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Prohibited Contract Clauses

Listed here are legal explanations of certain clauses that are prohibited in contracts executed by a state agency, including the University of North Carolina at Pembroke. Any such clauses should be removed from any contract to which UNCP (or any division or department thereof) is proposed to be a party. If you encounter an objection to the removal of any prohibited clause from a proposed contract, the University Counsel may be able to suggest an alternative provision that can be used to replace or modify the prohibited clauses in a manner that is acceptable to many proposed contractors.

Hold Harmless or Indemnification Clauses, Both in Tort and Contract, in Favor of the Contractor
Hold-harmless and indemnification clauses implicate the State's sovereign immunity, exposing the State to liability for: (1) acts of persons who are not state agents, employees or involuntary servants; (2) amounts greater than the Tort Claims Act provides; (3) actions other than negligence of state employees, agents or involuntary servants; (4) a forum other than the Industrial Commission; (4) relief for which the Tort Claims Act does not allow, e.g. attorney fees outside the Industrial Commission; and (5) potential liability in excess of amounts provided in State budget.

Response: The University cannot agree to any clause under which the University will assume risk, have responsibility for, hold harmless, save harmless, or indemnify another party, or a clause subjecting the University to liability beyond the limits of the Tort Claims Act (including attorneys fees). Any such clause should be removed or you should consult the University Counsel for a provision to use in modifying the clause.

Limitations to the Contractor's Liability for Nonperformance
Limitations on the contractor's liability for nonperformance implicate the Constitutional prohibition on exclusive emoluments. Constitution Art. I, § 32. It also implicates the Counsel General's obligation to exercise duties regarding civil litigation. N.C. Gen. Stat. § 114-6. But see, Tice v. DOT, 67 N.C. App. 48, 312 S.E.2d 241 (1984) (AG bound by traditional rule governing the attorney-client relationship with respect to consent judgments). The distinction may be between a contractor who undertakes to perform but disavows liability for nonperformance and limitations on performance undertaken.

Response: The University cannot agree to any clause limiting the other party's liability for actions undertaken by that party. Any such clause should be removed.

Waivers of the Limits of the University's Liability Established by the North Carolina Tort Claims Act
The Tort Claims Act, N.C. Gen. Stat. § 143-291 et seq. is a waiver of the State's sovereign immunity. Only the General Assembly can waive the State's sovereign immunity. E.g., Smith v. State, 289 N.C. 303, 312, 222 S.E.2d 412 (1976); Steelman v. City of New Bern, 279 N.C. 589, 184 S.E.2d 239 (1971); Vaughn v. County of Durham, 34 N.C. App. 416, 421, 240 S.E.2d 456 (1977); Jones v. Kearns, 120 N.C. App. 301, 462 S.E.2d 245 (1995). As the Supreme Court noted in Smith v. State:

This decision has no application to the doctrine of sovereign immunity as it relates to the State's liability for torts. That question is not involved in this case. While we continue to be aware of the many valid criticisms of governmental immunity from tort liability, which we noted in Steelman v. City of New Bern, supra, it may well be that if the State's immunity from tort liability is to be abolished or modified it should be done under rules, and perhaps within limits, fixed by the General Assembly. See Comment, The Role of the Courts in Abolishing Governmental Immunity, 1964 Duke L.J. 888. As to waiver of immunity, distinctions can be made between tort and contract liability.

The State is liable only upon contracts authorized by law. When it enters into a contract it does so voluntarily and authorizes its liability. Furthermore, the State may, with a fair degree of accuracy, estimate the extent of its liability for a breach of contract. On the other hand, the State never authorizes a tort, and the extent of tort liability for wrongful death and personal injuries is never predictable. With no limits on liability jury verdicts could conceivably impose an unanticipated strain upon the State's budget. Indeed, potential liability under the present open-end wrongful death statute alone (G.S. 28A-18-2 (Supp. 1975)) could create serious problems. For the extent to which the State has waived its immunity from tort claims, see G.S. 143-291 to G.S. 143-300.1 (1974).

Id. at 322. Therefore, a state agency cannot waive the State's sovereign immunity and assume liability for actions not covered by the Tort Claims Act, in a forum other than the Industrial Commission or for an amount greater than the tort claims act or different from the tort claim liability, e.g. attorney fees. See, Karp v. University of N.C., 88 N.C. App. 282, 362 S.E.2d 825 (1987)(the Industrial Commission has the authority to award attorney's fees pursuant to N.C.G.S. § 6-21.1 for actions brought under the N.C. Tort Claims Act; the Industrial Commission is considered a court for the purpose of hearing and passing upon tort claims under N.C.G.S. § 143-291, and N.C.G.S. § 143-291.1 expressly authorizes the Industrial Commission to tax costs against the loser in the same manner as costs are taxed in civil actions.).

Response: The University cannot agree to any clause subjecting the University to liability beyond the limits of the Tort Claims Act (including payment of attorneys fees). Any such clause should be removed or you should consult the University Counsel for a provision to use in modifying the clause so that it is allowable.

Acceleration Clauses Rendering All Payments by the University under the Instant and All Other Contracts between the Parties Due upon the Contractor's Finding of Default by the University under the Instant Contract
Acceleration clauses implicate the State's obligation to operate within a fixed budget forcing the State to make payments for which no money has been appropriated or budgeted and are not due in a particular fiscal year.

Response: The University cannot agree to any clause requiring the acceleration of payments. Any such clause should be removed. Additionally, if a contract contains any clause providing for payments beyond the current fiscal year, please consult the University Counsel for language that should be included to modify the provision.

Clauses Rendering the Contract Subject to the Laws and the Legal Forum of a State other than North Carolina, without Prior Approval from the Counsel General
Choice of forum clauses requiring breaches of contract to be litigated in a foreign jurisdiction are prohibited under N.C. Gen. Stat. § 22B-3 which provides:

Except as otherwise provided in this section, any provision in a contract entered into in North Carolina that requires the prosecution of any action or the arbitration of any dispute that arises from the contract to be instituted or heard in another state is against public policy and is void and unenforceable. This prohibition shall not apply to non-consumer loan transactions or to any action or arbitration of a dispute that is commenced in another state pursuant to a forum selection provision with the consent of all parties to the contract at the time that the dispute arises. (1993, c. 436, s. 2; 1995, c. 100, s. 1.)

Cross References - For provisions concerning limitations on the power of parties to consumer leases to choose applicable law and judicial forum, see N.C. Gen. Stat. § 25-2A-106.

In light of this statute, the Counsel General cannot authorize a provision that violates N.C. Gen. § 22B-3. Clauses permitting suit in another state implicate the State's sovereign immunity and the Counsel General's authority to represent the agency.

Choice of laws provisions implicate the State's right to assert sovereign immunity and limit negligence claims to the Tort Claims Act. Therefore, they are tantamount to unauthorized waivers of sovereign immunity.

Response: The University cannot agree to any clause that would make the University subject to the substantive law or the jurisdiction of another state. Any such clause regarding another state should be removed. If the contractor insists on designating the substantive law or jurisdiction for enforcement of the agreement, the clause may be replaced by a provision making the contract subject to the law and jurisdiction of the State of North Carolina.

Clauses that Alter the Incidents of North Carolina General Law of Contracts, Such as Reducing the Time in which to Bring an Action Otherwise Prescribed by the North Carolina Statute of Limitations
The General Assembly has the sole authority to waive sovereign immunity. Although the Supreme Court has waived sovereign immunity in actions for contract, that action is available only if North Carolina law does not provide another remedy. E.g., Davidson & Jones, Inc. v. North Carolina Dep't of Administration and the University of North Carolina, 69 N.C. App. 563, 571, 317 S.E.2d 718 (1984). When our Supreme Court resolved the case of Middlesex Construction Corp. v. State ex rel. Art Museum Bldg. Comm., 307 N.C. 569, 574, 299 S.E.2d 640, 643 (1983), rehearing denied, 310 N.C. 150, 312 S.E.2d 648 (1984), it discussed the case of Smith v. State, 289 N.C. 303, 222 S.E.2d 412 (1976), reversed on other grounds, 298 N.C. 115, 257 S.E.2d 399 (1979), and said: "We read nothing in Smith which would indicate an intention to modify, ameliorate or abrogate the legislative mandate of G.S. 143-135.3." Accordingly, we hold that the State's waiver of sovereign immunity in a breach of contract action is valid only to the extent expressly stated in the statute, and that the plaintiff's remedy here must be found exclusively within the express terms of the statute. Any contract between the State and another party includes by implication the existing law of the State. Angel v. Truitt, 108 N.C. App. 679, 682, 424 S.E.2d 660 (Ct. App. (1993). The waiver of sovereign immunity under Smith v. State therefore is limited to the waiver of immunity for contracts that include the law of North Carolina. To preserve its sovereign immunity an agency should not agree to waive provisions of North Carolina law.

Response: The University cannot agree to any clause providing less than three years for the University to file a legal claim or sue for breach of contract; providing that breach would cause irreparable harm and justify injunctive action; or providing for liquidated damages or cancellation fees to be paid by the University. Any such clauses should be removed.

Binding Arbitration Clauses and Other Administrative Mechanisms (such as requiring mediation) for Resolution of Disputes not Generally Available under the Laws of this State which Tend to Abrogate those North Carolina Statutes Endowing the Counsel General with Various Powers of Representation and Settlement in Behalf of State Agencies
Such provisions change the law under which sovereign immunity for breach of contract was waived and exposes the State to binding adjudications in fora other than the State courts.

Response: The University cannot agree to any clause that requires binding arbitration or any mandatory dispute resolution other than legal action in North Carolina courts. Any such clause should be removed. The University Counsel can provide you with an alternative provision that calls for resolution of disputes through mediation in accord with procedures as may be acceptable to both parties.

Clauses Authorizing the Contractor to Assign the Right to Receive Payment from the University under the Contract while Raising a Bar to Assertion against the Assignee of Counterclaims and Other Defenses with Respect to the Assignor's Deficient Performance or Nonperformance
This constitutes a waiver of defenses and recourse and implicates the exclusive emoluments clause because the assignee receives state funds without providing public service. It might also change the assumption that the State will always have its regular contract defenses available to it.

Response: The University cannot agree to any clause that allows the other party to assign its right to payment to a third party without subjecting the third party to all the defenses and claims the University would have against the original contracting party. Any such clause should be removed.

Covenants Not to Hire a Service Provider's Employee
A covenant that the University will not hire a service provider’s employees should be deleted on public policy grounds. The policy of the State of North Carolina is to hire into each position the individual whose education and experience make him or her the person best able to perform the specific requirements of the job. Writing the proposed covenant into any of our contracts with service providers makes it impossible to carry out that public policy. The "best-qualified individual" may in any particular case be the service provider's present employee, and, consistent with the State policy, the University needs to be in a position to hire that person. Thus, the University will reject all such clauses as "a violation of North Carolina public policy."

Response: Any clause limiting the University's right to hire a provider's employee should be removed.

 

ADDITIONAL COMMON CLAUSES THAT MAY BE PROHIBITED

Confidentiality or Non-disclosure Clauses that Contradict the Public Records Act or Other Applicable Law
The University is subject to statutes that require disclosure of most information to any person upon request, e.g., N. C. Gen. Stat. Sec. § 132-1, et seq., and disclosure of certain otherwise confidential information to specific persons, e.g., N. C. Gen. Stat. Sec. § 126-24, (an employee of the State is generally entitled to view the contents of his or her confidential personnel file). The University cannot agree to keep confidential information that it is required by law to disclose.

Response: The University cannot agree to confidentiality provisions in violation of applicable law. Any clause that contains a confidentiality or non-disclosure requirement should be modified by adding, " … unless disclosure is required by law" or similar language that can be provided by the University Counsel.

Clauses that Unconditionally Require Payments Beyond the Current Fiscal Year Without a Non-appropriations Provision
The University is not generally guaranteed to be appropriated funds by the General Assembly beyond the current fiscal year. For that reason, any clause requiring payments from the University beyond the current fiscal year should be conditioned upon appropriations from the State of North Carolina of sufficient funds to cover the purposes set forth in the Agreement.

Response: Please consult the University Counsel for language to use in modifying any clause that requires payments beyond the current fiscal year.

Clauses that Allow Another Party to Control the Investigation, Defense, or Settlement of Any Claim Against the University
Whenever a party agrees to indemnify or hold harmless the University, that party (or its insurer) often desires the complementary right to control the investigation, defense or settlement of any lawsuit or other claim for which the University may seek indemnification. Only the Counsel General of the State of North Carolina has authority to agree to such a term, absent additional enabling legislation from the General Assembly.

Response: Please consult the University Counsel for language to use in modifying any clause that purports to convey to another party the right to control the investigation, defense or settlement of any claim or lawsuit against the University so that such right is subject to the advance approval of the Counsel General of the State of North Carolina.

Non-compete Clauses That Contradict Applicable Bidding Requirements
Under North Carolina law, the University is subject to competitive bidding requirements for the procurement of certain goods and services. The University may not limit this obligation by contractually agreeing to any clause that prohibits such legally mandated bidding at or after the conclusion of the current agreement.

Response: The University cannot agree to a non-compete clause that prevents it from contracting with another provider beyond the expiration or termination of the current contract. Please consult the University Counsel for language to propose as an alternative to any non-compete provision.

Our thanks to the Office of General Counsel for the University of North Carolina at Charlotte for allowing us to adapt much of this information for use at UNCP.

Updated: Thursday, September 8, 2011

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