                                 The Attorney         General       of Texas
                                                  May 20, 1982

MARKWHITE
Attorney   General


                               Mr. Al Hurley                          Opinion No.,m-475
Supreme Court Suildin9         President
P. 0. BOX 12548
                               North Texas State University           Re:    Authority    of   state
Austin. TX. 78711.2548
51214752501                    P. 0. Box 13426                        universities     to    execute
Telex 91m74.1367               Denton, Texas   76203                  contractual indemnity agree-
Telecopier 512/47502S9                                                ments, and related questions

                               Dear Mr. Huriey:
1807 Main St., Suite 1400
Dallas, TX. 752014709
214&‘42-S944                        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 .it does not exist, you ask
4824 Alberta Ave.. Suite 160
El Paso. TX. 799052793
                               whether a contract containing such a” agreement    would be void or
915r533-3484                   voidable.

                                    The following clause is one, you advise,’ that commonly is found
122G Dallas Ave.. Suite 202    in contracts proffered by the university:
fiouston. TX. 77002699S
71-
                                         University shall indemnify and hold harmless
                                         contractor from and ags’inst.any and all claims;
806 Broadway. Suite 312                  actions, or damages including .attoceys     fees
Lubbock, TX. 79401-2479                  caused by or arising out of the performance,
9W747-5238
                                         failure to perform or breach of’ any of the
                                         university’s obligations~under this lease.
43G9 N. Tenlh. Suite 6
McAllm. TX 795WlS95                 ,Some indemnity agreements require: the indemaitor to hold the
512fss24547                    indemnitee harmless from liability arising by reason of the
                               indemnitee’s own acts. or arising from the acts of third parties. See
2aa MaIn Plaza. twte 400       14. Tex. Jur.yI    Contribution and Indemnification 024, at 675. ‘But
San Anfonlo. TX. 78205-2791    x    V.T.C.S. arts. 249d. 2212b. The clause set out above Is notof
512/225%4191                   that type. h-ever.      It purports to indemnify- only ,against harm
                               arlsing from acts of the university itself.
A” Equal Opportunity/
Afftmutfve Action Employer          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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           Mr. Al Hurley - Page 2   (NW-475)




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

                A contractually imposed obligatfon of indemnity creates a "debt"
           in the constitutional sense unless  at the time of the agreement it is
           within the lawful and reasonable contemplation of the parties that it
           will be satisfied out of current revenues or some currently available
           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
           and extent of liability controlled by agency); Harris County V.
           Dowlearn, 489 S.W.2d ,140 (Tex. Civ. App. - Houston [14th Dist.] 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 'state in war, or paying "existing debt." The term "existing debt"
           apparently refers to the debt existing ~ln 1876 when the provision was
           adopted. Further, the provision places a $2OO,COO limit on "debt
           created to supply deficiencies in the revenue."

                There are no saving provisions fin the article III, section 49
           constitutional prohibition against state debt such as there are in the
           article XI, sections 5 and 7 provisions dealing with debts of cities
           and counties. The latter..sectionprovides:

                    [N]o debt for any purpose shall .ever .be incurred
                    in any manner by .any city or .county unless
                    provision is made, at the time of creating the
                    same, for levying ,and collecting 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
           also County 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
           state debt, especially when coupled with the "cash basis" requirements
           of article III. section 49a of the constitution, a state agency will
           ordinarily be unable to execute an enforceable indemnity agreement in
           favor of another party. Persons contracting with 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.




                                               p. 1670
Mr. Al Hurley - Page 3   @f~-475)




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 constitutional warrant for it. T & N.O.R.R. Company v.
Galveston'County, supra. See Kearse v. Kearse, 276 S.W. 690 (Tex.
1925). Constitutional limitations must be read into a statute so as
"to restrict literalism to proper bounds." Kearse     V. Kearse, supra;
cf.
-     Educ. Code 9105.41 (management and 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 ,court held 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" arrangement was 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
"prekexisting law" 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. Since the validity of the original lease
contract - 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, -the prohibition of
section 49, article III was not put at issues in 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 ~to be the law in this state that the State
of Texas.,cannotbe 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
Palls V. 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
Jefferson County had complied with the constitutional requirement that
provision be made for .levying and 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
agreement as 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 violating any constitutional debt limit or
                       taxing restrictions applicable to counties. If
                       such obligation may be so discharged, the CounF
                       has bound itself to do so.... Necessarily, the
                       agreement to levy a 'sufficient tax' 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 obligations which the state
             agency or university has the constitutional and statutory power 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 void,
             although an invalid indemnity clause in an.otherwise enforceable
             coutract'will not ordinarily invalidate the remainder of the contract.
             See Williams v. Williams, 569 S.W.2d 867 (Tex. 1978); Paschal1 v. Gulf
             c.& S.F.Ry. Company, 100 S.W.2d~183 (Tex. Civ. Appt - Dallas 1936).
             modified and aff.'dsub nom. Campbell v. Pas&all, 121 S.W.2d 593 (Tex.
             1938). See generally Susman, Contracting With the State Fiscal and
            ~Constitutional Limitations, 44 Tex. L.Rev. 106 (1966).     .~

                                            SUhMARY

                          'Only those obligations which the state agency
                       or university has the constitutional and 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
                       remainder of ~the contract.




             JOEN W. FAINTER, JR.
             First Assistant Attorney   General




                                                  p. 1672
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        Mr. Al Hurley - Page 5   (nw-475)




        RICHARD E. GRAY III
        Executive Assistant Attorney General

        Prepared by Bruce Youngblood
        Assistant Attorney General

        APPROVED:
        ?PINION COMMITTEE

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




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