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Prohibited Contract Terms for State Agencies

Explanation for standard terms deleted from agency agreements between UNG and providing agency:

The University of North Georgia’s status as a state university imposes certain restrictions on its contracting activities that a private university or company does not face. Many standard clauses typically found in commercial contracts can not be accepted by the University of North Georgia. The restrictions are based on constitutional and statutory prohibitions. The following provisions are some of the most common provisions that we must strike through when negotiating an agreement or contract.

Contact for the Office of General Counsel for questions or further clarification

Legal Name of the University of Georgia

The correct legal name of UNG, which should appear on all UNG agreements and contracts, is “Board of Regents of the University System of Georgia by and on behalf of University of North Georgia.” UNG is a unit of the Board of Regents.

Indemnification and/or hold harmless

State agencies are constitutionally prohibited from agreeing to indemnify third parties. Indemnification provisions have been determined to violate the prohibition against pledges of the State’s credit and prohibition against gratuities by the State. (Ga. Const. Art. VII, Sec. IV, Par. VIII; Ga. Const. Art. III. Sec. VI, Par. VI; 1980 Op. Att’y Gen. 80-67; Op. Att’y Gen. 74-115) Indemnification provisions have also been determined to be invalid as unauthorized attempt to contractually waive the State’s sovereign immunity. (1980 Op. Att’y Gen. 80-67)

The first constitutional provision provides that the credit of the State shall not be pledged or loaned to any individual, company of association. Debt as used in the constitution is defined in terms of an annual budget cycle that relies on annual appropriation of the legislature. Under this definition, a “Pledge” would include agreeing to obligations of funds beyond the current fiscal year. The second constitutional provision relates to “gratuities clause” which prohibits state entities from granting any donation or gratuity (gift) to a third party or forgiving any debt or obligation owed to the public. The gratuities clause essentially requires that the state entity receive substantial benefit for the grant or use of assets (whether using property or personnel). Finally, by virtue of the doctrine of sovereign immunity, suit may not be maintained in the courts against a state entity without the express consent of the State.

Limitation of Liability

The University of North Georgia does not have the authority to prejudice the rights of the State of Georgia to sue or otherwise enforce a contract by agreeing to a limit on or a waiver of liability per the State Attorney General. (1980 Op. Att’y Gen. 80-67) (Refer to the discussion of arbitration, above, for more information.)

Warranty/Guarantee
The Attorney General has advised the warranty provisions violate against pledges of the State’s credit and the prohibition against gratuities by the State. The reason is that resources may have to be expended to satisfy such as warranty and guarantee.
Governing Law of or venue in any state other than Georgia
Contracts with state entities must be governed by the laws of the State of Georgia. State law provides that the Attorney General has exclusive authority and control over all matters of litigation or potential litigation involving State agencies. As a result, the University of North Georgia does not have statutory authority to accept the governing laws of another state.
Confidentiality

The University is subject to the Georgia Open Records Act (O.C.G.A. § 50-18-70. This Act gives any party the right to inspect and receive copies of most university records, including documents, contracts, and communications related to normal course fo business.

Attorney's Fees
As a public institution, we cannot agree to pay attorney’s fees, court costs, or other litigation expenses in the event of a dispute as that would be a violation of the constitutional gratuities clause.
Damage Clauses

Damage clause that are limited to consequential damages or special damages are generally acceptable since they are so ill-defined and speculative that most courts refuse to award them (i.e. lost profits). However, adding indirect or incidental damages as additional types of damages payable by the University of North Georgia is not acceptable. The Uniform Commercial Code regards these as distinguishable from consequential damages because they are usually meant to include out of pocket expenses directly attributable to the breach (i.e. travel expenses)

Late Payment/Cancellation Charges/ Interest Charges

State agencies are prohibited from agreeing to pay late payments or cancellation charges. This stems from an opinion of the Attorney General that late payment charges are in the nature of penalty/gratuity which the State is constitutionally prohibited from paying. (Attn. Gen. Position Paper dated August 8, 1978; Bently v. State Board of Examiners, 152 Ga. 836 (1922).

Taxes
The State is exempt from most taxes and generally will not agree to contract language which requires the payment of taxes. The University will not agree to reimburse the vendor for the payment of taxes.
Binding Arbitration

The University of North Georgia does not agree to binding arbitration. The rationale is that there is no specific statutory authority allowing us to do so. The State Attorney General has exclusive authority and control over all matters of litigation or potential litigation involving State agencies, thus UNG has no authority to limit the type or scope of judicial action. Provisions which effectively waive the right of the Attorney General to bring actions on behalf of the state are prohibited.

Multi-year terms or automatic renewals for agreements obligating state appropriated funds

As a general rule all contracts must expire at the end of the fiscal year (July 1- June 30) (O.C.G.A. Sec. 50-5-64; Att’y Gen. op. 74-115) There is one exception to this rule under O.C.G.A. Sec. 50-5-64. If this exception is applicable agreements that cross the fiscal year boundary must be on the Department of Administrative Services Installment Purchase Form.

In all other case, the state statute requires specific language which allows for instantaneous termination of the contract in the event funds are not appropriated in subsequent years. (O.C.G.A. Sec. 50-5-64 for specific language required.)

Interest
The Attorney General has determined that payment of interest would be prohibited by the gratuities clause fo the constitution and that the University lack statutory authority to agree to the payment of interest. Atty. Gen. Position Paper dated August 8, 1978; Bently v. State Board of Examiners, 152 Ga. 836 (1922) There is one exception to this rule under O.C.G.A. Sec. 50-5-64. If this exception is applicable, agreements that cross the fiscal year boundary must be on the Department of Administrative Services Installment Purchase Form which then statutorily allows for the payment of interest.
Prepayment of Service/Deposit
The University is not allowed to pay for all or any part of a service prior to the service being rendered. Pursuant to the State of Georgia Accounting Procedures Manual, payables for for normal operating expenditures should be recognized when the goods and services have been received or rendered. Accounting Manual Reference: Section: Vender Management; Subsection: Payment Method
Credit agreements
The Board of Regents lacks the legal authority to borrow money. An opinion by the Georgia Attorney General Opinion 74-115 dated 8/23/74 found in 1974 Ga. Ag Lexis 115; 1974 Op. Att’y Gen. Ga. 242 supports this stance. When the State of Georgia borrows, it does so by issuing bonds through the Georgia State Finance and Investment Commission. Other State agencies, of which UNG is one, aren’t allowed to borrow money. Please don’t ask UNG to fill out a credit application in conjunction with opening an account or signing a contract. Legally we are not authorized by the State to do so. The State of Georgia enjoys the highest bond ratings, and UNG is committed to handling their financial obligations promptly. You can give them the AP contact information and a W9.
Insurance
As a State entity, the University of North Georgia does not have the authority to purchase commercial insurance. State law provides for the Department of Administrative Services to procure insurance for State entities. The University of North Georgia is covered under the Georgia State Tort Claims Act (GSTCA) and the State of Georgia Broad Form Insurance that is administered by the Department of Administrative Services Risk Division. The GSTCA works in much the same way as liability insurance or self-insurance. For all 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. 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.

Cite: Georgia State Tort Claims Act (GSTCA) O.C. G.A. 50-1-20 et. Seq. http://w3.lexis-nexis.com/hottopics/gacode/Default.asp.
Confidentiality
As a State institution, the University is subject to the Georgia Open Records Act (O.C.G.A 50-18-70 et. seq.) We cannot agree to provisions that attempt to prohibit UNG from releasing bid or contract documents to any party that submits a request to inspect and obtain such records.
Patent and Copyright Indemnification
The Attorney General has taken the position that it is the sole legal advisior for the state and state entities may not agree to be represented by third parties, even when the matter involves the third party defending its patent rights.
Contractual provisions which require the University to accept the risk of loss of an item during delivery

Generally the University of North Georgia requires F.O.B. delivery to the University’s centralized receiving department so that the risk of loss is on the seller until such delivery. As a rule, we do not accept risk of loss until title actually passes to the University because the University has no way to cover the item under the state self-insurance policy.

Non-Solicitation Clause
During the term of this Agreement and each SOW and for twelve ( 12) months after their respective expiration or termination, neither party will, either directly or indirectly, solicit for employment or employ (except as permitted below) by itself any employee of the other party who was involved in the performance of the party's obligations, unless the hiring party obtains the written consent of the other party. The foregoing provision will not prohibit ageneral solicitation of employment in the ordinary course of business or prevent either party from employing any employee who contacts such party as a result of such a general solicitation or at his or her own initiative without any direct or in direct solicitation by or encouragement from such party

Additional information to help better understand the prohibited contract terms:

Indemnities

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. 

Insurance

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. 

Multi-Year Contracts

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. 

Unliquidated Expenses

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.

Credit Agreements

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. 

Waivers of jurisdiction and service; arbitration; laws of another state

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.”

Exemption From Payment of Taxes
Universities owned by the State Board of Regents are exempt from payment of taxes. No money shall be withheld by either party for the payment of taxes as required by law.
Unknown Terms and Conditions
UNG is not authorized to be bound by terms and conditions that are unknown at the time of signing the agreement. As a practical matter, entering into contracts that call for an unspecified sum of money to change hands would be void as a matter of State law.

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