be expected to bear all the costs relating to any such claims. R. Disclaimer of Liability Conversely, as a public entity, a transit system may be unable under local or state law to hold harmless or indemnify the contractor in any regard, but this is an issue to be addressed on the basis of local law and prac- tice. S. Disputes It is important to have a disputes resolution section; see the discussion in Section III of the recipient’s re- quirement to notify FTA in writing of any current or prospective dispute that may affect the FTA’s interest in the project or its administration of federal law and regulations. Generally it is wise to provide a process first for informal resolution. If informal resolution fails, it is possible to provide a method for the contractor to appeal decisions within the governing structure of the transit system to try to avoid litigation. If that process is not successful, the dispute could be brought either to arbitration or to court. Applicable law and jurisdic- tion—presumably the grantee’s place of business— should be cited here, as well as a provision relating to the payment of attorneys’ fees. T. Cancellation In some instances a provision distinct from termina- tion (see below) is included, allowing for the transit sys- tem to cancel the contract in the case of misrepresenta- tion by the contractor or in the event the contract was obtained by fraud or unlawful means or the contract conflicts with state or federal law or regulation. U. Termination 1. For Convenience This provision allows a transit system to terminate when it is in its best interest, usually with some re- quirement of advance written notice. As public bodies, transit systems are subject to a range of public policies and requirements, as well as the continuing availability of federal and local funds in a tight budgetary environ- ment, and should have a termination for convenience clause as a matter of course regardless of what the con- tract is for. Typically such a clause provides that the contractor shall be paid its allowable costs incurred to the date of termination, and any other allowable costs the transit system determines are reasonably necessary to complete the termination. Note that the Federal Government requires the in- clusion of a right to terminate (see Section III.C.7) in third-party contracts, so it is useful for a grantee to have a termination for convenience clause (if not a separate clause regarding the right of the Federal Gov- ernment to terminate) for that and other reasons. 2. By Mutual Agreement The contract may be terminated by mutual agree- ment of the parties. Similar provision may be made for the payment of allowable costs incurred to the date of termination as under the Termination for Convenience provision. 3. By Default The contract may be terminated if the transit system determines that the contractor has failed to meet the terms of the contract, has acted in bad faith, has aban- doned the agreement, or has failed to correct work that has been rejected. Generally an opportunity to cure is provided, or the contractor may not be liable if it can show that the failure to perform was due to factors be- yond its control (acts of God, fire, war, floods, for exam- ple) and without the fault or negligence of the contrac- tor. 4. Termination Requirements Provision should be made for the contractor, in the event termination occurs under the contract, to surren- der work products and documents relating to the ser- vices being performed under the agreement. V. Intellectual Property Rights Intellectual property rights are an important area of consideration, particularly in nontraditional outsourc- ings that involve information technology work as well as in professional services contracts for A & E work. All contracts that require data to be produced or furnished in meeting contract requirements should contain terms that set forth the respective rights and obligations of the parties regarding the use, duplication, and disclo- sure of that data.