Government Contracts Monitor

Interim Rule Addressing Open-Ended Indemnity and Unauthorized Obligations Is Now Final

March 12, 2014

By: Eric Whytsell

Last June, the FAR Councils issued an Interim Rule aimed at clarifying that open-ended indemnification provisions in End-User license Agreements (EULAs), Terms of Service (TOS) and other agreements are not binding on the Government unless expressly authorized by law – and shall be deemed stricken from such agreements. On December 31, 2013, the interim rule became a Final Rule, with no changes in response to the comments received.

The rule’s genesis lies in a March 27, 2013 memorandum opinion prepared by the Department of Justice’s Office of Legal Counsel (OLC). That opinion concluded that the Anti-Deficiency Act, 31 U.S.C. § 1341, is violated when a government contracting officer or other employee with authority to bind the Government agrees, without statutory authority or other exception, to an open-ended, unrestricted indemnification clause. Such clauses are often encountered when supplies and services are acquired subject to supplier license agreements, particularly those used in the information technology field.

For example, on-line services often require users to consent to terms of service that hold the service provider harmless for damage to third parties caused by the use of the service. If a Government purchase card holder signs up for such an on-line service and consents to such a TOS, the agency’s agreement to such an indemnity provision could result in the agency’s having legal liability in an amount in excess of the agency’s appropriation. In that case, an Anti-Deficiency Act violation has occurred.

In order to prevent such an outcome, the interim rule added a new subsection (u) addressing unauthorized obligations to FAR 52.212-4 (Contract Terms and Conditions – Commercial Items) and created a new FAR clause, 52.232-39 (Unenforceability of Unauthorized Obligations) that must be included in all solicitations and contracts. The operative language provides that, unless “expressly authorized by statute and specifically authorized under applicable agency regulations and procedures,” an open ended indemnification clause: (i) is unenforceable; (ii) will not be deemed to have been agreed to by the Government based on its inclusion in a EULA, TOS, or similar legal agreement; and (iii) shall be deemed stricken from the EULA, TOS, or other agreement.

In adopting the interim rule as final without change, the FAR Councils made clear that the clause even applies to licenses in situations where the EULA, TOS, or other agreement is passed through an intermediary or reseller, stating “[t]he clause is not limited to situations in which the Government has directly negotiated with the indemnitees.” The Councils also rejected the notion that the rule would cause commercial companies to forego doing business with the Government, claiming that they had seen no indication of such an impact in the nearly six months since the interim rule was issued.

Now that this rule addressing indemnification has become final, expect to see attempts to address other provisions in commercial EULAs and TOS that could lead to Anti-Deficiency Act violations.

Eric Whytsell is the attorney responsible for the content of this article.

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