Entering Into University Business Agreements

Purpose

This information is designed to heighten campus awareness of the financial liabilities assumed whenever a business transaction is undertaken with a third party. It is important that there be a careful review of all service contracts, licenses, permits, reservation agreements and commercial real estate leases by the Business Services Office prior to commencing any work, holding an event, reserving a facility or otherwise engaging a contractor's services.

Contract law is complicated and involves numerous federal and state laws that apply different standards depending upon the subject matter of an agreement.

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Goals of Contract Office

The Contracts Office goals are:

• To provide prudent customer service, advice and consultation in structuring business transactions for our campus;
• To assist department personnel in properly drafting contracts that are consistent with University policies;
• To minimize financial risks by identifying and dealing with as many contingencies as practical;
• To ensure, to the extent possible, that these contingencies are covered by the University's Risk Management & Insurance Programs so that the costs associated with losses, should they occur, are not borne by the University.

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Why Have a Written Contract?

In many, but not all, situations a verbal agreement may be legally permissible. A properly drafted written contract, however, reduces the chance of misunderstandings at a future date. Documentation of a business transaction protects the rights of the University. When the University has expressed its agreement in a complete and unambiguous document, the writing is the best evidence of our intent. Also, the written document provides an audit trail and authorizes the use of public funds in the payment of invoices for business transactions conducted on the campus.

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Does it Matter that the Contract Does Not Specifically State What is Meant?

Yes. If the terms are not clearly stated and all important terms and conditions are not included, the party with whom the University is dealing may interpret the terms differently. A major purpose of a written contract is to prevent litigation caused by inadequate documentation of crucial points. If we cannot resolve our differences when an issue is raised, the court will interpret the agreement. The judge may interpret the contract in a far different way than we intended. The courts do not usually consider verbal evidence of what we intended. Verbal statements are considered unreliable once a dispute has arisen. If the contract is vague or indefinite, or the intended performance cannot be determined, the court may not enforce the contract.

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Is the Campus, Department, Unit, or Program ever a Party to a Contract?

No. All University business is conducted in the corporate name of The Regents of the University of California.

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No. The Board of Regents has delegated to each Chancellor the authority to execute certain contracts on behalf of the Board. The Director of the Business Services Office is our campus official with contracting authority.

The Business Services Office requires that any campus sponsor of a business contract review, approve, and sign-off on the contract before the contract is executed by the Director of Business Services or her designee.

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No. Work may only commence once the Business Services Director executes the contract. This means that services may not begin if all parties do not sign the contract. This also means that no work can commence if the contract is only signed by a campus dean, department chair, department director, professor, principal investigator, or other manager.

By working without a fully executed agreement, the campus sponsor for the contract is taking the chance that there will be misunderstandings that could cost time or financial loss to the University. If one of the parties, with the knowledge of the other contracting party, undertakes performance of the contract before it is completed, it is generally held that the parties intended to be bound from the moment of the oral contract. Should a loss occur before the contract is executed, however, and both parties are sued by a third person, both parties could be uninsured for any loss.

Insurance companies and the University's Self-insurance Program are obligated to cover liability claims in a contract situation only if the contract is properly executed prior to a loss occurring. In the event that the other party does not have sufficient resources to pay a judgment or settlement, our campus may be held responsible for paying all or part of those costs, in addition to whatever cost are incurred by the University in defending the claim.

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In many situations, contracts include boilerplate language that provides protection only for the vendor and not the University. The vendor's contract may include provisions that don't apply to our particular business transaction. Some vendors use a one-size-fits-all contract. That's fine for the vendor's business but it is not adequate for the University. Contracts are often drafted by private parties and include provisions that are not acceptable when dealing with the University, as a public entity, or when the language does not comply with either the Standing Orders of the Regents or University policies.

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The Regents' Standing Orders prohibit the University from entering into any contract that provides for the University assuming third party liability. The UC System is limited to executing contracts by which the University assumes liability for conduct of University officers, agents, employees, students, invitees, and guests. Any contract that assumes liabilities for other than these specific categories is not authorized/forbidden by the University.

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What is Indemnification?

An indemnification clause is a contract provision in which the University assumes the financial responsibility for the liability of the vendor with whom we are dealing. A hold harmless clause provides that the risk of damages or loss is transferred from the vendor to the University.

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Indemnification is merely a promise, which may not be financially supported. Insurance ensures that the indemnification provision can be enforced. An indemnification/hold harmless provision, without insurance, may result in the University being liable for the entire loss if the other party is negligent and does not have sufficient resources to pay the claim.

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Why Can't the Other Party's Indemnification/Hold Harmless Language be Accepted as Written?

In most vendor provided contracts, the Indemnification/Hold Harmless provision is far broader than is allowed by the Regents' Standing Orders. Under Regental policy, the campus is only permitted to sign contracts where the language limits the University's liability to acts over which it controls and to the extent the University exercises its control. Requiring the University to assume liability for other parties, such as independent contractors and consultants who are not under the University's control, is called third party liability.

Many vendor-provided indemnification and hold harmless clauses are limitless. Significant risks can be hidden in the most innocuous appearing provisions. If these contract clauses are overlooked or not taken seriously, the result can be that liability can be imposed that the University never intended to assume, would not normally bear, and in some cases, cannot insure.

The assumption of liability under a written contract can be so severe that the other advantages created by the contract are over-shadowed. Our campus is best served by utilizing protocols which places contracting responsibility in the Business Services Office with experienced individuals who recognize the significance of such risk exposures.

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Not in all situations. The Insurance Policies and Self-Insured Programs cover general, automobile, and professional liability situations. These programs do not cover any situation where there is a violation of University policies such as engaging in work under an unapproved contract or assumption of third party liability, as prohibited by the Regents' Standing Orders.

There is also no insurance coverage for breach of contract issues. These are uninsurable exposures. Bad business judgments and financial mistakes are the responsibility of our campus.

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To be binding, changes must be in writing and signed by duly authorized representatives/agents of both parties. This documents the change; it provides clarity; and it binds the vendor to the change should problems arise later.

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