Business Contracts Office
Common Contractual Terms Explained
Frequently Negotiated Clauses
Below are three of the most commonly negotiated and contentious provisions found in service contracts. Departments that are confronted issues regarding these clauses (including the examples below) should consult the Contract Office or the Legal Affairs Department.
- Warranties & Warranty Disclaimers:
Warranties are simply representations by the seller to the buyer regarding the quality, characteristics, condition, or performance of the services. Disclaimers are methods for negating or limiting a specific warranty. Although most individuals are familiar with the typical product or seller warranties, there are additional warranties that may be necessary. For instance, it may be necessary to include warranties regarding licenses, permits, or certifications, or warranties that the contractor will comply with, all applicable federal, state, and local laws and regulations. If a contractor will perform work on site, the contractor should warrant that it will comply with University policies and the rules and regulations of the Board of Regents. When purchasing services containing intellectual property rights (i.e. software or technology), the contractor should also warrant that it has the full ownership rights to sell the product and services.
An indemnification is simply a protection against loss or liability resulting from third party claims. To indemnify someone means you will reimburse them, or “hold them harmless” from any damages and costs associated with third-party claims.
If UTSA purchases software from ABC Company, then UTSA should receive two specific protections from ABC Company:
- ABC Company should warrant that the software will not infringe any intellectual property rights, and
- ABC Company should indemnify (hold harmless) UTSA from any third party claim that software infringes an intellectual property right.
Receiving both these two protections is reasonable and fair. If a company is selling a product, the company should warrant that it has the right to sell it, and it should defend the buyer against claims that state otherwise.
In the above example, assume Widget International Co. claims that the software is actually theirs and charges UTSA with infringing Widget International’s intellectual property rights. If UTSA only has the basic warranty in its contract, UTSA may be able to sue ABC Company for breach, but UTSA will be left to its own devices to defend itself against Widget International. Although UTSA may prevail against both companies, UTSA is fighting two fronts in this instance. If UTSA receives both the warranty and the indemnity, however, UTSA is battling neither. With the indemnity protection, ABC Company must protect and defend UTSA from Widget International’s claims.
- Liability and Damages (legal responsibility):
The term “liability” is simply another means of stating “legal responsibility.” Liability is the responsibility or accountability one party has to the other. If one party breaches a contract (fails to perform its contractual obligations), the breaching party is considered to have liability to the other party for the damages incurred by the breach. When establishing a contract, the seller will understandably wish to limit its liability as much as possible. For instance, a seller may attempt to limit its liability for damages to a certain dollar amount. Most sellers will also attempt to eliminate their liability for consequential (indirect) damages. Because UTSA is a Texas State agency, agreeing to either of these clauses is problematic. See Constitutional and Legal Authority.
Below are two provisions that are commonly integrated into specific UTSA contracts:
- Confidentiality: Because of the nature of UTSA’s services, many contracts may involve confidential data in some manner. Student-related information, for example, is protected under the Family Education Rights and Privacy Act (FERPA). Similarly, information regarding UTSA’s personnel and intellectual property may also be confidential in nature. Any agreement related to such data or information requires the incorporation of specific confidentiality provisions. On the other hand, many vendor contracts may request non-disclosure or confidentiality warranties from UTSA. Because UTSA is a government agency, however, UTSA can only agree to these provisions to the extent authorized by law, court order, or administrative decree, including but not limited to, the Texas Public Information Act, currently codified in Section 552, Texas Government Code.
- University Marks : The Board of Regents of The University of Texas System owns all rights to the name, logos, and symbols of UTSA (“University Marks”). No displays of any kind or any other advertising may state or imply that UTSA endorses a particular contractor’s products or services. Any use of University Marks by a Contractor must have prior written approval of UTSA, and any use of University Marks for the purpose of a contractor’s direct profit must be pursuant to a license issued by the Collegiate Licensing Company or any successor identified by UTSA.
In certain instances, however, a contractor may be allowed to reference UTSA by name only as a customer of a contractor. Such reference may appear in the contractor’s promotional material or on the contractor’s web site provided that the reference does not state or imply endorsement by UTSA.
Constitutional & Court-Ordered Limitations
- Sovereign Immunity : The State of Texas is immune from liability and from suit with respect to most causes of action against it under the doctrine of sovereign immunity. Sovereign immunity, unless waived by the legislature, protects the State of Texas, its agencies, and officials from lawsuits for damages, absent legislative consent to sue the State. This means that the State of Texas cannot be sued in its own courts without its legislature's consent. Nevertheless, the State is liable on contracts made for its benefit as if it were a private organization. This means that when a Texas State agency enters into a contract, sovereign immunity from liability may be waived, but sovereign immunity from suit is not. Legislative consent to sue the State of Texas must still be obtained. This doctrine has a direct impact on the authority of State agencies to enter into certain contractual obligations. Under the doctrine of sovereign immunity, for example, a State agency will not be authorized to pay for contractual claims made by a contractor, such as claims related to indemnities or breaches of liability, unless the Texas Legislature by resolution permits a suit against the State. If an Agreement requires UTSA to indemnify or hold harmless another party for or from anything, and it cannot be removed, contact the Contracts Office or the Office of Legal Affairs. For further research, see Whitten, Matthew J., Fiction Becomes Reality: Will Texas Abrogate the Catch-22 of Sovereign Immunity when it Contracts?, Tex. Tech L. Rev. 243 (Winter 2004).
An exception to contractual sovereign immunity is found in the Dispute Resolution statute codified in Texas Government Code, Chapter 2260. This code waives sovereign immunity for certain contractual claims by authorizing a "Contested Case Hearing" with an administrative law judge in the State Office of Administrative Hearings. This Contested Case Hearing is limited to claims of less than $250,000, and specific mediation procedures must be followed prior to filing for such hearing. For further information, see Dispute Resolution Requirements below
- Prohibition Against Agency Debt: Section 49, Article III of the Texas Constitution commands that “no debt shall be created by or on behalf of the State . . . .” An indemnity obligation creates such a “debt” in the constitutional sense because when you indemnify someone, you are financially protecting them from some possible future damage. An indemnity by a State agency, therefore, may be unconstitutional unless at the time of the agreement there are existing funds that have been dedicated to cover the indemnity obligations. Because the cost of any future indemnity claims, if any, are unknown, dedicating such funds is typically not feasible in a government agency with allocated budgets. The critical issue to keep in mind is that any indemnity agreement that is negotiated by a State agency in violation of the law will be unenforceable and void. Furthermore, the State of Texas cannot be held liable for a contractual obligation established by an agent of the State that is in excess of that agent’s authority. For further information, see Texas Attorney General Opinion MW-475.
- Right to Suit: The State of Texas, as a sovereign entity, maintains the right to suit in almost all circumstances. Many agreements include clauses limiting or waiving a contractor’s liability, such as a clause that limits the contractor’s liability to the amount that UTSA has paid for the service. In such cases, an effort should be made to delete the provision. In agreements where the contractor is limiting its liability for consequential damages, or limiting its liability to a dollar figure, you may not succeed in getting the clause deleted. If the other party will not agree to delete the provision, confer with the Contracts Office or the Office of Legal Affairs regarding the issue. You may also wish to inform the contractor that neither UTSA nor the Texas Attorney General has the authority to prejudice the rights of the State to sue or otherwise enforce an agreement containing a limit on or waiver of liability.
Statutorily Required Clauses
- Governing Law (Jurisdiction) and Venue: Because UTSA is a State of Texas Government agency, agreeing to governing clauses from another state or government entity is extremely problematic.
- Products & Materials Produced in Texas (required for purchase of services)
- Eligibility Certification (related to preparing bid or proposal specifications)
- Dispute Resolution (required for the purchase of goods or any services)
In 1999, the Texas Legislature passed a law requiring a procedure that allows Contractors to resolve certain contract claims against the State or a State agency. This Statute is now codified in Texas Government Code, Chapter 2260. It requires that each State agency place a provision in every contract to which the statute applies, stating that the procedures must be used to try to resolve a dispute arising under the contract. This statute applies to all University contracts except:
- Contracts with the federal government
- Interagency Agreements (agreements between agencies of the State of Texas)
- Inter local Agreements (agreements with local governing bodies such as city and county governments, or independent school districts)
- Contracts with foreign and out-of-state governments or agencies thereof
- Contracts under which UTSA is not procuring goods or services (e.g. UTSA is providing the good or service)
For further information, see Dispute Resolution Explained.
- Electronic & Information Resources Accessibility (EIR Provision):
Section 2054.453 of the Texas Government Code establishes requirements for access by disabled persons to electronic and information resources (“EIRs”) procured or developed by Texas state agencies or institutions of higher education.
Section 2054.453 authorizes the Texas Department of Information Resources (“DIR”) to adopt rules concerning how Texas state agencies and institutions of higher education are to develop, procure, maintain, and use EIRs to provide access to individuals with disabilities. The DIR Accessibility Rules that are applicable to institutions of higher education are set forth in Title 1, Chapter 206, Rule §206.70 of the Texas Administrative Code , and in Title 1, Chapter 213, Subchapter C of the Texas Administrative Code.
Further information on the EIR Accessibility requirements
- Standard Addendum to Vendor-Provided Agreements :
The UT System Office of General Counsel maintains a Standard Addendum to service agreements that contains all the clauses discussed above.