Can NC State University agree to binding arbitration clauses in research contracts with federal laboratories and other universities, when the other side insists on arbitration as a condition of the contract?

Plain-English summary

NCSU was negotiating research agreements with federal laboratories (like Lawrence Livermore) and other universities. The counterparty was insisting on binding arbitration as the dispute-resolution mechanism: "arbitration may be used at any time that the contracting officer has authority to resolve the issue or controversy."

NCSU's general counsel asked the AG whether NCSU had authority to agree. The AG said yes, with three layers of constraints.

Layer 1: The State's contract immunity is largely gone. Before Smith v. State (1976), state agencies were generally immune from contract suits. Smith abrogated that immunity for cases where the General Assembly has not provided an alternative remedy. So NCSU can be sued for breach of contract in NC Superior Court unless the legislature created a different forum.

Layer 2: Where the legislature created an exclusive process, that controls. The legislature has specifically created mandatory dispute resolution mechanisms in several areas:
- State building construction disputes: G.S. 143-135.3 (administrative process)
- Tort claims against the State: G.S. 143-291 et seq. (Industrial Commission)
- State employee grievances: G.S. 126-1 et seq. (State Personnel Commission, arbitration only under 25 NCAC 1J.0504)

Where these exclusive processes apply, the agency cannot bypass them by signing an arbitration clause. Teachy v. Coble Dairies (1982) is the controlling case: the Tort Claims Act requires negligence claims against the State to go to the Industrial Commission, period.

Layer 3: Outside those processes, the agency can agree to alternative dispute resolution. The AG had not found any prior case directly addressing NCSU's authority to agree to binding arbitration in research contracts. But In re Arbitration Between State and Davidson & Jones (1984) affirmed an arbitration involving UNC-CH, providing tacit precedent. The general principle is that the State can consent to a forum other than NC Superior Court for disputes the legislature has not allocated to a specific forum. Research contracts with federal labs and other universities fall in that open space.

Layer 4: The G.S. 22B-3 limit. This statute makes contractual clauses requiring arbitration to be instituted or heard in another state generally void as against public policy. So NCSU can agree to arbitration in NC, but cannot agree to arbitration in California or Tennessee under most circumstances.

Caution from the AG. The opinion took the unusual step of warning NCSU about arbitration's risks. The Rules of Evidence do not apply; hearsay can drive the outcome. The process tends to favor "it just isn't fair" arguments over strict-text arguments. Errors of law go unreviewed. Arbitrators may award attorney's fees that NC courts would not. The advantage of experienced counsel is reduced. The AG suggested limiting arbitration-clause authority to the most senior university administrators, who can weigh the risks contract by contract.

Bottom line. NCSU may agree, but should approach arbitration clauses with eyes open.

Currency note

This opinion was issued in 1998. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

NC arbitration law has evolved significantly since 1998. The Revised Uniform Arbitration Act was adopted in NC (G.S. 1-569.1 et seq.) in 2003. State employee grievance procedures have been restructured under the State Human Resources Act. NCSU and other UNC institutions have continued to enter research contracts with arbitration clauses, generally tracking the AG's framework. Anyone analyzing a current arbitration clause in a state agency contract should pull the current arbitration statutes, any sector-specific mandatory dispute resolution rules, and check whether the contract counterparty is governmental (where sovereign-immunity considerations may add complexity).

Common questions

Q: Why does the State even need to agree to arbitration?
A: Because counterparties often insist on it. Federal labs and other universities have built arbitration into their standard research contract templates. NCSU faces a take-it-or-leave-it choice on many of these contracts.

Q: What if the arbitration clause covers a category the legislature has reserved?
A: The clause is unenforceable as to that category. The legislature's exclusive statutory process applies. The rest of the contract may still be valid, but the dispute over the reserved category goes to the legislatively-specified forum.

Q: Can the State recover attorney's fees in arbitration?
A: Possibly, depending on the arbitration agreement and rules. NC contract law generally does not allow attorney's fees absent statutory authorization, but arbitration clauses can override the default rule. State agencies should pay attention to this when reviewing arbitration clauses.

Q: What about non-binding mediation?
A: Non-binding ADR is less problematic because the parties retain the right to go to court if mediation fails. NC encourages mediation generally. The 1998 opinion's caution applies most strongly to binding arbitration that displaces court process.

Q: Why does the AG say arbitration favors the plaintiff?
A: Because arbitrators tend to weigh equitable arguments more heavily than judges. Judges follow precedent strictly; arbitrators have more latitude. A defendant standing on the precise contract terms or strict statutory text may fare better in court than in arbitration.

Q: Can the contracting officer be more junior than a senior administrator?
A: The AG recommended limiting arbitration-clause authority to senior administrators because of the stakes. That recommendation does not have the force of law, but is a prudent management practice.

Background and statutory framework

NC's framework for state contract disputes has multiple layers. Smith v. State (1976) opened the courthouse door for contract claims against the State. Subsequent statutes carved specific categories out of that general rule, channeling disputes into administrative tribunals (Tort Claims Act, construction disputes, personnel grievances). The remaining categories continue to litigate in NC Superior Court.

Binding arbitration adds another layer of choice. Parties can agree to take their disputes to a private arbitrator instead of any of the public fora. Whether a state agency can validly make that choice is a question of statutory authority and policy.

The 1998 AG opinion gave NCSU (and by extension other UNC institutions) a workable framework: arbitrate when the legislature has not pre-empted, but proceed carefully because arbitration changes the litigation dynamic.

The opinion is notable for its candor about arbitration's downsides. AG opinions are often technical; this one takes a step back and offers practical management advice. That candor reflects the AG office's experience with state-agency arbitration cases by the late 1990s.

Citations

• N.C. Gen. Stat. § 22B-3 (out-of-state arbitration clauses void)
• N.C. Gen. Stat. § 126-1 et seq. (State Personnel Act)
• N.C. Gen. Stat. § 126-34.2 (state personnel arbitration)
• N.C. Gen. Stat. § 143-135.3 (state construction dispute resolution)
• N.C. Gen. Stat. § 143-291 et seq. (Tort Claims Act)
• 25 N.C.A.C. 1J.0504 et seq. (State Personnel Commission ADR procedures)
• Smith v. State, 289 N.C. 303, 222 S.E.2d 412 (1976)
• Middlesex Constr. Corp. v. State ex rel. Art Museum Bldg. Comm'n, 307 N.C. 569, 299 S.E.2d 640 (1983)
• Huang v. NCSU, 107 N.C. App. 710, 421 S.E.2d 812 (1992)
• In re Arbitration Between State and Davidson & Jones Construction Co., 72 N.C. App. 149, 323 S.E.2d 466 (1984)
• Teachy v. Coble Dairies, Inc., 306 N.C. 324, 329, 293 S.E.2d 182, 185 (1982)
• 52 N.C. Op. Atty. Gen. 46 (local school board arbitration limits)

Source

• Landing page: https://ncdoj.gov/opinions/university-authority-to-agree-to-submit-claims-to-binding-arbitration/

Original opinion text

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