Negotiating Prohibited Contract Clauses

The University is prohibited by law from agreeing to certain contractual terms because it is a State entity. If you find such prohibited terms in a contract proposed by another party, it is advantageous to begin contract negotiations by explaining these limitations to the other party. The key is to determine early on in the negotiations whether a certain term might be a deal-breaker before you put in too much time and effort in negotiating other terms.

Below are examples of the types of clauses or provisions that are prohibited and legal language that you can use in negotiating these provisions out of contracts. If you have questions or are unsure about how to use the information below, contact the Office of Legal Affairs at 704-687-5732 or Amy Kelso via email.


Acceleration of Payment

In negotiating an acceleration clause out of the contract, you may use the following language to explain why the University cannot agree to such a provision:

"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. Therefore, the University may not enter into an acceleration clause."


Arbitration

If the Contract requires binding arbitration or any mandatory dispute resolution other than legal action in North Carolina courts, either:

  1. Remove the clause; or 
  2. Remove the clause and add a clause requiring mediation in North Carolina, such as:

"Any dispute arising under this Agreement may be settled by mediation in the State of North Carolina in accord with such procedures as may be acceptable to the parties."

In negotiating the removal of an arbitration clause, you may use the following language to explain the University's limitations:

"Any contract between the University and another party includes by implication the existing law of the State of North Carolina. The waiver of sovereign immunity therefore is limited to the waiver of immunity for contracts that include the law of North Carolina. To preserve its sovereign immunity the University may not 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. Therefore, the University, as a State agency, cannot agree to binding arbitration or any mandatory dispute resolution other than legal action in North Carolina courts."


Assignment of Rights

If the Contract 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, modify the Contract by removing the assignment language and inserting the following clause:

"This Contract is not assignable by either party."

In negotiating the removal of an assignment clause, you may use the following language to explain the University's limitations:

"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."


Exercising Control over Litigation

If the Contract contains a clause providing that the other party will control the defense or settlement of any claims that might arise out of a dispute related to the obligations or terms of the contract:

  1. Remove the clause; or
  2. Add the following language to their clause: "PARTY's assertion of a right to exclusive control of any investigation, defense or settlement of any claim filed against UNC Charlotte is subject to the advance approval of the Attorney General of the State of North Carolina."

In negotiating the removal of or revision to an exclusive control over litigation clause, use the following language:

"The North Carolina Attorney General is charged with representing all state agencies and institutions (N.C.G.S. § 114-2(2)).  For any state agency or institution to employ private counsel, it must obtain the prior written approval of the Attorney General (N.C.G.S. § 114-2.3(a))."


Governing Law

If the Contract contains clauses that would make it subject to either the substantive law or the jurisdiction of a state other than North Carolina, either:

  1. Remove the clause; or
  2. Remove the clause and add the a clause making the Contract subject to the law and jurisdiction of the State of North Carolina, such as:

"This Agreement shall be construed, governed, and enforced by and in accordance with the internal laws of the State of North Carolina. Each party expressly consents to the jurisdiction of the Superior Court of the State of North Carolina should litigation arise between the parties."

In negotiating the removal or change of a choice of law clause, you may use the following language to explain the University's limitations:

"Choice of law/forum clauses requiring the University to consent to litigation in a jurisdiction other than North Carolina are prohibited under N.C. Gen. Stat. 22B-3. Clauses permitting suit in another state implicate the State's sovereign immunity and the Attorney General's authority to represent the State agency. Therefore, the University, as a State agency, cannot agree to a clause subjecting the University to either the substantive law or the jurisdiction of another state."


Indemnity; Hold Harmless; Assumption of Liability

If you find in the contract an indemnity, assumption of risk, or hold harmless clause or a clause subjecting the University to liability beyond the limits of the Tort Claims Act (including attorneys fees), the clause must be removed. In negotiating the removal of such clauses, you may use the following language to explain the University's limitations:

"North Carolina laws and regulations provide that contract provisions 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. Specifically, 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 in violation of the Tort Claims Act would render that agreement void. A December 12, 1990 advisory letter from the North Carolina Attorney General to David N. Edwards, Jr., UNC General Administration, supports this determination."

If you are unable to negotiate such a clause out of the contract altogether, an alternative (although not favored) approach is to insert the following language at the end of each sentence providing that the University will takeassumption of risk, have responsibility, hold harmless, save harmless, or 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."


Limitation of Liability

In negotiating the removal of clause limiting the other party's liability, you may use the following language to explain the University's limitations:

"Limitations on the other party's liability for nonperformance implicate the 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. N.C. Gen. Stat. 114-6. Therefore, the University, as a State agency, cannot agree to clause limiting the other party's liability."


Liquidated Damages

In negotiating the removal of a clause providing for liquidated damages or cancellation fees to be paid by the University, you may use the following language to explain the University's limitations:

"Any contract between the University and another party includes by implication the existing law of the State of North Carolina. The waiver of sovereign immunity therefore is limited to the waiver of immunity for contracts that include the law of North Carolina. To preserve its sovereign immunity the University may not 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. Therefore, the University, as a State agency, cannot agree to a clause providing for liquidated damages or cancellation fees to be paid by the University."


Material Breach; Irreperable Harm

In negotiating the removal of a clause providing that breach would cause irreparable harm and justify injunctive action, you may use the following language to explain the University's limitations:

"Any contract between the University and another party includes by implication the existing law of the State of North Carolina. The waiver of sovereign immunity therefore is limited to the waiver of immunity for contracts that include the law of North Carolina. To preserve its sovereign immunity the University may not 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. Therefore, the University, as a State agency, cannot agree to a clause providing that breach would cause irreparable harm and justify injunctive action."


Statute of Limitations

In negotiating the removal of a clause providing less than three years for the University to file a legal claim or sue for breach of contract, you may use the following language to explain the University's limitations:

"Any contract between the University and another party includes by implication the existing law of the State of North Carolina. The waiver of sovereign immunity therefore is limited to the waiver of immunity for contracts that include the law of North Carolina. To preserve its sovereign immunity the University may not 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. Therefore, the University, as a State agency, cannot agree to a clause providing less than the statutory three years for the University to file a legal claim or sue for breach of contract."


Non-compete Clauses

If the Contract includes a “non-compete” clause, which requires, for instance, that the University may not contract with a similar service provider for a specified length of time after the expiration or termination of the Contract, you may use the following language in a letter to explain the University's limitations:

"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."