PROHIBITED, RISKY, CAUTIONARY, AND ALTERNATE CONTRACT CLAUSES
As a public constituent institution of the University of North Carolina System, North Carolina A&T State University is a state agency. Certain contract clauses or terms are legally prohibited in contracts with State entities. Determining early on whether the other party is willing to negotiate on some of the prohibited clauses will improve efficiency by preventing too much time spent in negotiations that may eventually fall through.
Below are examples of some prohibited or risky clauses and provisions and language to use to negotiate these terms out of contracts with N.C. A&T. Questions about how to use the information below should be directed to the Office of Legal Affairs at 336-334-7592 or legal_review@ncat.edu.
ALTERNATE CONTRACT TERMS WITH EXPLANATIONS
A. Acceleration of Payment, Late Payment Penalties, or Finance Charges
An acceleration of payment clause is a term in a contract that requires payment of the full amount of a debt under certain conditions. They are usually found in contracts that require multiple installment payments.
If a contract provides for an accelerated payment, late payment penalty, or finance charge, you must remove the language.
Rationale to Provide to Other Party
Acceleration clauses implicate the State’s obligation to operate within a fixed budget, forcing the University, as a state agency, to make payments for which no money has been appropriated or budgeted and are not due in a particular fiscal year.
B. Arbitration and Other Administrative Mechanisms to Resolve Disputes
Arbitration is a procedure in which a dispute is submitted to an arbitrator to make a binding decision on the dispute outside of the judicial process.
An arbitration clause is a clause in a contract that requires the parties to resolve their disputes through an arbitration process.
Mediation is a process wherein the parties meet with a mutually selected impartial and neutral person who assists them in negotiating a satisfactory resolution to their dispute. You may agree to attempt to resolve disputes by mediation.
If a contract requires binding arbitration or any mandatory dispute resolution other than legal action in North Carolina courts, you may:
Remove the arbitration clause from the contract entirely; or
Remove the arbitration clause and replace the arbitration clause with a clause requiring mediation in North Carolina using the following language:
Disputes arising under this Agreement may be settled by mediation in the State of North Carolina in accordance with procedures acceptable to and agreed by the parties.
Rationale to Provide to Other Party
As a state agency, NC A&T cannot agree to an arbitration provision or any mandatory dispute resolution other than legal action in North Carolina courts because contracts between the University and another party includes North Carolina’s existing law by implication. In North Carolina, the waiver of the State’s sovereign immunity is limited to the waiver of immunity for contracts that include the law of North Carolina. To preserve its sovereign immunity the University cannot agree to waive provisions of North Carolina law. A clause requiring binding arbitration or any mandatory dispute resolution other than legal action in North Carolina courts change the law under which sovereign immunity for breach of contract was waived.
C. Assignment of Rights or Transfer of Ownership Rights
Assignment clauses are legally contracts terms that give a party the chance to transfer ownership or assign their contractual obligations and rights to a different contracting party. In other words, an assignment clause can reassign contracts to another party.
If the contract allows a contractor to assign its rights to a third party without transferring all of the claims and defenses to the third party that the University has against the original contracting party, you must:
(1) Remove the assignment language from the contract entirely; and
(2) Replace it with the following clause: Neither party may assign its rights or obligations under this agreement.
Rationale to Provide to Other Party
An assignment clause constitutes a waiver of the University’s defenses and recourse. It also implicates the exclusive emoluments clause of the North Carolina Constitution 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.
D. Automatic Contract Renewal (or Evergreen Contracts)
An auto-renewal (also called a “self-renewal,” “evergreen,” or “perpetual renewal”) clause in a contract provides for the automatic renewal of the contract at the end of the contract term unless either party notifies the other party, in writing, of an intent to terminate. Often, this notice must be given within a specific time period before to the end of the current contract term. As a general rule, the University does not allow contracts to contain automatic renewal clauses. Contracts should have a start (or effective) date, and a termination (or expiration) date.
If a contract includes an automatic renewal clause, you must:
(1) Remove the automatic renewal language; and
(2) Modify the contract to include a specified date of termination (generally no more than three years, depending upon nature of the contract) by using language such as: Notwithstanding anything to the contrary contained in this Agreement (including, without limitation, any terms and conditions attached to and incorporated into this contract): (a) in no event shall the term of this Agreement be longer than the initial term expressly stated in this Agreement; (b) any automatic renewal or extension (whether or not conditioned upon any notice or absence of notice from either party) or any similar evergreen provision shall be deemed null and void from the beginning; and (c) the term of this Agreement shall not be extended or renewed except by a separate written agreement authorized and executed by the parties. In the event of any inconsistency in this Agreement relating to the duration of the initial term of this contract, the shorter initial term shall govern. If no initial term is stated in this Agreement, then the term shall be two years from the date on which the term begins.
Rationale to Provide to Other Party
Although State law allows companies to enter into contracts that contain automatic renewal clauses, the General Assembly set parameters in N.C. Gen. Stat. § 75-41. As a state agency, NC A&T does not enter into contracts that automatically renew because automatic renewal clauses implicate the State’s obligation to operate within a fixed budget, and may force the University to make payments for which no money has been appropriated or budgeted and are not due in a particular fiscal year.
E. Exercising Control over Litigation
Control over litigation entitles the other party to select and direct defense counsel and to determine defense strategy, including whether to compromise the claim by settlement or to litigate the claim to judgment. If a contract provides that the other party will have the right to control the defense or settlement of any claim that may arise out of a contract dispute, you may do one of the following:
(1) Remove the clause; or
(2) Modify the clause by adding the following language: Any party’s assertion of a right to exclusive control of any investigation, defense, or settlement of any claim filed against the university is subject to the advance written approval of the North Carolina Attorney General’s prior written approval.
Rationale to Provide to Other Party
By law under N.C. Gen. Stat. § 114-2(2), the North Carolina Attorney General represents all state agencies and institutions. Any state agency or institution employing private counsel must obtain the prior written approval of the Attorney General of the State of North Carolina in accordance with N.C. Gen. Stat. § 114-2(2)). For any state agency or institution to employ private counsel, it must obtain the prior written approval of the Attorney General pursuant to N.C. Gen. Stat. § 114-2.3(a)).
F. Governing Law (or Venue, Forum, Choice of Law)
A governing law clause (also called a choice of law, forum selection, or venue provision) is used to specify which rules and laws will apply in the event of a legal dispute. As a State agency, disputes that arise from any contract with the University must be decided in North Carolina using the substantive law of the State of North Carolina.
If a contract provides that disputes would be resolved under the substantive law or jurisdiction of a state or country other than North Carolina, you may do one of the following:
(1) Replace the clause with one making the contract subject to the law and jurisdiction of the State of North Carolina using the following language: This Agreement shall be construed, governed, and enforced by and in accordance with the laws of the State of North Carolina. Each party expressly consents to the jurisdiction of the State and federal courts in Guilford County, North Carolina without regard to any conflict of laws provisions; or
(2) Remove the clause (this is disfavored, but will make the contract silent on the governing law).
Rationale to Provide to Other Party
N.C. Gen. Stat. § 22B-3 prohibits the University from consenting to choice of law/venue/forum clauses to litigation in a jurisdiction other than North Carolina. Contract terms permitting suit in another state or country implicate the State’s sovereign immunity and the Attorney General’s authority to represent the State agency, are against public policy, and are therefore void and unenforceable. Choice of law 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.
G. Liability Clauses – Hold Harmless, Indemnification, Assumption of Liability in Tort and Contract (or Acceptance of Responsibility) in Favor of Contractor
A liability is generally a responsibility to compensate for breach of contract or some failure to perform according to an established agreement. Liability clauses provide certainty and acts as a safety net that clearly outlines the parties’ responsibilities in the event of a breach of contract. However, there are certain limitations to liability clauses when contracting with North Carolina state agencies that require removal or modification.
Express or contractual assumption of the liability means that one party agrees to take responsibility for any breach or loss for which the other party is responsible.
An indemnity clause is a contract provision that allows the parties to manage the risks attached to the contract by making one party pay for the loss suffered by the other. Indemnity is the act of making someone “whole” (equal to what they have lost) or protecting them from identified losses.
A hold harmless clause in a contract absolves one party of legal liability for any loss suffered by another party. Hold harmless clauses ensure that one party cannot hold the other party legally responsible for any loss that results from services provided. The University can only agree to hold another party harmless to the extent that any of the liability arises out of the negligent act or omission of an employee, officer, or agent of the University while acting in the scope of their employment.
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.
If a contract requires “indemnity, assumption of liability, acceptance of responsibility, or hold harmless clause by the University in favor of the other party, or clauses subjecting the University to liability beyond the limits of the Tort Claims Act (including attorneys’ fees), or other such phrases, you must do one of the following:
(1) Remove any indemnity, assumption of liability, acceptance of responsibility, or hold harmless clause by the University in favor of the other party, or clauses subjecting the University to liability beyond the limits of the Tort Claims Act (including attorneys’ fees).
(2) An alternative, but disfavored approach is to insert the following language at the end of each sentence that states the University will assume risk, have responsibility, hold harmless, save harmless, indemnify, or a clause subjecting the University to liability beyond the limits of the Tort Claims Act (including attorneys’ fees):
. . . only in the manner and to the extent provided by North Carolina law including, but not limited to the NC Tort Claims Act, GS 143-291, et seq., and without waiver of its sovereign immunity.
Rationale to Provide to Other Party
North Carolina laws provide that contract terms such as limitations on the other party’s liability, waivers of the limits of the University’s liability, and hold harmless or indemnification clauses in favor of the other party are contrary to public policy and are therefore void. Under the North Carolina Tort Claims Act (N.C. Gen. Stat. § 143-291 et seq.) a State entity 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, for an amount greater than allowed under the Tort Claims Act ($1,000,000), or for liabilities different from the liabilities allowed under the Tort Claims Act (such as attorney's fees). Agreeing to such terms would render that agreement void.
H. Limitation of Other Party’s Liability
Limitation of liability clauses (or damage caps) seek to limit the amount payable in damages on a breach, restrict the types of loss recoverable or the remedies available, or imposes a short time frame in which damages are recoverable.
If a contract provision limits the other party’s liability, you must remove the clause.
Rationale to Provide to Other Party
Limitations on the other party's liability for nonperformance implicate the North Carolina Constitutional prohibition on exclusive emoluments, N.C. Constitution Art. I, Sec. 32. It also implicates the Attorney General’s obligation to exercise duties regarding civil litigation under N.C. Gen. Stat. § 114-6. Under the North Carolina Tort Claims Act (N.C. Gen. Stat. § 143-291 et seq.) a State entity 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, for an amount greater than the Tort Claims Act ($1,000,000), or for liabilities different from the liabilities allowed under the Tort Claims Act (such as attorney's fees). Agreeing to such terms would render that agreement void.
I. Liquidated Damages and Cancellation Fees
Liquidated damages provisions specify a predetermined amount of money that must be paid as damages if one party fails to meet certain contractual requirements. Liquidated damages clauses act as assurance for both parties. The party who breaches the contract knows ahead of time how much they would owe the other party. Similarly, the other party can negotiate an amount that would adequately cover its loss without having to go to court.
If a contract provision refers to liquidated damages, you must remove the clause.
Rationale to Provide to Other Party
As a state agency, NC A&T cannot agree to pay liquidated damages or cancellation fees because any contract between the University and another party includes by implication the existing law of the State of North Carolina. The State’s waiver of sovereign immunity is limited to the waiver of immunity for contracts that include the law of North Carolina. To preserve its sovereign immunity, the University cannot agree to waive provisions of North Carolina law. A clause requiring liquidated damages or cancellation fees to be paid by the University changes the law under which sovereign immunity for breach of contract was waived.
J. Material Breach; Irreparable Harm; Injunctive Relief; Equitable Relief
A material breach of contract is a serious violation of the terms of the contract. A material breach occurs when one party’s failure to abide by a contract’s terms is so significant that it may defeat the purpose of entering the contract in the first place.
Irreparable harm is harm that cannot be repaired and for which money compensation or the exchange of property would be inadequate.
An injunctive relief (sometimes called equitable remedy or equitable relief) clause specifically orders one party or both parties to the contract to refrain from doing an act that would cause harm to the other party. Injunctive relief is a court-granted remedy that requires a party to act or refrain from doing a particular act in cases where a legal remedy such as monetary damages are considered inadequate to rectify the situation. Injunctive relief is generally only available when there is no other legal remedy such as an appropriate
If a contract term provides that a breach would cause irreparable harm and justify injunctive action, you must remove the clause.
Rationale to Provide to Other Party
Any contract between the University and another party includes by implication the existing law of the State of North Carolina. The State’s waiver of sovereign immunity is limited to the waiver of immunity for contracts that include the law of North Carolina. To preserve its sovereign immunity, the University cannot agree to waive provisions of North Carolina law. A clause requiring that breach would cause irreparable harm and justify injunctive action changes the law under which sovereign immunity for breach of contract was waived.
K. Non-Compete Clause; Restrictive Covenant; Covenant Not to Compete
A non-compete clause (also called a restrictive covenant or a covenant not to compete), is a contract clause under which one party (usually an employee) agrees not to enter into or start a similar profession or trade in competition against another party (usually the employer). Non-compete clauses and agreements vary, but usually seek to keep an employee or former employee from working for a competitor company or competing individual, starting a company that offers the same products or services, developing competing products or providing competing services, or recruiting former colleagues to join a new business or work for a new employer for a specific duration of time. Non-compete clauses are premised on the possibility that a current or former employee might begin working for a competitor or start a business and gain competitive advantage because they have inside information about their former employer's operations or trade secrets, or sensitive information such as customer/client lists, business practices, upcoming products, and marketing plans; or that the new employer may exploit confidential information about the former employer to gain an advantage, or to help a competitor of the former employer.
If a contract term limits who the University may hire or contract with, you must remove the clause.
Rationale to Provide to Other Party
As a state agency, NC A&T cannot agree to a clause that provides that the University may not contract with a similar service provider or hire specific individuals for a specified length of time after the expiration or termination of the contract, or that the University may not hire the contractor's personnel for a specified period of time. State agencies are bound to comply with competitive bidding requirements under State law. Therefore, if the University determines that it needs a particular service, it is required to competitively bid for that service, and cannot agree to a non-compete clause that prohibits such bidding. State of North Carolina policy is to hire into each position the individual best able to perform the specific requirements of the job based on the individual’s education and experience. A non-solicitation of personnel clause implicates the University’s statutory obligation to hire the best candidate for any available position and is a violation of North Carolina public policy.
L. Personal Liability of Contract Signer
University contract terms cannot provide for personal liability for authorized signatories. However, unauthorized individuals who sign contracts may be liable under University Policy 1102, Signature Authority and Delegation of Authority to Sign Contracts.
If a contract provision provides for personal liability for the University’s authorized signatory, you must remove the clause.
Rationale to Provide to Other Party
The Defense of State Employees Act, N.C. Gen. Stat. § 143-300.2 et seq. applies only to liabilities within the course and scope of an employee’s State employment.
The University cannot protect an employee from personal liability. The Defense of State Employees, Medical Contractors, and Local Sanitarians Act (N.C. Gen. Stat. Ch. 143, Article 31A) applies only to liabilities within the course and scope of employment. However, pursuant to University Policy 1102, Signature Authority and Delegation of Authority to Sign Contracts, personal liability may attach to unauthorized individuals who purport to sign contracts on behalf of the University.
M. Procurement Relationship with University Employee or Immediate Family Member of University Employee
The University cannot simply award state contracts to employees involved in other businesses or their immediate family members.
If a contract creates a procurement relationship with a University employee or employee’s immediate family member, you must get prior written approval to enter into the contract from NC A&T’s Procurement Services Office and the North Carolina State Purchasing Office (SPO) before making purchases from or through individuals who are also employees or immediate family members of employees of the University or the State of North Carolina.
N. Statute of Limitations and Alterations of North Carolina’s General Law of Contracts
A statute of limitations clause in a contract sets the forth the deadline or limits the period of time in which a party can file a claim in the event of a contractual dispute. The University cannot agree to a statute of limitations that is less than the three years allowed by State law.
If a contract provision provides a statute of limitations that is less than the three years allowed by North Carolina law, you must replace the clause with a statute of limitations that is a least three years.
Rationale to Provide to Other Party
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. Any contract between the University and another party includes by implication the existing law of the State of North Carolina. The State’s waiver of sovereign immunity is limited to the waiver of immunity for contracts that include the law of North Carolina. To preserve its sovereign immunity, the University cannot agree to waive provisions of North Carolina law. A clause requiring less than three years for the University to file a legal claim changes the law under which sovereign immunity for breach of contract was waived.
O. Time is of the Essence
Time is of the Essence (TIOTE) is a contract clause that means that a party’s contractual obligations must be completed in a timely manner or they are in breach of the contract. Including a TIOTE clause makes completion dates material to the contract. With a TIOTE clause, the reason behind noncompliance (or breach) does not matter. The fact that the completion did not occur on the date specified causes the breach. Contracts that do not include a TIOTE clause are judged by a reasonableness standard that looks at the circumstances that prevented timely completion (most University contracts do not include a TIOTE clause).
If a contract provision includes a time is of the essence clause, you must remove the clause.
P. Waivers of the Limits of the University’s Liability Established by the North Carolina Tort Claims Act
The limit of liability is the maximum amount that the State will pay for a specified loss, damage to property, or injury.
If a contract provision purports to waive the limits to the University’s liability established by the North Carolina Tort Claims Act, N.C. Gen. Stat. § 143-291 et seq., you must remove the clause.
Rationale to Provide to Other Party
The Tort Claims Act sets forth the waiver of the State’s sovereign immunity. Only the General Assembly can waive the State’s sovereign immunity. The NC Supreme Court has said: 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. For the extent to which the State has waived its immunity from tort claims, see N.C. Gen. Stat. §§ 143-291 to 143-300.1.
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. The Industrial Commission has the authority to award attorney’s fees pursuant to N.C. Gen. Stat. § 6-21.1 for actions brought under the North Carolina Tort Claims Act; the Industrial Commission is considered a court for the purpose of hearing and deciding tort claims under N.C. Gen. Stat. §§ 143-291 and 143-291.1.
