# The Attorney General ofTexas

May 20, 1982

MARKWHITE Attorney General

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A” EqualOpportunity/ Afftmutfve Action Employer Mr. Al Hurley President North Texas State University P. 0. Box 13426 Denton, Texas 76203 Opinion No., m-475

Re: Authority of state universities to execute contractual indemnity agreements, and related questions

Dear Mr. Huriey:

You have asked about the authority of the state to indemnify others contractually. If such authority exists,you ask what acts can be covered by the indemnity agreement. If .itdoes not exist,you ask whether a contract containing such a” agreement would be voidable.

The following clause is one, you advise,’that commonly in contractsprofferedby the university:

University shall indemnify and hold harmless contractor from and ags’inst.anyand all claims; actions, or damages including .attoceys fees caused by or arising out of the performance, failure to perform or breach of’ any of the university’s obligations~under this lease. void or

is found

,Some indemnity agreements require:the indemaitor to hold the indemnitee harmless from liability arising by reason of the indemnitee’sown acts. or arising from the acts of third parties. See 14.Tex. Jur.yI Contribution and Indemnification 024, at 675. ‘But
x V.T.C.S. arts. 249d. 2212b. The clause set out above Is notof that type. h-ever. It purports to indemnify-only ,againstharm arlsing from acts of the university itself.

To the extent that such a clause merely reinforces obligations the university has legally undertaken eisewhere, and does not expand
or increasesthe school’s liability or the scope of its liability, it is harmless surplusage. But to the extent that It purports to create liability or potential liability on the part of the university beyond its statutory or constitutional powers to incur liability, it is invalid. The governing bodies of state universities are creatures of statute and may ~o”stitutio”ally exercise only powers properly

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delegated to them by the legislature. See Foley V. Benedict, 55 - S.W.2d SO5 (Tex. 1932).

A contractually imposed obligatfon of indemnitycreates a "debt" in the constitutional sense unless at the time of the agreement it is within the lawful and reasonable contemplationof the parties that it will be satisfied out of current revenues or some currentlyavailable fund. Tex. Const. art. III, §49. art. XI, §§5, 7; T A N.O.R.R. Comlanv v. Galveston County, 169 S.W.2d 713~(Tex. 1943). See also Brown v. Jeffe&o n County, 406 S.W.2d 185 (Tex. 1966)~. Cf. city of Big Spring v. Board of Control, 404 S.W.2d 810 (Tex. 1966)duration ity controlled by agency); Harris County V. and extent of liabil Dowlearn, 489 S.W.2d ,140(Tex.Civ. App. - Houston [14thDist.] 1973, writ ref'd n.r.e.) (orohibition not annlicable to non-contractual

.. obligations). settidr;49, article III of the Texas Constitution commands that "no debt shall be created by or on behalf of the State...." The only exceptions are for supplying casual deficiencies of revenue, repelling invasion, suppressing insurrection, defending the 'statein war, or paying "existingdebt." The term "existingdebt" apparentlyrefers to the debt existing~ln1876 when the provisionwas adopted. Further, the provision places a $2OO,COO limit on "debt createdto supply deficiencies in the revenue."
There are no saving provisions fin the article III, section 49 constitutionalprohibitionagainst state debt such as there are in the articleXI, sections 5 and 7 provisions dealingwith debts of cities and counties. The latter..section provides:
[N]o debt for any purpose shall .ever.beincurred in any manner by .any city or .county unless provision is made, at the time of creating the same, for levying ,andcollecting a sufficient tax to pay the interest thereon and provide at least two percent (2%) as a sinking fund...;

The Texas Supreme Court has held that this provision does not prevent a county from agreeing to assume.indebtedness in the form of a "hold harmless'!agreement so long,as provision is made.for levying and collecting'

the.tax required. Brown v. Jefferson Counte,gupra. See alsoCounty of Ector v. City of Odessa, 492 S.W.2d 360 (Tex.Civ. AK -E1Paso 1973.no writ).

In light of .~therestrictive constitutional'prohibition against statedebt, especiallywhen coupledwith the "cashbasis" requirements of article III. section 49a of the constitution,a state agency will ordinarilybe unable to execute an enforceable indemnityagreement in favorof another party. Persons contractingwith agents~of the state are bound at their peril to ascertain the limitations of the agent's authority and cannot recover to the extent the agent exceeds it.

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Sta~te V. Ragland Clinic-Hospital, 159 S.W.2d 105 (Tex. 1942). Nor will statutory "control and management"authority In the agent suffice if there is no constitutionalwarrant for it. T & N.O.R.R. Companyv. Galveston'County, supra. See Kearse v. Kearse, 276 S.W. 690 (Tex. 1925). Constitutional limitationsmust be read into a statute so as "to restrict literalism to proper bounds." Kearse V. Kearse, supra; cf. Educ. Code 9105.41 (managementand control of N.T.S.U.). -
A relatively recent Texas Supreme Court case might at first appear to undermine the holding of State v. Ragland Clinic-Hospital. supra. and then efficacy of the section 49, article III Idebt" prohibition,but not if seen in proper perspective. In State v. City National Bank of Austin, 603 S.W.2d 764 (Tex. 1980), the ,courtheld a state agency liable for the "holdover occupancy" of office building space wafter the expiration of a four year lease containing a "holdover" clause. The state contended, as briefs on file with the court reveal, that the "holdover"arrangementwas a new one negotiated with the lessor after the original lease expired, and.that the agency was prohibited from contracting with respect to it by both the "prekexistinglaw" provision of the constitution (article.111.section 44) and a'statute. But the state did not claim that,the original lease had been invalidsfor lack of authority'in~the agency -to.incur debt on behalf of the state. contract Since the validity of the original lease

- which contained'a "holdover" clause -- was.uncontested, the court said (after noting the state's contentions applicable only to an alleged "subsequent" agreement): "In view of our holding that the State is liable.because of the written agreement, we find it unnecessary to discuss these points." Similarly, -theprohibition of section 49, article III was not put at issuesin either Board of Regents of the University.of Texas v. S. 8 Gi.Construction Company, 529 S.W.2d 90.(Tex. .Civ.App. - Austin 1975, writ ref'd n.r.e.), or University of Texas System V. Robert E. McKee,.Inc.. 521 S.W.2d 944 (Tex.Civ. App. - Eastland 1975,writ ref'd n.r.e.).

We think it continues~tobe the law in this state that the State of Texas.,cannot

be held liable for a contractual obligation concluded by an agent of the state in excess of his authority,and that no state agent can be given authority to Incur or create a debt on behalf of the state in contravention of.the constitution. See City of Wichita PallsV. Kemp Public Library Board of Trustees, 593 S.W.2d 834 (Tex. Civ. App. - Fort Worth 1980, writ ref'd n.r.e.). In holding that JeffersonCounty had compliedwith the constitutionalrequirement that provision be made for .levyingand collecting the required tax, the supreme court In Brown v. Jefferson County.-supr'a.did not declare that the county was unconditionally bound to perform the indemnity agreementas agreed. It said:

The 'hold and save' agreement herein .involved... may be one which may be funded and paid off

p. 1671. . . Mr. Al Rurley - Page 4 (MW-475)

without violatingany constitutionaldebt limit or taxing restrictions applicable to counties. If such obligationmay be so discharged, the CounF has bound itself to do so.... Necessarily, the agreement to levy a 'sufficienttax' fromyear to year is subject to constitutionally imposed restrictions.... 406 S.W.Zd 189, 190. (Emphasis added).

See Galveston, H & S.A.Ry. Company v. Uvalde County. 167 S.W.2d 305 - (Tex. Civ. App. - San Antonio 1942, writ ref'd w.o.m.); Attorney General Opinion..WW-423 (1958). See also Attorney General Opinion C-385 (1965).

We advise, therefore,that only those obligationswhich the state agency or university has the constitutional and statutory power to dischargemay be the subject of a valid indemnity agreement by it in favor of others. An indemnity agreement negotiated by a state instrumentality in violation of law is unenforceable and void, although an invalid indemnity clause in an.otherwise enforceable coutract'willnot ordinarily invalidatethe remainder of the contract. SeeWilliamsv. Williams, 569 S.W.2d 867 (Tex. 1978); Paschal1v. Gulf c.& S.F.Ry. Company, 100 S.W.2d~183 (Tex. Civ. Appt - Dallas 1936). modifiedand aff.'d sub nom. Campbellv. Pas&all, 121 S.W.2d 593 (Tex. 1938). See generally Susman, Contracting With the State Fiscal and ~ConstitutionalLimitations,44 Tex. L.Rev. 106 (1966). .~
SUhMARY
'Only those obligations which the state agency or universityhas the constitutionaland statutory authority to discharge may be the subject of a valid indemnity agreement by it in favor of others. An indemnity agreement negotiated by a state instrumentality in violation of law is unenforceable and VOi& although- an invalid indemnity clause in an otherwise enforceable contract will not ordinarily invalidate the remainderof ~thecontract.

JOENW. FAINTER,JR. FirstAssistant **Attorney** General

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RICHARD E. GRAY III ExecutiveAssistantAttorney General
Preparedby Bruce Youngblood AssistantAttorney General

APPROVED: ?PINION COMMITTEE

Susan L. Garrison, Chairman Virglna Daugherty Rick Gilpin PatriciaHinojosa Jim Moellinger Bruce Youngblood

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