Prohibited Clauses

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Below are legal explanations of why certain clauses are prohibited in contracts executed by a state agency, including the University of North Carolina at Greensboro.

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 Attorney General’s obligation to exercise duties regarding civil litigation. N.C. Gen. Stat. § 114-6.

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. § 143-291et 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).

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).

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.

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.

Clauses Rendering the Contract Subject to the Laws and the Legal Forum of a State other than North Carolina, without Prior Approval from the Attorney 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.

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 Attorney 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 Attorney 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.

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 Department 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.

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

An assignment clause 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. Therefore, the University, as a State agency, cannot agree to an assignment clause.

Covenants Not to Hire a Service Provider’s Employees

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.”