Texas Courts Face New Questions About Sovereign Immunity

By William Coats.

The subject of sovereign immunity, not a new topic to many readers, is presently of great concern to many contractors.

Texas remains one of the few legal backwaters in the world of common law jurisdictions where it is generally not possible for a private party to a contract with a state agency to sue the agency for breaching that contract. In the age when English monarchs had absolute power, the theory of sovereign immunity developed in the common law, meaning citizens were not allowed to sue the monarchy. When the Unites States was founded, we adopted the common law of England. Since then, most states have abrogated the legal theory of sovereign immunity, at least as it applies to contracts. Texas has not yet done so. With few exceptions, it is the rule in Texas that state agencies and state colleges and universities cannot be sued in state courts for breach of contract. In recent years the Texas Supreme Court has made it clear the Texas courts do not intend to totally overrule the theory, and that it will take an act of the Texas Legislature to fully cure this problem.

Even though sovereign immunity has been available to state agencies and universities for many years, in the past it has not been applied to cities, counties and school districts in Texas. Courts have generally held that such agencies have waived sovereign immunity by virtue of the statutes under which they are organized, statutes that allow these entities to "sue or be sued."

That has changed.

Recently, the Fifth Circuit Federal Court of Appeals held that Travis County was immune from a contractor's suit for breach of contract. Shortly thereafter, several state appeals courts weighed in. The Dallas Court of Appeals held that school districts are immune in Satterfield & Pontikes Inc. v. Irving independent School District. The Waco Court of Appeals, in the City of Mexia v. Tooke, found that the language of a city's organizational statute allows the city to "plead and be impleaded" in a suit that does not waive sovereign immunity. On the brighter side, the San Antonio Court of Appeals did find a waiver in a recent case involving the Alamo Community College v. Browning Construction.

The Legislature was in session when the Fifth Circuit made its ruling in the Travis County case and quickly enacted a statute partially addressing only contracts signed after the date of the statute. It did not address the question of contracts signed before the effective date of the statute September 1, 2003. This leaves open the question of whether the Texas Supreme Court, if faced with a claim of sovereign immunity by a county in a case involving a contract signed before September 1, 2003, will decide that counties are immune, and that the corrective statute was unnecessary. The other decision could be that the county is immune in disputes on old contracts but not on new ones.

The cases mentioned above have occurred since the last session of the Legislature. Two of the recent State Court of Appeals cases mentioned above are on appeal to the Texas Supreme Court. Meanwhile, it has become common for school districts and cities to plead sovereign immunity in most breach of contract cases. The effect in many cases is that parties who may be immune from suit are less willing to reach a reasonable business settlement. It is difficult to know how contractors should respond. One way is to only undertake projects for public bodies that will affirmatively agree to waive sovereign immunity. (Few public owners, however, are willing to include such waivers in their documents.) Walking away from projects in midstream if a public owner is making unreasonable demands during the work is not often a practical solution, but might be considered. The real solution is for the status of the law to be resolved in an appropriate way. We expect all private parties to honor their contracts or be faced with lawsuits for breach of those contracts, and we should expect nothing less from public entities.