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ACRP LRD 41 9 considerations with structuring a contract for the use of space as a license rather than a lease. Because leases are real property transactions, users can avail themselves of the property laws, which makes the termination and winding down of lease agree- ments for airport property more complex than if the agreement were structured as a license. Accordingly, in certain jurisdic- tions there may be advantages to employing license agreements rather than leases in connection with providing space to airport concession or service providers to avoid issues related to the transfer of real property. III. CONTRACTING PROCESS A. Contracting and Procurement Issues State, county, municipal and other governmental entities typically have procurement laws, regulations and policies gov- erning the solicitation of and contracting for goods and services by such entities. Airports may be subject to state or local pro- curement requirements or may be provided with statutory or delegated authority to adopt their own procurement regimes. In any event, the development and execution of sound and ef- fective commercial contracts requires both compliance with the applicable procurement requirements and a thorough under- standing of the process in order to deliver timely and effective contracting actions. This section will address issues and require- ments common to public procurement systems as they relate to the development of commercial contracts. There are several fundamental differences between the gen- eral commercial contracts and the formation and administra- tion of contracts between public or quasi-public entities and private, commercial entitiesâthe main difference being the requirement to use a competitive and transparent process in selecting vendors.30 B. Procurement Systems Those jurisdictions and special purpose entities that have been provided contracting authority typically exercise that authority pursuant to a procurement system implemented through statute, regulation, policy, procedure, or a combination of these authorities. Often within a single state, there may be a myriad of procurement regimes. At the state and local gov- ernment level, procurement regimes vary widely as to (1) type of work required to be competitively bid; (2) exemptions from some or all of the bidding requirements; (3) authorized procure- ment methods; and (4) procurement procedures in general. For instance, in New Jersey while procurements are conducted by the state, its counties and municipalities and all their agencies, school districts, Rutgers (the State University), other state col- leges, and the independent and quasi-independent agencies all generally follow a similar procurement regime, but each entity 30 Public contracts and public law: government in the marketplace, 3 Local Government Law Â§ 22:1. the property for less than the appraised value, a justification for such decision. 24 The authority to dispose of property by Massachusetts governmental bodies (which is defined to include the stateâs political subdivisions, including any city, town, district, regional school district, county, or agency, board, commission, authority, department or instrumentality of a city, town, district, regional school district or county) is governed by that government bodyâs charter or enabling legislation.25 The actual disposition, how- ever, is governed by the stateâs Uniform Procurement Act. The act requires that the governmental body (1) declare the prop- erty available for disposition; (2) specify any restrictions on the propertyâs use; (3) determine the value through an appraisal; and (4) solicit proposals for the sale or rent of property that is valued in excess of $35,000.26 The statute requires advertising, public bid opening and publishing of a notice if the body de- cides to dispose the property for less than the appraised value.27 Disposition to the federal, state or other governmental body re- quires the surplus determination, appraisal and publication of notice if the property is disposed for less than appraised value but does not require advertising or public bid opening.28 1. Leases Many jurisdictions consider a lease in excess of a certain period (typically between 5 and 30 years) a disposition subject to the same provisions as the sale of real property. In connection with lease disposition of property, it is important to determine and address in the lease the tax status of the leased property. If real property held by an airport is tax exempt and a lease to a non-tax-exempt entity renders it taxable, this should be ad- dressed in the lease with the liability for any taxes assessed against the leased property made an obligation of the lessee. In Tri-County Public Airport Authority v. Board of County Commis- sioners of Morris County,29 the Supreme Court of Kansas held that property used for airport operations was exempt from ad valorem taxes, but that despite revenue from the property leased to non-airport related entities in the adjacent authority-owned industrial park being used to support airport functions, the por- tion of the airport authority property leased to these entities did not constitute a government function and was not tax exempt. 2. Licenses While disposition regimes typically deem leases in excess of a certain period a disposition subject to approval, the same may not attach to license agreements. Further, there are additional 24 Id. at 7C Â§ 36. 25 The applicable Uniform Procurement Act provision requires that the disposing governmental body have the requisite authority and states âIf a governmental body duly authorized by general or special law to engage in such transaction determines that it shall rent, conv, or other- wise dispose of real property. . . â Id. at Â§ 16(a). 26 Id. at Â§ 16(a)-(d). 27 Id. (d)-(g). 28 Id. (i). 29 Tri-County Public Airport Authority v. Board of County Com- missioners of Morris County, 245 Kan. 301, 777 P.2d 843 (1989).
10 ACRP LRD 41 through public bidding. Most procurement systems, however, recognize situations where the advantages of public bidding are outweighed by the costs or are otherwise not appropriate. These include, among others, the following: (1) small purchases; (2) emergency purchases; (3) certain personal and professional services; (4) single source suppliers; (5) special purpose enti- ties; and (6) exemptions that may be appropriate for a particular entity.35 In addition, many jurisdictions recognize a hybrid procure- ment approach often referred to as a âriderâ or âpiggybackâ con- tract where an entity may use or ride a contract led by another government entity. Procurement regimes often list which en- tityâs contract may be piggybacked and is usually based on some sort of affiliation (i.e., local governments may be permitted to ride state contracts). In theory, competition has been achieved through the procurement conducted by the affiliated entity in letting the base contact. While this process provides efficiencies and may be useful in many circumstances, airports need to ana- lyze the use of this process to make sure that there is a reason- able way to align the scope of work, pricing, and other contract attributes with the underlying base contract. The traditional way to execute competitive public bidding was through an Invitation for Bids (IFB) process where all bidders respond to identical requirements with the contract awarded to the lowest priced responsive and responsible bidder. In addition to reducing a potential source of official corruption by requiring award to the lowest responsible bidder36, this pro- cess tends to promote price competition and results in prices lower than may be achieved through negotiations. The simplic- ity of these concepts and approaches made the IFB process at- tractive to public and private sector participants. While the IFB method continues to be used and is especially appropriate for commodity-type procurements, public officials realized that this method fails to account for important aspects of contractor selection such as experience, delivery approach, schedule management, social goal delivery and others. As a re- sult, there has been a move over the last 40 years to migrate to more flexible procurement methods that reflect these additional concerns, such as negotiated procurement though the use of a request for proposals and other methods. 35 Local procurement through competitive bidding; contracts exempted from competitive bidding requirements, 3 Local Govern- ment Law Â§ 22:10 36 Procurement regimes include the concept of responsibility to guard against awarding contracts to a low bidder that is not capable of adequately performing under the contract. A Responsible contractor is typically defined as an entity âthat: (a) has (or can obtain) the financial, technical, and organizational skills and resources, and the facilities and equipment, necessary to perform the contract in accordance with its terms; (b) has a satisfactory performance record; (c) has a satisfactory record of integrity and business ethics; (c) has not been suspended, debarred, or otherwise ineligible to receive contracts from the [appli- cable jurisdictions]; (d) meets any other qualification criteria that may be imposed by applicable laws or regulations; and (e) provides adequate evidence that it has paid and filed all applicable and tax returns.â A determination of non-responsibility serves as the basis for reject- ing a bid. has its own statutes, regulations, rules, and bureaucracy to ad- minister them.31 This diversity of approaches has led to efforts by the Ameri- can Bar Association to encourage uniformity through the adoption of a Model Procurement Code for State and Local Governments.32 While the code has been adopted in whole or in substantial part by a number of states and by thousands of munici palities, significant inconsistency among procurement systems remains.33 A countervailing agent for consistency is that the presence of federal funding of state and local projects has inserted federal contracting principles into many procure- ment regimes.34 It is important for airport managers to under- stand both the limits of its contracting authority and the re- quirements of the applicable procurement regime, particularly when embarking on a new project or a procurement outside the usual course of business or operations. C. Procurement Requirements Most procurement regimes have in common a number of public procurement concepts, including open competition (and exemptions thereto), advertising, solicitation methods, solicita- tion procedures, responsiveness requirements, responsibility re- quirements, and others, but may differ significantly in how these are implemented and in the exceptions to general rules. One primary policy goal of any public procurement system is to promote competition, which is typically accomplished 31 See, Robert S. Peckar and Charles F. Kenny, 41 New Jersey Practice: Construction Law Â§ 5.1. STATUTE TYPE OF WORK N.J.S.A. 52:32-1 et seq. State Building Contracts N.J.S.A. 52:34-6 et seq. N.J.S.A. 40A:11-1 et seq. Local Public Contracts Law N.J.S.A. 18A:18A-1 et seq. Public Schools Contracts Law N.J.S.A. 18A:64-52 et seq. State College Contracts Law N.J.S.A. 18A:64A-25.1 et seq. County College Contracts Law N.J.S.A. 27:7-1 et seq. Department of Transportation N.J.S.A. 27:25-1 et seq. New Jersey Transit N.J.S.A. 27:23-1 et seq. New Jersey Turnpike Authority N.J.S.A. 27:12B-1 et seq. New Jersey Highway Authority N.J.S.A. 27:12B-1 to 27:12B-4 Repealed by L.2003, c. 79, Â§ 49 N.J.S.A. 27:25A-1 et seq. South Jersey Transportation Authority N.J.S.A. 18A:72A-1 et seq. Educational Facilities Authority N.J.S.A. 52:18A-78.1 et seq. New Jersey Building Authority N.J.S.A. 5:10-1 et seq. Sports and Exposition Authority N.J.S.A. 13:17-1 et seq. Hackensack Meadowlands Development Commission N.J.S.A. 34:1B-1 et seq. New Jersey Economic Development Authority 32 American Bar Association, The 2000 Model Procurement Code for State and Local Governments, https://www.american- bar.org/content/dam/aba/administrative/public_contract_law/pcl- model-02-2000-code-procurement.pdf (last visited Dec. 2, 2019). 33 Mechanics of competitive sealed bidding, 1 Bruner & OâConnor Construction Law Â§ 2:32. 34 Id.
ACRP LRD 41 11 address these issues.41 Whether airports are subject to the pro- curement rules of their city, county, or other entity that owns them or have airport specific procurement regimes that address concessions issues, the industry standard is to solicit conces- sionaires through an RFP process.42 E. Good Faith and Fair Dealing In order to be responsive, bidders and offerors are often required to accept the terms and conditions of the contract specifications and a variety of standard form clauses, which give the procuring entity extensive discretion over every aspect of contract performance, including unilateral power to modify or terminate the contract and methods for resolving disputes. In a commercial setting, such a contact would be deemed a contract of adhesion. Accordingly, courts have imposed on government entities an obligation of good faith and fair dealing where the contract formation, performance and dispute resolution provi- sions have been imposed by the government rather than bar- gained for by the parties.43 While it may be attractive from an operating and business perspective to leverage the government entityâs status, this obligation should be considered in the devel- opment and negotiation of airport commercial contracts. F. Procurement Ethics Issues As public entities, airports are generally charged with up- holding high ethical standards in contracting and each airport should take the necessary steps to ensure that its contracting process is implemented in a fair and even-handed manner. Air- port managers need to guard against both actual corruption as well as the appearance of impropriety. These concerns affect much of the source selection processâin government contract- ing, the term source selection generally refers to the process and procedures that are used to select a vendorâbut they also are found in the text of many government contracts. Typically, a government contract will include numerous clauses designed to protect the process and to provide the airport with appropriate remedies in the event foul play were to have occurred during the process. While these clauses rarely come into play, it would be ill-advised to exclude such clauses for both practical and op- tical reasons. The following are types of clauses that are often included in government contracts. 41 See, e.g., Dallas/Ft. Worth International Airport board policy for concession policy, https://www.dfwairport.com/cs/groups/ webcontent/ documents/webasset/p2_246112.pdf (last visited Mar. 20, 2020); Metro- politan Washington Airports Authority, Contracting Manual, https: // www.mwaa.com/sites/default/files/archive/mwaa.com/file/ ContractingManual-4thEdition-Rev2.pdf (last visited Mar. 20 2020). 42 Resource Manual for Airport In-Terminal Concessions, (Airport Cooperative Research Program Report 54, 2011). https://doi.org/10.17226/13326. 43 Roni Adil Radi Elias, How Good Must the Governmentâs Good Faith Be? Defining the Boundaries of the Contractual Duty of Good Faith and Fair Dealing in Public Contracts, 10 Charleston L. Rev. 105, 107 (2016). Further, in the construction markets, public administrators have recognized the value of alternate delivery methods, such as Construction Management at Risk or Design-Build.37 While there are advantages to both the negotiated award procurement processes and the alternative delivery methods, many procure- ment systems prohibit the use of these methods outright, lack clear guidance on whether they are authorized, or require an additional layer of approval (either within or external to the pro- curing entity) to use them. Accordingly, in order to plan and execute procurements to develop and institute strong commercial contracts, airports must fully understand the scope of their contracting authority and the associated structural and procedural requirement and restrictions. D. Concessions Solicitations In a government setting, procurement typically refers to the acquisition of goods or services by the government for its own account or use. Most government entities rarely operate as the âseller,â and in many jurisdictions there is little, if any, guidance on how to develop and manage a contracting process when the government is not a purchaser. Because airports are often the seller or grantor, typically granting a concession or authority to conduct business at the airport, it is important to understand what rules, if any, govern these transactions. Historically, pro- curement systems and their competitive bidding requirements did not govern concession agreements, which is used here as a broad term where the government is the seller or license grant- or, or serves a role other than purchaser under the agreement because they did not involve expenditures by the public entity.38 Given the lack of transparency under this approach, some juris- dictions have included concession-type contracting activities either in their procurement regimes or in standalone conces- sion contract provisions. For instance, the New Jersey Public Contracts Law includes a number of concession-type contract procedures, including a legal review of concession authority, a resolution authorizing the concession, developing a basis of award and requirement that the concession be awarded based on price and other factors most advantageous to the govern- ment.39 New York City requires similar planning, bidding, and bid evaluation requirements and has a multilevel review panel structure for municipal concessions.40 As airports are a category of entities that more frequently engage in concession activities, the procurement regimes for airports that conduct significant concessions volume often do 37 Legal Issues Relating to Large Scale Airport Construc- tion Projects, (Airport Cooperative Research Program Report 38, 2020). https://doi.org/10.17226/25723, discusses in depth issues related to and their use of design-build and construction-manager-at-risk delivery methods. 38 Mira Consulting, Inc. v. Board of Education, Albuquerque Public Schools, 389 P.3d 306 (N.M. Ct. App. 2016). 39 N.J. Rev. Stat. Â§ 40A:11-1. 40 New York City Charter Â§ 362-378.
12 ACRP LRD 41 the funding amount. The court found that the contract was for shepherding favorable legislation with a contingent fee due upon that legislationâs passage, and thus, the contract was contrary to public policy and void. The court indicated that the illegality of the contract was not erased merely because no lobbying or per- sonal influence was contemplated by the contract or performed on its behalf as contingent fee contracts for procuring favorable legislation are void because such contracts tend necessarily to influence legislation improperly.51 Whether using the Federal Acquisition Regulations language or something similar, airport managers should consider including language along these lines in order to protect the procurement process. The Contractor warrants that no person or selling agency has been employed or retained to solicit or secure the Con- tract upon an agreement or understanding for a commis- sion, percentage, brokerage or contingent fee, excepting bona fide employees or bona fide established commercial or selling agencies maintained by the Contractor for the purpose of securing business. For breach or violation of this warranty, the Airport shall have the right to terminate the Contract without liability or in its discretion to deduct from the contract price or consideration, or otherwise recover, the full amount of the commission, percentage, brokerage or contingent fee. 2. Organizational Conflict of Interest Airport managers should be aware of the concept of an âorgani zational conflict of interestâ and need to consider how it can impact the procurement process. Under federal law, an organi zational conflict of interest exists when the contractor either has an unfair advantage in the procurement process due to its relationship with the government or some person, or its objectivity might be impaired due to prior relationship with the government.52 The law relating to organizational conflicts of in- terest is quite nuanced, and it is important to note that the con- cept applies even when the parties were acting honestly and fair- ly toward each other. The concept prohibits situations that could create the appearance of impropriety or where the temptation for mischief is simply deemed too great a risk to bear. Federal Acquisition Regulations guidance on identifying organizational conflicts of interest include: â(a) Preventing the existence of conflicting roles that might bias a contractorâs judgment; and (b) Preventing unfair competitive advantage. In addition to the other situations described in this subpart, an unfair competi- tive advantage exists where a contractor competing for award of any Federal contract possessesâ(1) Proprietary information that was obtained from a Government official without proper authorization; or (2) Source selection information (as defined in 2.101) that is relevant to the contract but is not available to all 51 See also, Sholer v. State ex rel. Dept. of Public Safety, 149 P.3d 1040 (Ok. Civ., App. 2006) contract with law firm to use political influence, rather than professional skills, with governor to promote settlement of case declared an unenforceable lobbying contract. 52 48 C.F.R. Â§ 2.101 (2019). 1. Covenant Against Contingent Fees The Federal Acquisition Regulations contain a prohibition on paying fees to sales agents contingent on the award of the contract unless they qualify as a legitimate selling agency.44 While the language of the Federal Acquisition Regulations clause is somewhat opaque, the intent of the clause is to prohibit arrangements that look like they involve improper influence, bribes, or impermissible gifts.45 The language tries to strike a balance between influence peddlers and sales agents that pro- vide legitimate services and does this through an exception if the agent is an established commercial or selling agency, main- tained by a contractor for the purpose of securing business, that neither exerts nor proposes to exert improper influence to solicit or obtain government contracts nor holds itself out as being able to obtain any government contract or contracts through improper influence.46 While this language has not been widely adopted in state level procurement regimes, state courts have recognized the in- validity of contracts obtained through the influence of agents or lobbyists using favors or corrupt means.47 For instance in Rotemi Realty, Inc. v. Act Realty Co., the Florida Supreme Court reversed a lower court ruling that brokerage fees on sale of real estate to a municipal government were against public policy be- cause real estate brokerage fees are standard industry practice. The court did reiterate its general rule that in situations where âcompensation is contingent on success in securing contracts from public officials is not illegal on its face,â but rather is illegal only if shown at trial to involve âfavors or corrupt means.â48 Many states and municipalities have enacted regimes reg- ulating lobbying activities, and there are a number of cases where courts refuse to enforce contingent lobbying contracts as against public policy or the applicable lobbying regulatory regime.49 While these tend to be cases where the lobbyist is seeking to enforce its contract and recover the contingent fee, they do demonstrate that contingent fees to deliver a result from the government are disfavored. For instance, in Rome v. Upton,50 the plaintiff claimed that the defendant breached a con- tract that called for the plaintiff to complete an application for public financing for an apartment project and, after approval of public financing, for the defendant to pay the plaintiff 1.25% of 44 48 C.F.R. Â§ 52.203-5(a) (2019). 45 Collin David Swan and Sati Harutyunyan, The âInfluence Peddlerâ Revisited: A Look At The Evolution Of The U.S. Covenant Against Contin- gent Fees In The Procurement Marketplace, 59 NO. 8 Govt Contrac- tor Â¶ 51. 46 48 C.F.R. Â§ 52.203-5(b) (2019). 47 But see, Conn. Agencies Regs. Â§ 22a-439-4 (prohibiting contin- gent fees for architects and engineers on pollution abatement facilities); Fla. Stat. Â§ 287.055 (2019) (prohibiting contingent fees for architects and engineers). 48 Rotemi Realty, Inc. v. Act Realty Co., 911 So. 2d 1181, 1188 (Fla. 2005). 49 William M. Howard, Annotation, Validity, Construction, and Application of State and Municipal Enactments Regulating Lobbying and of Lobbying Contracts, 35 A.L.R.6th 1 (2008). 50 Rome v. Upton, 648 N.E.2d 1085 (1st Dist. 1995).
ACRP LRD 41 13 that the winning bidder had an organizational conflict of inter- est based on the cityâs disclosure to the winning bidder that the city âlikedâ the incumbentâs general manager and that he knew the operations. Because the contract was partially funded by the Federal Transit Authority, the RFP adopted FTA organi- zational conflict of interest language. The Minnesota Supreme Court recognized the organizational conflict of interest issue but concluded no conflict occurred as the conversation did not provide the winning bidder with unequal access to non-public information. The court further held that the winning bidder did not create biased ground rules by assisting the city in develop- ing the RFP. In Medco Behavioral Care Corp. of Iowa v. State, Depât of Human Servs.,57 the Iowa Supreme Court found an obligation to identify and mitigate organizational conflicts of interest. The court noted that the procuring agencyâs implementing statute obligated it to carry out its contracting powers âin accordance with the standards and priorities established by this chapter, by applicable federal law, by the regulations and directives issued pursuant to federal law, by applicable court orders, and by the state plan approved in accordance with federal law.â Pursuant to this language, the court determined that the state agency was obligated to follow the Federal Acquisition Regulations provi- sions related to organizational conflicts of interest in procuring a Medicaid program contractor. The Supreme Court upheld a lower court ruling that participation by a corporate affiliate in the analysis and planning of programmatic requirements on the Medicaid program, though not the RFP itself, constituted an organizational conflict of interest disqualifying the winning bidder. While these concepts are technical, airport managers should note the following two âtakeaways.â First, an organizational conflict of interest will generally be found to exist if airport personnel give a preferred vendor inside information relating to a procurement opportunity, and this includes insights on the source selection process as well as the timing of the procure- ment (i.e., giving a preferred vendor a âheads upâ that the pro- curement will be coming). Such actions can expose the airport to reputational risk and could taint the vendor with an organi- zational conflict of interest. These practices should be avoided. Second, an organizational conflict of interest is generally found to exist when a vendor helps prepare the scope of work for a subsequent procurement. This concept has particular applica- tion to design and planning solicitations as well as certain types of IT procurements. Ordinarily, a design firm that conducted a feasibility assessment would be precluded from bidding on the resulting design contract, and an IT firm that drafted a scope of work would be precluded from bidding on the implementation services. In order to avoid misunderstandings, it is generally appro- priate to include contract language describing these conflicts such that vendors will be aware of these restrictions. Such lan- guage should be included both in the solicitation for a follow-on 57 Medco Behavioral Care Corp. of Iowa v. State, Depât of Human Servs., 553 N.W.2d 556 (Iowa 1996). competitors, and such information would assist that contractor in obtaining the contract.â53 Both state legislatures and courts have also recognized the organizational conflict of interest issue. Tennessee recognizes organizational conflicts of interest in its procurement code:54 (a) As used in this section, âorganizational conflicts of interestâ may include any relationship or action between any party, including contractors and consultants, and the state or its agents making decisions to procure or contract that may: (1) Conflict with the stateâs best interest; or (2) Taint the procurement process or reputation of the state. (b) The central procurement office, state building com- mission and department of transportation shall establish policies and procedures to define and identify organiza- tional conflicts of interest. The policies and procedures shall set forth methods, which may include avoidance, mitigation, or waiver, to deal with organizational con- flicts of interest. (c) The policies and procedures shall provide that all determinations relating to specific organizational con- flicts of interest be in writing. Such determinations shall periodically be reported to the speaker of the house of representatives, the speaker of the senate and to the comptroller of the treasury. In the statute authorizing local agencies (defined to include cities and counties) to conduct design-build procurements,- California directs them to adopt organizational conflict of inter- est policies.55 (c) The local agency shall develop guidelines for a stan- dard organizational conflict-of-interest policy, consistent with applicable law, regarding the ability of a person or entity, that performs services for the local agency relating to the solicitation of a design-build project, to submit a proposal as a design-build entity, or to join a design-build team. This conflict-of-interest policy shall apply to each local agency entering into design-build contracts autho- rized under this chapter. State courts have also found that organizational conflicts of interest may undermine the procurement process and the re- sulting contract. In Rochester City Lines, Co. v. City of Rochester,56 a disappointed incumbent bidder for a city bus contract alleged 53 48 C.F.R. Â§ 9.505 (2019). 54 Tenn. Code Ann. Â§ 12-4-115; see also, Idaho Code Ann. Â§ 40-904. 55 Cal. Pub. Cont. Code Â§ 22162. 56 Rochester City Lines, Co. v. City of Rochester, 868 N.W.2d 655 (Minn. 2015).