[ Previous Page]  [ Home Page ]

The following opinion is presented on-line for informational use only and does not replace the official version. (Mich Dept of Attorney General Web Site - www.ag.state.mi.us)



Opinion No. 5683

April 3, 1980


Authority to indemnify


Authority subject to funds available on hand

The Job Development Authority may only enter into an indemnification agreement when authorized by the Legislature and to the extent of funds available on hand for such use.

Mr. Vern A. Finch

Chief, Management & Disposal Branch

Real Estate Division

Department of the Army

Omaha District, Corps of Engineers

6014 U. S. Post Office and Courthouse

Omaha, Nebraska 68102

You have asked for my opinion as to the constitutional and statutory provisions concerning the Michigan Job Development Authority (the 'JDA') which bear on the issue of whether the JDA can agree to indemnify the United States Government or its agencies as part of the JDA's contract for acquisition of industrial facilities by way of an exchange of certain buildings. Under that agreement, the JDA would receive the Michigan Army Missile Plant located in Sterling Heights, Michigan, in return for providing the Department of Defense with two newly-constructed office buildings, to be built on Army property in Warren, Michigan. The JDA would then convey the Sterling Heights property to an industrial concern in return for the industrial concern's undertaking to pay for these office buildings and all other expenses of the JDA in the transaction.

The JDA is 'a public corporation and government instrumentality' created by section 11(1) of 1975 PA 301, as amended, MCLA 125.1701 et seq; MSA 3.540(101) et seq (the 'Act'). See McQuillin, Municipal Corporations, Sec. 2.13 relating to quasi-corporations. The constitutionality of 1975 PA 301, supra, was upheld by three members of the Court, and three members concurred that the Act may be construed as constitutional in the Advisory Opinion on Constitutionality of 1975 PA 301, 400 Mich 270; 254 NW2d 528 (1977).

The general objective of the JDA is summarized in the Act, Sec. 2(1)(a), as follows:

'. . . [T]o alleviate and prevent conditions of unemployment; to preserve existing jobs and create new jobs to meet the employment demands of population growth; to promote the development of present business enterprises and to meet the growing competition for business enterprises; to revitalize and diversify the Michigan economy in general and achieve the goals of economic growth and full employment.'

The JDA is empowered to make contracts which are necessary, convenient or desirable to the exercise of its powers [Act, Secs. 12(a) and 59(d)]. The JDA may also acquire, hold and dispose of real and personal property [Act, Secs. 14(a)] as well as solicit and accept gifts and other aids from all sources, including federal agencies [Act, Secs. 12(b)].

In furtherance of the purposes of the Act, the JDA may acquire by gift or purchase a project, defined by the Act, Secs. 5(1) and 5(3), consisting of industrial buildings, machinery and equipment for lease or sale to business enterprises. [Act, Secs. 12(c), 12(e) and 12(g)]. The project costs which may be incurred by the JDA in connection with a project include costs for organization services, acquisition, and financing [Act, Sec. 5(3)].

The JDA act contemplates the Authority undertaking enterprise activity which is self-supporting. This conclusion as to the self-supporting nature of the JDA is reinforced by the observation of Chief Justice Kavanagh in the Advisory Opinion on Constitutionality of 1975 PA 301, 400 Mich 270, 289, 290; 254 NW2d 528, 533, that the notes and bonds of the JDA 'will not purport to pledge the state's credit.'

Under the JDA's power to contract and to acquire projects, the JDA has the power to establish project costs, including the costs of organization services, acquisition, and financing. Thus, the JDA may in such planning specify financing for indemnification on a self-liquidating basis. (1) Such indemnification agreements could involve the placing of a deposit in escrow or a deposit with the other contracting party. However, it is axiomatic that a governmental entity may not spend funds which it does not have available on hand. OAG, 1975-1976, No 4952, p 337 (March 22, 1976). See Rhyne, Municipal Law (1957), p 258. Thus, the JDA has no power to agree to any indemnification agreement beyond the amount legally available for the intended use.

The principle that funding is necessary for an indemnification agreement has also been recognized by your office in connection with the Corps of Engineers refusal to accept a hold harmless clause running from the United States Government to the State of Michigan in connection with a memorandum of understanding concerning Camp Grayling. The authority cited by J. S. Augello of the Real Estate Division of the Corps of Engineers, Omaha District Office, in his letter of January 4, 1980, to the Michigan Department of Military Affairs as to the federal government's inability to enter into indemnification agreements recognizes the requirement for funding before indemnification commitments can be made. That requirement is equally applicable to the JDA.

Any indemnification undertaking by the JDA, beyond funds demonstrably available and authorized for the purpose, would not only violate the general principle that governmental entities cannot commit themselves to spend money which they don't have, but such indemnification agreement would potentially jeopardize the JDA's constitutional status as an independent agency authorized to borrow without binding the state and without being subject to the state's constitutional limitations on borrowing. As stated by Justice Levin in his concurring opinion in the Advisory Opinion on Constitutionality of 1975 PA 301, 400 Mich 270, 308-309; 254 NW2d 528, 544, if the legislature makes an effective commitment of the general taxing power so as to acknowledge responsibility for the undertakings of the JDA, such legislative action could lead to the conclusion that the agency was, in fact, subject to the state's constitutional limitations on borrowing.

Another limitation on indemnification agreements is the statute which voids such agreements where they purport to indemnify a person against liability for personal injury and property damage which are caused by that person's sole negligence, and such agreements concern the construction or alteration of a building. 1966 PA 165, Sec. 1, MCLA 691.991; MSA 26.1146(1).

An alternative for the JDA to consider in this area of risk allocation is its power to procure insurance against any loss in connection with its property, assets, or activities [Act, Sec. 14(b), supra].

Note should be made that the State of Michigan is precluded from entering into an indemnification agreement with the Army (without specific legislative appropriation therefor) by Const 1963, art 9, Sec. 17 which provides:

'No money shall be paid out of the state treasury except in pursuance of appropriations made by law.'

In furtherance of that section, an indemnification agreement by the State which is specifically funded and authorized by the legislature and limited to such appropriation would be permissible.

Frank J. Kelley

Attorney General

(1) In Wheeler v City of Sault Ste Marie, 164 Mich 338; 129 NW 685 (1911), the court refused to grant specific performance of a land contract which had an unlimited hold harmless clause in it running from the city to an individual, treating the contract and its hold harmless provision as ultra vires. The court indicated that, in the absence of authority conferred by law, the carrying of casualty and indemnity risks for individuals or other corporations was clearly beyond the power of the defendant city.


[ Previous Page]  [ Home Page ]