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Texas Supreme Court Addresses Sovereign Immunity

Sidebar - Highlighting New and Significant Changes in the Law

July 2006
By: Mike Pipkin

On June 30, 2006, the Texas Supreme Court reversed established precedent and, in doing so, limited the waiver of sovereign immunity in a way that the Texas Legislature may not have intended. In Tooke v. City of Mexia—S.W.3d—, 2006 WL 1792223 (June 30, 2006), the court ruled that the phrase in a city’s charter allowing it to “sue and be sued” was not a clear and unambiguous waiver of sovereign immunity, despite the exact opposite ruling 36 years earlier in Missouri Pacific R.R. Co. v. Brownsville Navigation Dist., 453 S.W.2d 812, 813 (Tex. 1970).

Sovereign Immunity Defined

Generally speaking, sovereign immunity protects governmental entities from lawsuits for money damages. Texas Natural Res. Conservation Comm’n v. IT-Davy, 74 S.W.3d 849, 853 (Tex. 2002). Political subdivisions of the state, including departments, agencies, cities, and districts, are entitled to such governmental immunity unless it has been waived. See Wichita Falls State Hosp. v. Taylor, 106 S.W.3d 692, 694 n. 3 (Tex. 2003). Sovereign immunity encompasses immunity from suit, which bars a suit unless the governmental entity has consented, and immunity from liability, which protects the entity from judgments even if it has consented to the suit. Texas Dep’t of Transp. v. Jones, 8 S.W.3d 636, 638 (Tex. 1999). By entering into a contract, a governmental entity necessarily waives immunity from liability, voluntarily binding itself like any other party to the terms of an agreement, but it does not waive immunity from suit. Catalina Development, Inc. v. County of El Paso , 121 S.W.3d 704, 705 (Tex. 2003).

The Tooke Decision

Tooke and its brethren, the handful of related decisions handed down on the same day, seek to define the specific limitations on the waiver of sovereign immunity.

In Tooke, the City of Mexia entered into a three-year contract with J.E. Tooke & Sons wherein Tooke was to furnish the labor and equipment for collecting brush and leaves. The City canceled the contract after the first year and Tooke sued for lost profits and attorneys’ fees. The issue before the Supreme Court of Texas was whether sovereign immunity protected the City from Tooke’s claims or whether immunity had been waived.

Tooke presented three arguments in support of its claim that the City had waived sovereign immunity. First, Tooke argued that §51.075 of the Local Government Code waives immunity by providing that home-rule municipalities, such as Mexia, “may plead and be impleaded in any court.” Second, Tooke asserted that the City waived immunity by partially performing under the contract and accepting its benefits. Finally, Tooke contended that the City waived immunity by operating in its proprietary capacity.

In one short paragraph, the Supreme Court rejected plaintiff’s second and third arguments, finding (1) no partial performance because the City had paid Tooke for all work performed; and (2) that garbage and waste removal is a governmental function, rather than proprietary. Tex. Civ. Prac. & Rem. Code, §101.0215(a)(6). The court, however, took 17 pages to analyze whether the “may plead and be impleaded” language of §51.075 of the Local Government Code waived the City’s sovereign immunity.

The Tooke Court’s Study of Legislative Intent

Citing 18th century commentaries and 19th century case law, the court acknowledged the history and purpose of sovereign immunity: “to shield the public from the costs and consequences of improvident actions of their governments.” The court further recognized its consistent deferral to the Legislature to waive sovereign immunity from suit. To ensure that such legislative control was not lightly disturbed, “a waiver of immunity must be clear and unambiguous.”

Nevertheless, the court found ambiguity in phrases such as “may sue and be sued” and “may plead and be impleaded” and concluded that these clauses do not, by themselves, waive immunity. The court refused to define these phrases in a vacuum and traced the legislative history back to the earliest antecedents of §51.075. These statutes, focused primarily on a city’s power to incorporate and capacity to be sued, were completely devoid of reference to immunity from suit. The court also recognized that although this phrase was included in various “organic” statutes creating various governmental entities, the legislative record was completely silent regarding immunity. Accordingly, the statutes meant only that a “municipality was the sort of entity that it was possible to sue, leaving aside whether suit was barred by immunity.”

Perhaps the most succinct statement of the court’s holding is as follows: “[T]he effect of a ‘sue and be sued’ clause in an organic statute depends on the context in which it is used. The words can mean that immunity is waived, but they can also mean only that a governmental entity, like others, has the capacity to sue and be sued in its own name.”

At the very least, the court determined that such a clause “cannot be said to be clear and  unambiguous,” as necessary to reflect a clear legislative intent to waive sovereign immunity.

In a simultaneously issued case, a construction company sued the Irving Independent School District for breach of contract for the construction of a new middle school. Satterfield & Pontikes Constr., Inc. v. Irving Indep. School Dist., —S.W.3d—, 2006 WL 1793473 (Tex., June 30, 2006). Similar to the Tooke plaintiffs, the construction company argued that the “sue and be sued” language of §11.151 of the Education Code constituted waiver of the District’s sovereign immunity. The Supreme Court, citing Tooke, stated “for the reasons explained today in Tooke v. City of Mexia, we agree with the court of appeals that Section 11.151(a) is not a clear and unambiguous waiver of immunity.”

2005 Sovereign Immunity Legislation

Contractors and their sureties, often faced with the dilemma of pursuing a governmental entity, would likely view the decisions with disdain were it not for the 2005 enactment of legislation waiving immunity for certain breach of contract claims against local governmental entities. This new legislation should limit the effects of Tooke and its brethren, at least with respect to such entities.

In 2005, the Texas Legislature addressed the confusion surrounding the applicability and waiver of sovereign immunity in claims arising from written contracts with governmental entities by passing H.B. 2039. This new legislation, codified at §§271.151.160 of the Local Government Code, squarely addresses the issue of sovereign immunity and provides that by entering a contract, local governmental entities waive their sovereign immunity to suit for breach of contract, subject to certain limitations and exclusions (discussed below). The Bill Analysis states:

Several recent courts of appeals decisions have ignored prior Texas case law and have disregarded the plain meaning of statutes by holding that they do not constitute a statutory waiver of immunity from suit in cases arising from breach of contract.

Currently, at least twelve cases involving the issue of statutory waiver of immunity from suit arising from the “sue and be sued” or similar language are pending before the Texas Supreme Court. Several cases have been pending since 2003.

C.S.H.B. 2039 clarifies and reexpresses the legislature’s intent that all local governmental entities that are given statutory authority to enter contracts shall not be immune from suit arising from those contracts, subject to the limitations set forth in C.S.H.B. 2039.

Bill Analysis, C.S.H.B. 2039, May 17, 2005.

Under the statute, damages are limited monetarily to include only the remaining contract balance owed, including increased costs from owner-caused delays or acceleration, the amount owed for change orders or additional work in connection with the contract, and interest as allowed by law. Tex. Loc. Gov’t Code §271.153. Furthermore, consequential damages, exemplary damages, and damages for unabsorbed home office overhead are not recoverable. The statute further excludes recovery of attorneys’ fees, unless the underlying contract expressly authorizes the prevailing party to recover its reasonable and necessary attorneys’ fees by specific reference to the statute. Id. at §271.159. The statute took effect September 1, 2005, but also applies to claims arising under contracts executed before that date, if sovereign immunity had not been previously waived.

The Tooke decision examines H.B. 2039, which on its face, appears to indicate the Legislature’s desire to roll back the protections of sovereign immunity. Interestingly, while claiming to uphold the statute purpose, the Tooke court claims that, in passing it, the Legislature actually rejected the notion that “sue and be sued” language alone waives immunity from suit.

The court then cites to H.B. 2039 as support for its holding, suggesting the Legislature has adopted a more “measured approach.” The court then strictly adheres to the statute limitations on damages, concluding that because Tooke sought lost profits, which are considered consequential damages, the statute excluded their recovery, and therefore, statutory immunity remained intact. It likewise affirms the statute’s retroactivity provision, finding it can apply both retroactively and proactively.

Therefore, under the Tooke court’s analysis of the statute, the important question becomes whether the local governmental entity engaged in certain contractual relationships. According to the court, such a question balances the rights of parties contracting with local governments and the state’s interest in protecting public resources from “unjustified burdens.”

Looking Ahead

Despite the court’s characterization of “sue and be sued” in organic legislation as unclear and ambiguous, and the court’s subsequent finding in Tooke that sovereign immunity was not waived, the Texas Supreme Court has authored another chapter in the continuing saga of sovereign immunity. Now, a local governmental entity will waive sovereign immunity by forming a contract, but any damages sought pursuant to a purported breach of that contract are statutorily limited. Therefore, damages sought, not the local government’s actions, will determine whether sovereign immunity has been waived.

From a contractor and surety perspective, the recent legislation and Tooke decision raise significant issues, including the exclusion of consequential damages, exemplary damages, attorney’s fees, and unabsorbed home office overhead. Accordingly, contractors will likely seek to structure public contracts to specifically define a breach and the resulting damages to fit within the statutory damages limitations. This is especially true or contractors such as Tooke, who enter into long-term, annually renewable contracts with a local government entity, because damages arising from breach of such a contract may arguably be viewed as consequential as opposed to remaining contract balance. Furthermore, parties contracting with public entities must specifically authorize attorneys’ fees to the prevailing party, and such authorization must specifically refer to §271.159 of the Local Government Code.

At the very least, Tooke and §271.151 et seq. of the Local Government Code could potentially impede the ability of a contractor or its surety to negotiate with a governmental entity. The recent law also hastens contractors to request, or even demand, certain language in its contracts with local governmental entities. Meanwhile, as those who forget the past are destined to relive it, we should not fail to anticipate further possible legislation. For instance, the 1999 Legislature enacted Chapter 2260 of the Government Code, providing a process for resolving certain contract claims against the state and units of state government, without waiving immunity from suit or liability. In 2003, after the Supreme Court held that counties were immune from suit for breach of contract (Travis County v. Pelzel & Assocs., Inc., 77 S.W.3d 246, 250-51 (Tex. 2002), the Legislature enacted §262.007 of the Local Government Code, waiving counties’ immunity from suit for breach of engineering, architectural, or construction contracts with limitations on damages. And, in 2005 while Tooke was on appeal, the Legislature passed H.B. 2039, enacting §§271.151.160 of the Local Government Code. Tooke v. City of Mexia increases the likelihood that the 2007 Texas Legislature will include additional legislation to respond to what doubtless many will view as the Supreme Court’s restriction of legislation intended to address the limits of sovereign immunity. 

 

* The definition of “local governmental entity” includes municipalities, public school and junior college districts, and special-purpose districts, but do not include counties or units of state government, such as the Department of Transportation. . . . the important question becomes whether the local governmental entity engaged in certain contractual relationships.

Sidebar, July 2006 (pdf)


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