Prohibited Contract Terms for State Agencies

An indemnity is a contractual clause by which a contractor may ask that the University defend it against any claims of other persons who might be injured as a result of something that happens while the parties are carrying out their duties under the contract. The Georgia Attorney General has determined that public agencies cannot enter into agreements indemnifying contractors, or any other entity, against third party claims. A copy of an official opinion from the Attorney General to this effect is attached to this letter as Exhibit “A.”

Occasionally a contractor will attempt to deal with this restriction by rewriting an indemnity clause so as to eliminate the words “indemnity” or “indemnify,” while leaving the intent of the clause intact – that is, to obligate the University to defend the contractor against third party claims. “Indemnity” is not a magic word, and if a contract clause has the effect of creating an indemnity, we would not be able to agree to it even though that word has been removed.

The University of North Georgia does not enter into clauses that obligate it to indemnify a contractor “to the extent permitted by law.” There are two reasons for this. From our standpoint, because we know that the extent to which the law permits us to indemnify contractors is no extent whatsoever, it would be disingenuous for us to imply in a contract that there might be some set of circumstances under which we would defend the contractor against a third party claims. We would not agree to something that we know we could not do. Secondly, the “extent” clause is simply an invitation to litigate the matter in the event a third party claims arises, and we prefer not to enter into agreements that invite litigation.

Please do not ask us to ignore this rule. Because the University lacks the contractual authority to enter into an indemnity, any person who is signing such a document on the University’s behalf signs it without authority to do so. We would not ask our administrators to expose themselves to personal liability by signing contracts that they know cannot be enforced.

We find that the indemnity issue is seldom a problem once contractors understand that we cannot provide indemnities, and why. If you think about what an indemnity is, it starts to look a lot like a policy of liability insurance. While the University cannot offer its contractors indemnities, there are many insurance companies that exist for precisely that purpose. 

Many contractors ask for clauses that define the manner in which the University insures itself. As a state instrumentality, the University is covered under the Georgia State Tort Claims Act

(GSTCA), O.C.G.A. §§ 50-21-20 et seq. The GSTCA is too voluminous to attach to this letter but you can see it online at http://w3.lexis-nexis.com/hottopics/gacode/Default.asp. Look at Title 50, Chapter 21, Article 2. The State of Georgia waives its sovereign immunity as to covered claims, but retains it as to other claims.

The GSTCA works in much the same way as liability insurance, or self-insurance. For all the types of claims that are covered under the GSTCA, coverage is provided at a limit of $1,000,000 per person, $3,000,000 per occurrence. GSTCA coverage is administered by the Georgia Department of Administrative Services, Risk Management Division. The GSTCA is different from liability insurance in that we cannot adjust the coverage limits upward or downward; the limits are set by law. Also, because it is not insurance in the conventional sense, we cannot add contractors as additional insured parties. 

The authority to commit taxpayer funds to various agencies for various purposes from year to year belongs to the Georgia General Assembly. While the Board of Regents of the University System of Georgia receives an appropriation every year, and the Board of Regents allocates a portion of that appropriation each year to the University of North Georgia, we cannot presume by contract to commit the General Assembly to doing so. That power belongs to the General Assembly exclusively. Consequently, we cannot enter into contracts that commit funds from future years’ appropriations. For example, we cannot enter into multiyear leases with public funds. An opinion of the Georgia Attorney General on this point is attached to this letter as Exhibit “B.”

This does not mean that we cannot enter into any multiyear contract. Contracts that have appropriate escape clauses do not create problems. Nor do contracts that do not require funding, such as sponsorship contracts. And contracts that are funded through non-public sources of money may be permitted under some circumstances. 

In much the same way that we cannot presume that our next year’s appropriation would permit us to fund a multi-year contract, we cannot presume that we would have funds available to pay for claims that might exceed our available funding. Certainly indemnities and limitation of liabilities would fall into this category – who can say how much it might cost to fund an indemnity that has no cap? But the same thing is true as to any other potential expense that cannot be calculated, such as paying a contractor’s attorney’s fees, paying for add-ons which aren’t priced in the contract, paying for unknown cost increases during the life of the contract, and so on.

The Board of Regents lacks the legal authority to borrow money. An opinion by the Georgia Attorney General on that point is attached as Exhibit “C.” When the State of Georgia borrows, it does so by issuing bonds through the Georgia State Finance and Investment Commission. Other State agencies don’t borrow money. Please don’t ask us to fill out credit applications in conjunction with contracts. We simply cannot do that. Nor can we agree to pay interest on late payments, which is tantamount to borrowing money. The State of Georgia enjoys the highest bond ratings, and University of North Georgia is an excellent customer with a reputation for honoring its financial obligations promptly. We do that without the need to apply for credit, and without the threat of interest charges. 

Under Georgia’s constitution, the Attorney General is the State’s attorney for all purposes – including, especially, management of litigation. University of North Georgia cannot usurp his authority by agreeing in advance to control the way litigation would be managed in the event of a dispute. We cannot agree that we would submit to the laws or jurisdiction of another state, that we would waiver formal service of process, or to binding arbitration. It doesn’t mean, for example, that we would absolutely refuse to arbitrate a dispute if one arose. It simply means that decisions of that nature are reserved for the Attorney General and we cannot sign a contract that would usurp his constitutional authority. The text of Art. 5, Sec. 3, Par. 2 is attached to this letter as Exhibit “D.”