Sovereign Immunity: Not All Bad for Contractors

By William Coats

The Texas Supreme Court has provided some clarity on the sovereign immunity question, and at least for certain governmental entities, contract claims may be pursued in court. For other entities of the state, the sovereign immunity question remains a major hurdle.

In recent years there has been some confusion in Texas about the right of contractors to sue government entities. Generally in Texas, sovereign or governmental immunity protects governmental entities from lawsuits for money damages. There are two type of sovereign immunity: immunity from suit and immunity from liability. Immunity from suit bars a suit against a governmental entity unless there has been an express consent to being sued. Immunity from liability protects a governmental entity from judgments even if it has consented to the suit.

The courts have decided that by voluntarily entering into a contract, a governmental entity waives immunity from liability, thereby binding itself to the terms of the agreement. But the governmental entity's entry into a contract does not waive immunity from suit by entering a contract. To a contractor with a claim against a government entity that can be a distinction without a difference, because the result is that without a waiver of both immunity from liability and suit, the contractor is unable to pursue a claim in court against the government entity.

There has been a disagreement among the Texas courts as to whether language in state statutes providing that a governmental entity may "sue or be sued," "plead or be impleaded" or "prosecute or defend" a lawsuit constitutes a clear and unambiguous waiver of immunity from suit. The Texas Supreme Court addressed the issue in a series of opinions issued in June, in which it held that the phrases "sue and be sued" or "plead and be impleaded" did not, in and of themselves, constitute a clear and unambiguous waiver of immunity from suit. The court stated that, "sue and be sued," could mean immunity from suit is waived but could mean that a governmental entity has the capacity to sue or be sued in its own name.

As a result, the language in the state statute that provides that the entity may "sue or be sued" does not automatically mean that immunity from suit has been waived. Nevertheless, in 2005, HB 2039 was passed. The statute provides that local governmental entities' immunity from suit is waived for breach of contract claims under certain circumstances. "Local governmental entities" includes municipalities, public school districts, junior college districts and special purpose districts such as water-improvement and drainage districts. The definition does not include counties or units of state government. The statute limits damages that can be recovered from the governmental entity to: the balance owing on the contract including increased costs that are a direct result of owner-caused delays or acceleration; the amount owing for change order or additional work directed by the local governmental entity in connection with the contract; and interest.

Other statutes specifically prohibit the recovery of consequential damages (such as lost profits), exemplary damages or damages for unabsorbed home-office overhead.

One local statue was addressed, in part, by the Texas Supreme Court in the Tooke v. City of Mexia decision. The contractor did not sue the city to recover for the remaining contract balance, but did sue the city to recover its lost profits and attorneys' fees. The court held that the city was immune from the contractor's claims since the only damages claimed by the contractor were excluded by the statute. The court indicated that sections of the Texas Local Government Code waives immunity from suit for contract claims provided that damages are within the scope allowed by the statute.

The question therefore arises as to what these recent opinions mean to contractors. For claims of the type allowed under the statute, this should mean that contractors no longer need to worry about a claim of sovereign immunity from suit. However, for claims outside the statute, such as unabsorbed overhead, lost profits or other consequential damages, sovereign immunity remains a hurdle. Since the court tied the waiver of immunity from suit to the existence of a statute, the limited waiver of immunity from suit only applies to those entities. State colleges and universities and state agencies are major divisions of the state not mentioned in the statute. Chapter 2260 of the Texas Government Code provides a separate procedure to assert claims for breach of contract against units of state government including universities and other institutions of higher education.