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Institutions of higher education face potential breach of contract claims from employees, students, and vendors, purchasers, or business partners. In this section, an institution's potential liability for contracts entered into by its employees or other agents is discussed.

The institution may be characterized as a “principal” and its trustees, administrators, and other employees as “agents” for purposes of discussing the potential liability of each on contracts transacted by an agent for, or on behalf of, the institution. The fact that an agent acts with the principal in mind does not necessarily excuse the agent from personal liability, nor does it automatically make the principal liable. The key to the institution's liability is authorization—that is, the institution may be held liable if it authorized the agent's action before it occurred or if it subsequently ratified the action. However, even when an agent's acts were properly authorized, an institution may be able to escape liability by raising a legally recognized defense, such as sovereign immunity. This defense is available in some states to public institutions but not to private institutions.

The existence and scope of sovereign immunity from contract liability vary from state to state. The Texas Court of Appeals, in considering a coach's breach of contract claim against Texas Tech University, explained the genesis of sovereign immunity:

[I]t is helpful to delve into the history underlying the doctrine of sovereign immunity. The latter found its genesis in old England. Then, as most will admit, the king (or queen as the case may be) was omnipotent. No inherent authority belonged to those over whom he lorded [citation omitted]. Rather, any rights or privileges they enjoyed were no greater than those the monarch deigned to bestow on them. Moreover, the judiciary that he created not only recognized this relationship between the king and his people but also deduced from it that since the former was sovereign over all, the latter could not be [sic] sue him without his approval. Thus, the tenet was of neither legislative nor executive origin. Instead, judges simply declared it to be law…

With the discovery and population of the New World, our forefathers were called upon to establish their own system of government. Having rebelled against the tyranny of British rule, one would think that they would instill a government of limited powers… Nonetheless, not all things British were rejected for our own courts adopted much of the common law developed overseas. And, included in that body of law was the doctrine of sovereign immunity… So, though we have no king…, the government (e.g., State, county, and municipalities) and those working for it in their official capacities came to enjoy that created to protect monarchs so many years ago [Leach v. Texas Tech University, 335 S.W.3d 386 at 391 (Tex. App. January 20, 2011)].

The court ruled that the university had not waived sovereign immunity and thus could not be sued for breach of contract. However, not all states have determined that universities enjoy the same level of immunity as the Texas courts have granted Texas Tech University.

A U.S. Supreme Court case demonstrates that sovereign immunity from contract liability will occasionally also be available to public institutions under federal (rather than state) law. In Regents of the University of California v. Doe, 519 U.S. 425 (1997), the Court upheld the university's assertion of Eleventh Amendment immunity as a defense to a federal court breach of contract suit brought by a disappointed applicant for employment. Such a federal immunity claim applies only in those limited circumstances in which a federal district court could obtain jurisdiction over a breach of contract claim.

Regarding contract liability, there is little distinction to be made among trustees, administrators, employees, and other agents of the institution. Whether the actor is a member of the board of trustees or its equivalent—the president, the director of athletics, the dean of arts and sciences, or some other functionary—the critical question is whether the action was authorized by the institution. Allegedly aggrieved parties can be vendors and independent contractors, campus guests, current or former employees, or current or former students. For example, Kalick v. U.S., 604 Fed. Appx. 108 (3d Circ. 2015), involved a dispute between a student and a university over tuition payment. The university withheld the student's transcript pending payment of his outstanding tuition balance. The student alleged breach of contract, and ultimately learned that the federal courts lacked subject matter jurisdiction over such a dispute.

The issue of who has authorization to bind the institution to contractual terms can become very complex. In Brown v. Wichita State University, 540 P.2d 66 (Kan. 1975),⁵ the court discussed the issue at length:

To determine whether the record establishes an agency by agreement, it must be examined to ascertain if the party sought to be charged as principal had delegated authority to the alleged agent by words which expressly authorize the agent to do the delegated act. If there is evidence of that character, the authority of the agent is express. If no express authorization is found, then the evidence must be considered to determine whether the alleged agent possesses implied powers. The test utilized by this court to determine if the alleged agent possesses implied powers is whether, from the facts and circumstances of the particular case, it appears there was an implied intention to create an agency, in which event the relation may be held to exist, notwithstanding either a denial by the alleged principal, or whether the parties understood it to be an agency.

“On the question of implied agency, it is the manifestation of the alleged principal and agent as between themselves that is decisive, and not the appearance to a third party or what the third party should have known. An agency will not be inferred because a third person assumed that it existed, or because the alleged agent assumed to act as such, or because the conditions and circumstances were such as to make such an agency seem natural and probable and to the advantage of the supposed principal, or from facts which show that the alleged agent was a mere instrumentality” [quoting Corpus Juris Secundum, a leading legal encyclopedia]… The doctrine of apparent or ostensible authority is predicated upon the theory of estoppel. An ostensible or apparent agent is one whom the principal has intentionally or by want of ordinary care induced and permitted third persons to believe to be his agent even though no authority, either express or implied, has been conferred upon him.

Ratification is the adoption or confirmation by a principal of an act performed on his behalf by an agent, which act was performed without authority. The doctrine of ratification is based upon the assumption there has been no prior authority, and ratification by the principal of the agent's unauthorized act is equivalent to an original grant of authority. Upon acquiring knowledge of his agent's unauthorized act, the principal should promptly repudiate the act; otherwise it will be presumed he has ratified and affirmed the act [540 P.2d at 74–75].

The Brown case arose after the crash of a plane carrying the Wichita State football team. The survivors and personal representatives of the deceased passengers sued Wichita State University (WSU) and the Physical Education Corporation (PEC) at the school for breaching their Aviation Service Agreement by failing to provide passenger liability insurance for the football team and other passengers. The plaintiffs claimed that they were third-party beneficiaries of the service agreement entered into by WSU, the PEC, and the aviation company. The service agreement was signed by the WSU director of athletics and by an agent of the aviation company. The university asserted that it did not have the authority to enter the agreement without the board of regents' approval, which it did not have; that it did not grant the director of athletics the authority to enter the agreement on its behalf; that the director only had authority to act as the agent of the PEC; that WSU could not ratify the agreement because it lacked authority to enter it initially; and that, as a state agency, it could not be estopped from denying the validity of the agreement.

The court held that the PEC was the agent of the university and that the director of athletics, “as an officer of the corporate agent [PEC], had the implied power and authority to bind the principal—Wichita State University.” The court further held that failure to obtain the board of regents' approval did not invalidate the contract because the legislature had “delegated to the board of regents the authority to control, operate, manage, and supervise the universities and colleges of this state” (540 P.2d at 76),⁶ and the board had created no policy, rule, or regulation that limited the authority of its agents to enter into contracts. The fact that the agreement had been partly performed was particularly persuasive to the court.

For a later example of a case in which a court ruled that the individual signing a contract on behalf of the Arizona Board of Regents lacked the authority to modify a contract, making the contract modification unenforceable, see Kaman Aerospace Corp. v. Arizona Board of Regents, 171 P.3d 599 (Ariz. Ct. App. August 23, 2007).

In a case involving both apparent authority and ratification doctrines, the Supreme Court of Massachusetts ruled that Boston University had to pay a technical training company more than $5.7 million for its “willful and knowing” breach of contract (Linkage Corporation v. Trustees of Boston University, 679 N.E.2d 191 (Mass. 1997), cert. denied, 522 U.S. 1015 (1997)). One important issue in the case was whether an earlier contract between Boston University and Linkage for the provision of educational services by Linkage had been renewed; Linkage asserted that it had, but the university stated that the contract had not been renewed but had been lawfully terminated. A jury had found that the university's vice president for external programs had apparent authority to enter a renewal contract with Linkage and also found that the university had ratified that agreement.

With respect to the apparent authority issue, the court noted that the vice president had “virtual autonomy” in supervising the relationship between Linkage and the university. He had been the university's representative in the negotiation of the earlier contract and was named in the contractual documents as the university's primary representative for all legal notices. Boston University argued that the vice president lacked authority to enter the agreement because, at the same time that negotiations for the contract renewal were taking place, the university had issued a directive that required all payments greater than $5,000 to be authorized by the senior vice president. The court, however, ruled that, because the vice president for external programs had direct access to the president and because the contractual relationship predated the directive, it was reasonable for Linkage's president to conclude that the directive would not be enforced with respect to its contract with the university.

With respect to the ratification issue, the court agreed with the jury that the conduct of university officials subsequent to the execution of the renewal contract supported the ratification argument. The vice president had asked his superiors, in writing, if additional review was necessary after he executed the renewal contract. Neither the senior vice president nor the president advised Linkage's president or their own vice president that they did not approve of the renewal contract. Characterizing the conduct of university officials as “informed acquiescence,” the court endorsed the jury's finding that the university had ratified the agreement. Although the behavior of university officials was sufficient to establish ratification, the court added that, because the university benefited financially from the execution of the renewal contract, this benefit was additional evidence of its ratification of the agreement.

Colleges and universities are increasingly being sued for breach of contract by current or former employees. These issues are discussed in Chapter 4 of this book. Even colleges controlled by religious organizations may be subject to breach of contract claims. For example, the Supreme Court of New Jersey ruled, in McKelvy v. Diocese of Camden, 800 A.2d 840 (N.J. 2002), that a former seminarian could sue the Diocese of Camden, New Jersey, for breach of contract. The plaintiff alleged that he had been sexually harassed while a student at the seminary; he sued for reimbursement of his tuition and loans, and for compensatory damages. Despite the argument by the diocese that such a lawsuit violated the First Amendment's free exercise clause, the state court ruled unanimously that the case could proceed.

Although students attempting to assert claims for educational malpractice are finding their tort claims dismissed, their contract claims sometimes survive summary judgment or dismissal, as long as the contract claim is not an attempt to state a claim for educational malpractice. See Metcalf v. University of North Carolina at Chapel Hill, 798 S.E.2d 442 (N.C. Ct. App. 2017) (upholding finding that trial court lacked subject matter jurisdiction where plaintiffs reframed what were actually educational malpractice claims—which are not recognized in North Carolina—as claims of breach of contract, breach of fiduciary duty, fraud, and unfair and deceptive trade practices).

For example, in Swartley v. Hoffner, 734 A.2d 915 (Pa. Super. Ct. 1999), appeal denied, 747 A.2d 902 (Pa. 1999), a doctoral student who was denied a degree brought a breach of contract claim against Lehigh University and her dissertation committee members, claiming that they had failed to carry out their duties as required by university policies. The court ruled that “the relationship between a private educational institution and an enrolled student is contractual in nature; therefore, a student can bring a cause of action against said institution for breach of contract where the institution ignores or violates portions of the written contract” (734 A.2d at 919). But the court nevertheless affirmed the trial court's award of summary judgment to the defendants, finding no evidence that university policies required dissertation committee members to give the student a passing grade once her dissertation defense had been scheduled. But not all courts will allow breach of contract claims to proceed in these circumstances. In Gally v. Columbia University, 22 F. Supp. 2d 199 (S.D.N.Y. 1998), a trial judge dismissed the student's contract claim, ruling that it was a disguised attempt to state a claim for educational malpractice.

The variety of contract and agency law principles that may bear on contract liability makes the area a complex one, calling for frequent involvement of legal counsel. The postsecondary institution's main concern in managing liability should be the delineation of the contracting authority of each of its agents. By carefully defining such authority and by repudiating any unauthorized contracts of which they become aware, postsecondary administrators can protect the institution from unwanted liability. Although protection may also be found in other defenses to contract actions, such as sovereign immunity, advance planning of authority is the surest way to limit contract liability and the fairest to the parties with whom the institution's agents may deal.