Legislature Steps up to the Plate on Sovereign Immunity

In mid-June, Governor Rick Perry signed HB 2039 into law, allowing contractors to sue local governmental entities directly for breach of contract.

By Joseph P. Dirik

Joe Dirik is a graduate civil engineer and attorney. He is a member of the construction law practice group at the Dallas office of Jenkens & Gilchrist, PC.

At the 11th hour, the Texas Legislature passed HB 2039, an important bill waiving the state's immunity against suit for certain lawsuits brought against local governmental entities. Gov. Rick Perry signed the legislation in mid-June.

Texas was among a minority of states that allowed the doctrine of sovereign immunity to prevent a contractor from seeking redress in court against the state for breach of contract. The concept that the state was immune from suit in its own courts was itself a judicial creation.

The doctrine of sovereign immunity derives from the ancient concept that "the king can do no wrong" and pre-dates the Texas Constitution. In 1970 the Texas Legislature enacted the Texas Tort Claims Act, waiving the state's sovereign immunity for torts in certain circumstances. HB 2039 does not waive sovereign immunity to suits for negligent or intentional torts.

Contractors are now able to sue local governmental entities directly for breach of contract. The legislation limits damages awarded to:

• the balance due and owed under the contract as amended;
• the increased cost to perform the work as a direct result of owner-caused delays or acceleration;
• the amount of change orders or additional work the contractor is directed to perform; and interest as allowed by law.

The bill expressly disallows awards for the following damages:

• consequential damages (for example, no lost profits);
• exemplary (punitive) damages; and
• unabsorbed home office overhead (such as Eichleay formula charges).

Furthermore, attorney's fees cannot be awarded to any party in the suit or arbitration unless the contract with the local governmental entity expressly authorizes the prevailing party to recover its attorney's fees.

HB 2039 applies to contracts executed after September 1, 2005, the effective date of the bill.

Because the bill does not limit the manner in which the owner might order extra work or cause delays or acceleration, I believe contractors can pursue claims for constructive changes as well as for changes directed in writing.

Note that the parties must comply with any prerequisite to bringing suit identified in their contract. For example, the contract may require that as a prerequisite before bringing suit the parties undergo non-binding arbitration or mediation.

The local government entity is free to raise any defense against a claim other than a bar against suit based on sovereign immunity.

So what happens to contractor claims against state agencies? While I believe there is a strong chance that the 80th Legislature will completely waive sovereign immunity in certain contract claims, the procedures outlined in Chapter 2260 of the Government Code still apply to most claims. (For example, some contracts subject to Transportation Code Section 201.112 are not covered by Chapter 2260). A contractor claiming breach of contract must provide written notice of the claim within 180 days after the date of the event giving rise to the claim. The agency examines the claim and any possible counterclaim, and attempts to negotiate (or mediate, if agreed) with the contractor. The contractor may request a contested case hearing if the claim is not entirely resolved within 270 days after the date the claim is filed. The agency then refers the claim to the State Office of Administrative Hearings for a contested case hearing.

The state is required to pay valid claims for $250,000 or less, but only if money has been or is later appropriated by the Legislature. For claims of $250,000 or more, the Administrative Law Judge recommends to the next legislative session that the Legislature either appropriate money to pay the claim or not appropriate money to pay the claim and deny consent to suit. In other words, for any claim above $250,000, an ALJ's determination of a valid claim is not binding on the state.

But the SOAH process is not necessarily the end of the story. The Texas Supreme Court hinted, and several courts of appeals have found, that the state entity may waive its sovereign immunity in certain situations. The state, for example, waives immunity from suit when it brings an action against a contractor in state court. In such a case, the contractor is free to bring a counterclaim directly against the state.

Several cases involving waiver of sovereign immunity are pending before the Texas Supreme Court. I believe it is possible that the Court may permit contractor suits under certain situations. The 80th Legislature, however, should step up to the plate again and address waiver for state agencies in the next session. HB 2039, and the expected changes to come, will drastically change the way contractors work with Texas public entities.