July 7, 1998
Mary Beth Kurz General Counsel North Carolina State University
P.O. Box 7008 Raleigh, NC 27695-7008
Re: Advisory Opinion; University Authority to Agree to Submit Claims to Binding Arbitration.
Dear Mary Beth:
In March 1998, you wrote to inform us that NCSU was negotiating several research agreements with various organizations including government-owned, contractor-operated facilities such as the Lawrence Livermore Laboratory and other institutions of higher education. In the course of these negotiations, these organizations have insisted that NCSU agree to binding arbitration to settle disputes that might arise under the proposed contracts. In particular, the clause in question states that "arbitration may be used at any time that the contracting officer has authority to resolve the issue or controversy." You have written to ask whether NCSU has the authority to enter into binding arbitration agreements with these contractors. It is our opinion that, consistent with the limitations explained below, NCSU may enter into these agreements.
Prior to the Supreme Court’s decision in Smith v. State, 289 N.C. 303, 222 S.E.2d 412 (1976), state agencies were generally immune from suit for breach of contract. In Smith v. State, however, the Supreme Court for the first time abrogated the State’s sovereign immunity on breach of contract claims. In reaching that decision, the Supreme Court expressly stated that its decision to set aside the State’s sovereign immunity and exercise jurisdiction over breach of contract claims against the State was limited to those cases where the General Assembly has not provided an adequate alternative remedy. Id. at 321. ("It has been the policy of this State to meet its valid obligations, and we foresee no change in that policy. The purpose of this decision is to implement the policy and to provide a remedy in exceptional situations where one may be required."); see also, Middlesex Constr. Corp. v. State ex rel. Art Museum Bldg. Comm’n, 307
N.C. 569, 299 S.E.2d 640 (1983) (superior court had no jurisdiction over the plaintiff’s claim that the Art Museum Building Commission had breached its contract because the General Assembly had provided an administrative remedy for the plaintiff’s claim under G.S. § 143-135.3) and Huang v. NCSU, 107 N.C. App. 710, 421 S.E.2d 812 (1992) (superior court has no jurisdiction over a faculty member’s claim for breach of contract).
Neither State v. Smith nor any subsequent precedent has addressed a state agency’s authority to agree to resolve claims arising from alleged breaches of contract through some process other than a suit in the North Carolina General Court of Justice. But see In re Arbitration Between State and Davidson & Jones Construction Co., 72 N.C. App. 149, 154-55, 323 S.E.2d 466, 469-70 (1984), disc. review denied, 313 N.C. 507, 329 S.E.2d 396 (1985) (affirming arbitration involving UNC-CH). However, when it abrogates the State’s sovereign immunity, the General Assembly has the exclusive authority to dictate not only the terms under which the State may be sued but also the forum in which the suit may be adjudicated. E.g., Teachy v. Coble Dairies, Inc., 306 N.C. 324, 329, 293 S.E.2d 182, 185 (1982) (Tort Claims Act requires that claims against the State for negligence be brought before the Industrial Commission).
In light of that principle, it is our opinion that NCSU’s authority to enter into binding arbitration agreements is limited to those claims for which the General Assembly has not already established a mandatory dispute resolution mechanism. See 52 N.C. Op. Atty. Gen. 46 (absent legislative authority a local school board cannot delegate its authority to supervise their employees or its obligation to decide appeals from decisions of school personnel to an arbitrator). Statutes which establish a mandatory dispute resolution mechanism include G.S. § 143-135.3 which establishes the process for resolving disputes over State building construction contracts. The Tort Claims Act, G.S. § 143-291 et seq. is another area where the General Assembly has preempted State agency authority to agree to alternative dispute resolution mechanisms. Similarly, G.S. § 126-1 et seq. establishes the dispute resolution mechanism for grievances brought by state employees subject to the State Personnel Act. Those disputes may be arbitrated only in accordance with the alternative dispute resolution procedures adopted by the State Personnel Commission. G.S. § 126-34.2; 25 N.C.A.C. 1J.0504 et seq. NCSU’s tenure regulations adopted pursuant to the Code of the Board of Governors is another legally established process for resolving employment disputes that, in our opinion, cannot be altered by the parties’ agreement to arbitrate their disputes. Aside from these particular statutory or regulatory restrictions on binding dispute resolution procedures, G.S. § 22B-3 provides that contractual clauses that require arbitration to be instituted or heard in another state are generally void as against public policy.
There may be other statutes or binding regulations that preempt a state agency’s authority to agree to resolve contractual disputes through binding arbitration. However, absent such mandatory statutory or administrative procedures, it is our opinion that NCSU can agree to resolve its contractual disputes through any alternative dispute resolution mechanism that fairly addresses the parties’ obligations, including binding arbitration. We are not aware of any statute that creates a special process for resolving disputes in contracts such as those described in your letter. Therefore, NCSU may legally agree to contracts with government-owned, contractor operated facilities which provide that "arbitration may be used at any time that the contracting officer has authority to resolve the issue or controversy."
Although it is our opinion that NCSU has the authority to enter into binding arbitration agreements, we urge you to exercise caution when considering those terms. Arbitration is rough justice. The Rules of Evidence will not apply to the proceedings. Consequently, the hearsay comments of unauthorized personnel could play a significant role in the proceedings. The process is also likely to favor the plaintiff who claims "it just isn’t fair" over a state agency that stands on the specific terms of the agreement or the letter of the law. Moreover, an arbitrator’s decision is rarely subject to appeal; errors of law will go unreviewed. See In re Arbitration Between State and Davidson & Jones Construction Co., 72 N.C. App. 149, 154-55, 323 S.E.2d 466, 469-70 (1984), disc. review denied, 313 N.C. 507, 329 S.E.2d 396 (1985). Depending on the terms of the agreement, the arbitrator’s award might include attorney fees whereas such fees are not normally recoverable in a breach of contract claim filed in State court. Finally, the informality of the proceedings will tend to reduce any advantage that experienced counsel could provide to the agency. In light of the differences between alternative dispute resolution procedures and litigation in State courts, we suggest that the authority to agree to resolve disputes in fora other than State courts be limited to the most senior university administrators.
signed by
Grayson G. Kelley Senior Deputy Attorney General
Thomas J. Ziko
Special Deputy Attorney General