Bulletproofing Your Public Contracts

Presented By: Steven Graham, C.P.M., CLGPO

Vance-Granville Community College

Piedmont RegionalTraining

October 21, 2014

Two Types of Law

Civil Law

Laws that affect relationship

amongst individuals :

Contract law Tort law

Public Law

Includes:

criminal, administrative

and constitutional laws.

Administrative laws include:

Statutes Case law (common law) Administrative regulations

and rules

Two Sources of Contract Law

Common Law

Applies to the following types

of transactions: Service contracts Intangibles (i.e. intellectual

property such as patents,

copyrights, trademarks,

royalty and licenses Real property

Uniform

Commercial Code

Applies to the following types

of transactions: Purchase or sale of “goods” Transactions that create a

lease of personal property Transactions that involve

letters of credit Transactions that create a

security interest in personal

property or fixtures

What is a Contract?

A contract is an agreement between two or more parties with the intent to be legally bound. In order for a contract to be valid and enforceable, it must involve mutual assent (agreement), mutual obligation (exchange of consideration), legal purpose, and competent parties. Types of contracts include:

Purchase agreements Service agreements Construction or repair agreements Grant agreements Intergovernmental agreements/MOUs

Pre-Audit Certificate RequirementThe Budget and Fiscal Control Act requires local government expenditures to be authorized to ensure that funds are properly appropriated or budgeted to meet contractual obligations. In a nutshell, the pre-audit statute requires the following three elements:

1. The finance officer must ensure that there is an appropriation authorizing the obligation in the unit’s budget ordinance or resolution.

2. The finance officer must ensure that an unencumbered balance remains in the appropriation sufficient to pay in the current fiscal year the sums obligated by the transaction for the current fiscal year.

3. The finance officer must affix a signed certificate to each contract or agreement requiring the payment of money or by a purchase order for supplies and materials to assure compliance in accordance with the Budget and Fiscal Control Act.

Contract Execution

It is important to distinguish between the authority to enter into (approve) a contract, and the authority to execute (sign) a contract. The fact that someone has the authority to execute a contract does not necessarily mean that he/she also has the authority to approve a contract.

State statutes do not expressly assign responsibility for executing or signing contracts. The Board assigns this responsibility to one or more individuals within the entity.

Both the common law and state statutes require that a contract must be entered into or approved by a person or board with the authority to contract on behalf of the entity that will be bound by the contract. The Board can delegate its authority to others within the entity unless a statute specifically requires action to be taken by the Board.

Contract Execution

All contracts must be executed (signed) by the proper person having legal authority to bind the contractor to the obligations contained in the contract documents. The name of the person signing must be typed or handwritten below the person’s signature, along with the capacity in which the person signed the agreement (e.g. President, Manager, Partner).

Terms, Conditions & ProvisionsTerms, conditions and provisions of a contract set out a detailed description of the goods or services to be provided. But, most importantly, they set out the expectations, requirements and obligations of the parties to the contract. The terms, conditions and provisions in a contract will provide protection for both parties involved in the agreement. If any dispute occurs over performance under the contract, the contract can be used as a reference point to assist in settling the dispute.

Terms are the things that you agree to do when you sign a contract or other document. Each term gives rise to a contractual obligation. Conditions are things that must be in place before the transaction can be concluded successfully. Provisions typically appear at the end of a contract document and tell the parties how their relationship will be governed and how the contract will be administered.

Identifying the Parties

Use one word descriptive terms, introduced in the opening clause identifying the parties, to refer to the parties throughout the contract. Check to ensure that references to the parties are consistent throughout the contract.

Recommended LanguageThe parties to this contract (Contract) are Name of Public Entity (OWNER) and Name & Type of Business (CONTRACTOR) having its principal place of business at principal business address;

Scope of Work (Purpose)

Describe the goods or services required under the contract in sufficient detail. If the description is too vague, it will be difficult for the owner to enforce the contract or establish a breach of contract by the contractor. A detailed description of the goods or services should be attached as an exhibit to the contract and incorporated by reference if sufficient detail cannot be provided in general terms in the contract itself. Be sure to answer A sufficiently defined scope of work should define the What, Where, When, How and How Many.

Recommended Language CONTRACTOR, in exchange for the compensation paid by OWNER under this Contract, shall provide the following services:

Compensation- Payments

Identify a definitive amount of money the owner must pay pursuant to the contract. If a total number of goods or hours of service cannot be identified, a monetary cap should be placed on the total amount, which may not be exceeded without a duly executed written amendment or change order to the contract.

Be sure to address the following: Payment Method (Rate Per Hour, Lump-Sum,

Installment) Payment Due Dates (Net 30 Days) Reimbursable Expenses (Travel Expenses)

Term of ContractIdentify the time period during which the owner and contractor are subject to the contract’s commitments. The term of a contract shall commence on an Effective Date and shall end on an Expiration Date identified in the contract. Due to legal implications, work under a contract should not commence before the effective date or after the expiration date.

Contract extension or renewal options can provide owners the unilateral right to extend the contract beyond the current contract term end date. An extension option allows the owner to amend the contract to allow additional time to complete the work or to conduct a procurement process. A renewal option allows the contract to be renewed for additional contract terms after the completion of the initial contract period. It is recommended that any contract which provides for automatic renewal or renewal unless the public entity takes affirmative action to terminate be modified to delete the automatic renewal. Use this language:“This [contract/agreement/lease] may be renewed for an additional term by the mutual written consent of the parties. Notice of a desire to renew must be sent X number of days before the current agreement expires”.

Review & Negotiation of Various Contract Clauses

Prohibited Clauses Other Clauses to Consider

• Limitations of Liability • Hold Harmless or

Indemnification • Acceleration of Payment • Choice of Law or

Governing Law • Forum, Venue or

Jurisdiction Selection• Alterations of NC General

Law of Contracts• Binding Arbitration• Assignment of Rights/

Delegation of Duties• Non-Compete Clauses

• Confidentiality or Non-Disclosure of Information

• Termination for Non-Appropriation of Funds

• Entire Agreement/Modification

• Force Majeure Clause• Termination With/Without

Cause• Insurance• Waiver & Severability• Use of Public Entity’s

Name in Advertising, Endorsement, or Promotion

Limitations of Contractor’s Liability for Nonperformance

Example“In no event shall Contractor be liable for any damages arising from any breach of contract or liability in tort”.ExplanationLimitation of liability clauses limit the public entity’s recourse against a vendor for nonperformance or other breach of contract.Solution: Negotiate the removal of the clauseLimitations on the contractor’s liability for nonperformance implicate the Constitutional prohibition on exclusive emoluments (NC Constitution Article I. Section 32). It also implicates the Attorney General’s obligation to exercise civil litigation (G.S. 114-6). Therefore, state and local government entities cannot agree to a clause limiting the other party’s liability.

Limitations of Liability Under the NC Tort Claims Act

Example“In no event shall Contractor be liable for any damages arising from any breach of contract or liability in tort”.

ExplanationAssumption of risk clauses subject a public entity to liability for acts of individuals not employed by the public entity and compels the public entity to pay for more than its own negligence. In negotiating the removal of such a clause, use the following language:

"North Carolina laws and regulations provide that contract provisions such as limitations on the other party's liability and waivers of the limits of the public entity’s liability 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 public entity cannot waive the State's governmental immunity and assume liability for actions not covered by 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. (Authority: Advisory Opinion, North Carolina Attorney General to David N. Edwards, Jr., UNC General Administration, December 12, 1990)”.

Limitations of Liability Under the NC Tort Claims Act

Solution (in priority order)1. Remove the clause entirely.2. Replace the clause with the following language:

“The parties shall remain responsible for the acts and omissions of their respective officers, agents, and employees.”.

3. If you are unable to negotiate either 1 or 2, the only remaining option is to insert the following language at the end of the clause subjecting the public entity to liability beyond the limits of the Tort Claims Act (including attorney fees) and after each sentence providing that the public entity will take assumption of risk or have responsibility:

“…only in the manner and to the extent provided by North Carolina law, notwithstanding any other choice of law provisions in this contract.”.

Hold Harmless or Indemnification Example“Owner shall defend, indemnify, and hold harmless the Contractor against any and all loss, injury, or other damage”.

ExplanationIndemnity or hold harmless clauses subject a public entity to liability for acts of individuals not employed by the public entity and compels the public entity to pay for more than its own negligence. In negotiating the removal of such a clause, use the following language:

"North Carolina laws and regulations provide that contract provisions such as 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 public entity cannot waive the State's governmental immunity and assume liability for actions not covered by 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. (Authority: Advisory Opinion, North Carolina Attorney General to David N. Edwards, Jr., UNC General Administration, December 12, 1990)”.

Hold Harmless or Indemnification

Solution (in priority order)1. Remove the clause entirely.2. Replace the clause with the following language:

“The parties shall remain responsible for the acts and omissions of their respective officers, agents, and employees”.

3. If you are unable to negotiate either 1 or 2, the only remaining option is to insert the following language at the end of the clause subjecting the public entity to liability beyond the limits of the Tort Claims Act (including attorney fees) and after each sentence providing that the public entity will hold harmless, save harmless, or indemnify:

“…only in the manner and to the extent provided by North Carolina law, notwithstanding any other choice of law provisions in this contract”.

Acceleration of Payment

Example“If Owner breaches the agreement, Contractor may accelerate and declare all obligations of the Owner immediately due and payable by the Owner”.ExplanationAcceleration clauses require all future payments to automatically becomes due when a certain event occurs (often breach of the agreement) before those payments would otherwise be due.Solution: Negotiate the removal of the clausePublic entity is obligated to operate within a budget fixed for every fiscal year. Acceleration clauses force the public entity to make payments for which no money has been budgeted and which are not due in a particular fiscal year. Therefore, the public entity may not enter into a contract with an acceleration clause.

Choice of Law or Governing Law

Example“This Agreement shall be governed in accordance with the law of the Planet of Mars. Any legal action shall be brought in the proper court of Mars”.

ExplanationChoice of law clauses dictate which state’s laws will apply to the interpretation of the contract and to any dispute relating to the contract. In negotiating the removal of such a clause, use the following language:

“Choice of law clauses requiring the public entity’s contracts to be interpreted in accordance with the laws of another state or jurisdiction other than North Carolina implicate the State’s governmental immunity. The scope of North Carolina’s waiver of governmental immunity is based on North Carolina law, and subjecting a contract to the laws of another state or jurisdiction exceeds the scope of the State’s waiver. Therefore, the public entity cannot agree to a clause subjecting it to the law of another state”.Solution: Remove the clause and replace“This agreement shall be construed, governed, and enforced by and in accordance with the laws of the State of North Carolina”.

Forum, Venue, or Jurisdiction Selection

Example“The resolution of any claim or dispute arising under this Agreement shall be subject to enforcement solely in the proper court of Mars”.

ExplanationForum, venue, or jurisdiction selection clauses dictate where litigation stemming from the contract will occur. In negotiating the removal of such a clause, use the following language:

“Forum selection clauses requiring the public entity to consent to litigation in the courts of a state other than North Carolina are prohibited under N.C. Gen. Stat. 22B-3. These clauses exceed the scope of the State’s waiver of governmental immunity and impair the Attorney General’s exclusive responsibility and obligation to defend the public entity under N.C. Gen. Stat. 114-6. Therefore, the public entity cannot agree to a clause subjecting it to litigation in the courts of another state”.Solution: Remove the clause and replace“Each party expressly consents to the jurisdiction of the Superior Court of the State of North Carolina should litigation arise between the parties”.

Statute of Limitations Example“Any legal action brought pursuant to this Agreement shall be initiated within a period of 1 year following the discovery by the party bringing the action of the event giving rise to the cause of action”.

ExplanationThe statute of limitations is the amount of time a party has to file a claim or lawsuit against the other. Under North Carolina law, the statute of limitations for claims involving contracts is three years. In negotiating the removal of such a clause, use the following language: “Any contract with the public entity containing a clause that shortens or lengthens the parties’ time to file a legal claim changes the law under which governmental immunity for breach of contract was waived. Therefore, it is unlawful for the public entity to agree to a clause that changes the time frame during which the parties can file a legal claim or sue for breach of contract”.Solution: Remove the clause and replace“Any legal action brought pursuant to this Agreement shall be initiated within a period of 3 years following the discovery by the party bringing the action of the event giving rise to the cause of action”.

Material Breach/Irreperable Harm

Example“The parties agree that a material breach of any provision of this Agreement constitutes irreparable harm entitling the non-breaching party to all remedies of law, including injunctive relief”.

ExplanationThis type of clause asserts that breach of the contract will necessarily be regarded as irreparable harm to the non-breaching party and will automatically justify court action to order the breaching party to comply.

Solution: Negotiate the removal of the clauseAny contract between the public entity and another party implicates the laws of North Carolina. The public entity cannot agree to waive provisions of North Carolina law, including governmental immunity. Any waiver of governmental immunity for breach of contract must be limited to those waivers authorized under North Carolina law. A clause asserting that breach would cause irreparable harm and justify injunctive actions changes the law under which immunity was waived and thus constitutes an unauthorized waiver of governmental immunity. Therefore, the public entity cannot agree to a clause providing that breach would cause irreparable harm and justify injunctive relief.

Liquidated Damages/Cancellation Fees

Example“In the event that the Owner breaches this agreement, in addition to any actual damages, the public entity must pay to the Contractor liquidated damages in the amount of $20,000, which such payment shall be over and above any other award of damages, costs and fees”.

ExplanationLiquidated damages clauses require the public entity to pay a predetermined amount of money if it breaches the contract. Cancellation fees require the public entity to pay a prescribed amount of money in the event it cancels the contract.

Solution: Negotiate the removal of the clauseAny contract between the public entity and another party implicates the laws of North Carolina. The public entity cannot agree to waive provisions of North Carolina law, including governmental immunity. Any waiver of governmental immunity for breach of contract must be limited to those waivers authorized under North Carolina law. A provision requiring the public entity to pay liquidated damages or cancellation fees changes the law under which immunity was waived and thus constitutes an unauthorized waiver of governmental immunity. Therefore, the public entity cannot agree to a clause that requires it to pay liquidated damages or cancellation fees.

Binding Arbitration Example“All disputes arising out of this Agreement shall be settled by arbitration. The decision of the arbitrator shall be final and binding upon both parties”.ExplanationArbitration clauses or mandatory alternative dispute resolution clauses require disputes arising out of the contract to be resolved through some process other than mediation or litigation in the courts of North Carolina. In negotiating the removal of such a clause, use the following language: “Any contract between the public entity and another party implicates the laws of North Carolina. The public entity cannot agree to waive provisions of North Carolina law, including governmental immunity. Any waiver of governmental immunity for breach of contract must be limited to those waivers authorized under North Carolina law. A clause requiring any mandatory alternative dispute resolution, including binding arbitration, changes the law under which immunity was waived and thus constitutes an unauthorized waiver of governmental immunity. Therefore, the public entity cannot agree to binding arbitration or any mandatory dispute resolution other than legal action in North Carolina courts”. Solution: Remove the clause and replace“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”.

Assignment of Rights/Delegation of Duty

Example“Contractor may delegate the performance of this Agreement to a qualified third party; “ or “Contractor may assign any interest in this Agreement without Owner’s prior written consent”.ExplanationAssignment of rights and delegation of duties clauses allow the vendor contracting with the public entity to give away rights or transfer the obligation to perform services under the contract to a third party. In negotiating the removal of such a clause, use the following language: “A clause that permits delegation of performance or assignment of rights under the contract constitutes a waiver of regular contract defenses available to the public entity and a waiver of the public entity’s recourse against a vendor who breaches the contract. In addition, it may violate the North Carolina constitutional provision prohibiting anyone from receiving payment from the State for work without actually providing services. Therefore, the public entity cannot agree to an assignment clause”. Solution: Remove the clause and replace“This contract is not assignable by either party”.

Non-Compete Clauses Example“For a period of 12 months after conclusion of this contract, the Owner agrees that it will not enter into a contract with any company performing substantially the same services that are the subject of this agreement”.ExplanationNon-compete clauses prohibit the public entity from subsequently contracting with other parties that provide similar services for a specified length of time during and/or after the contract ends. Solution: Negotiate the removal of the clause In hiring vendors and other contractors, the public entity is bound to comply with competitive bidding requirements under State law. Therefore, if the public entity determines that it needs a particular service, it is required to competitively bid for that service and cannot agree to a clause that prohibits such bidding”.

Other Clauses to Consider

Does the Contract contain confidentiality or non-disclosure provisions?

Confidentiality clauses are often used by parties to ensure that certain information remains confidential. Contractors frequently ask a public entity to keep all information provided by a contractor confidential.

Pursuant to Chapter 132 of the North Carolina General Statutes, any person may inspect and obtain copies of their public records and public information unless otherwise specifically provided by law. Therefore, the public entity cannot agree to keep confidential information that is required by law to disclose.

Any clause that contains a confidentiality or non-disclosure requirement should be modified by inserting the following language at the end of the clause to make it subject to the NC Public Records Act:“…unless disclosure is required by law”.

Other Clauses to Consider

Does the Contract provide for payments beyond the current fiscal year?

Termination for Non-Appropriation of Funds clauses must be included in contracts providing for payments beyond the current fiscal year. If the contract provides for payments beyond the current fiscal year, add the following clause:“This Agreement may be subject to the annual appropriation of funds by the public entity. Notwithstanding any provision herein to the contrary, in the event that funds are not appropriated for this Agreement, the public entity shall be entitled to immediately terminate this Agreement, without penalty or liability, except the payment of all contract fees due under this Agreement up to and through the last day of service for the current fiscal year”.

Other Clauses to ConsiderDoes the Contract contain a clause setting forth that the Contract is the complete agreement of the parties?

Entire Agreement clauses should be included in contracts to protect a public entity from claims by the other party that oral statements made contrary to or in addition to the contract are applicable. Add the following clause: “This Agreementconstitutes the entire understanding of the parties and supersedes all prior oral and written agreements. Modifications and amendments to this agreement, including any exhibit or appendix, shall be enforceable only by a writing signed by all of the parties”.

Does the Contract contain a force majeure clause (“act of God clause”) effective to both parties?

An “act of God” or “force majeure” clause should be included in contracts if the public entity determines that acts of God are likely to impact contract performance. Add the following clause: “If either party’s performance of obligationsunder this Agreement is materially hampered, interrupted, or interfered with by reason of any fire, casualty, lockout, strike, labor conditions, unavoidable accident, riot, war, or act of God, or by the enactment, issuance, or operation of any municipal, county, State, or federal law, ordinance or executive, administrative, or judicial regulation, order of decree, or by any local or national emergency, the affected party shall be excused from performance of this Agreement”.

Other Clauses to ConsiderDoes the Contract allow the public entity to terminate the Contract with or without cause?

A Termination clause identifies the circumstances under which the contract may be cancelled prior to the termination date specified in the contract. There are two different types of termination clauses:

Termination Without Cause (For Convenience)Termination for convenience or without cause states that the contract will be cancelled because “we want to do so”. A reasonable amount of notice must be given for this type of termination, typically 30 days as that’s a billing cycle for most entities.

Termination For Cause (For Default)Termination for cause or for default can be a remedy for a breach of the contract by the other party. This type of termination gives the aggrieved party the right to terminate because the other party did something “wrong”. Proper notice must be given, and the party in the wrong must be given the opportunity to fix (cure) the problem before the termination will be effective.

Other Clauses to ConsiderIs sufficient insurance coverage in place to protect the public entity against types of claims that may arise under a Contract?

All contractors, with certain limited exceptions, should be required to maintain reasonable insurance coverage and provide written proof of insurance coverage and, if applicable, additional insured documentation of this protection. “Written proof” consists of certificates of insurance and endorsements to policies. Insurance coverage must be obtained from a company duly licensed to do business in the State of North Carolina. “Additional insured” status means the public entity is considered an “insured” party on the insurance policy (usually the general liability, commercial auto liability and umbrella/excess liability policy) of another person or entity (i.e., contractor) who is the “named insured”. The other party’s insurance policy must be specifically endorsed to add the public entity as an “additional insured”. Merely obtaining a certificate of insurance to this effect does not guarantee that the endorsement has been issued, so it is best to obtain a copy of the actual policy endorsement whenever possible.

Other Clauses to ConsiderThe specific insurance coverage and limits required will vary depending on the nature of a contract. As a minimum, the contractor typically is required to maintain the following coverage and limits:Type of

InsuranceDescription Limits

General Liability Provides protection for bodily injury and property damage claims arising from operation of a contract caused by the named insured.

Combined single limit of no less than $1M each occurrence & $2M aggregate

Auto Liability Provides protection for bodily injury and property damage cause by an accident arising from the operation of a covered vehicle that the insured is legally obligated to pay.

Combined single limit of $1M on owned, hired, and non-owned vehicles used in contract performance

Worker’s Compensation &

Employers Liability

Provides compensation for medical care for employees who are injured in the course of employment and protects employers from liabilities arising from disease, fatality, or injury to employees resulting from workplace conditions or practices.

NC statutory coverage limits on workers comp, as well as employer’s liability coverage with minimum limits of $500,000 covering all employees.

Other Clauses to ConsiderDoes the Contract provide the public entity with protection due to non-enforcement of terms and terms that are ruled to be unenforceable?A Waiver clause should be included that provides for protection of the Agreement due to non-enforcement of terms. The public entity may decide not to utilize an enforcement or penalty provision in a contract. To prevent the waiver of the right to enforce the provision at a later date, add the following waiver clause: “The failure of a party to enforce any provision in this Agreement shall not be deemed to be a waiver of such right”.

A Severability clause should be included that provides for protection of the Agreement due to terms that are ruled to be unenforceable. The following severability clause protects the entire contract in the event that a court finds a particular clause illegal or void. In such case, only that clause is removed, but the rest of the contract remains in force: “Should any portion of this Agreement be declared invalid or unenforceable for any reason, such portion is deemed severable from the Agreement and the remainder of this Agreement shall remain fully valid and enforceable”.

Other Clauses to Consider

Does the Contract allow the other party to use the public entity’s name in any advertising, endorsement, or promotion?If the contract allows the other party to use the public entity’s name in any advertising, endorsement, or promotion, add a clause to require advance written consent, such as:

“Contractor will not appropriate or make use of public entity’s name or any of public entity’s trade or service marks or property, in any advertising or otherwise, without prior written consent of the public entity”.

REMEMBER: Read the Fine Print

Contract terms, conditions and provisions should be reviewed to ensure their compliance with all federal, state and local laws.

The acceptance of contractor terms and conditions that are additional or different than the standard boilerplate terms and conditions established by your public entity should be on a limited and case-by-case basis. Legal counsel should be consulted when contractual language contains prohibited or risky clauses.

Questions

LEARN…LEAD…BELIEVE.

Steven Graham, C.P.M., CLGPO Vice President of Finance and Operations Vance-Granville Community College PH: (252) 738-3446 Email: grahams@vgcc.edu