In the Courts – Governmental Immunity

by James F. Parker

San Antonio River Auth. v. Austin Bridge & Road, L.P., No. 04-16-00535-CV, 2017 WL 3430897 (Tex. App.—San Antonio Aug. 9, 2017, pet. filed).

It makes sense, but we needed a court to say it—whether a governmental entity is immune to a claim is a question to be determined by a court, not an arbitrator.

San Antonio River Authority (“SARA”) contracted with Austin Bridge & Road (“Austin Bridge”) to repair Medina Lake Dam. The contract between Austin Bridge and SARA contained an arbitration provision. When the cost of labor and materials ran over budget, Austin Bridge invoiced SARA for the increased cost; SARA refused to pay the invoice.

Austin Bridge initiated an arbitration proceeding against SARA. In response, SARA filed suit for declaratory judgment in district court seeking a declaration that Austin Bridge’s arbitration claim was barred by governmental immunity. In addition, SARA argued that the arbitration agreement was ineffective because it cannot enter into a binding arbitration agreement under Texas Government Code (“TGC”) § 2009.005.

The Texas Court of Appeals in San Antonio concluded that the question of whether a governmental entity has waived immunity is a question for the court, not an arbitrator. Deciding that question, the court found SARA’s immunity to be waived under the Local Government Contract Claims Act because it was a suit to recover an amount due and owed on a contract that provided goods or services to the governmental entity.

Finally, the court rejected SARA’s claim that § 2009.005 barred arbitration agreements by governmental entities. Subsection 2009.005(c) provides that “[n]othing in this chapter authorizes binding arbitration as a method of alternative dispute resolution.” In the context of the rest of the section, the court concluded that subsection (c) merely provides that the section does not waive governmental immunity if a governmental entity chooses to engage in binding arbitration. The court therefore enforced the arbitration agreement between the parties.

Clear Creek Indep. Sch. Dist. v. Cotton Commercial USA, Inc., 529 S.W.3d 569 (Tex. App.—Houston [14th Dist.] 2017, pet. filed).

Another arbitration case—this one originally filed in 2010—reflects just how long an arbitration can go when a claim of governmental immunity is interjected.

Following Hurricane Ike, the Clear Creek Independent School District (“CCISD”) contracted with Cotton Commercial USA (“Cotton”) for restoration services of some of its facilities. After the work was substantially completed, the school district discovered that Cotton USA had fabricated some of its invoices. The school district filed suit, alleging fraud and seeking refund of some of the money it had paid Cotton. Cotton counterclaimed for the balance owed to it on the work it had performed, and moved to compel arbitration.

The arbitrator awarded Cotton $669,122.60 in damages against the school district. When Cotton moved to confirm the award in court, the school district asserted governmental immunity. Specifically, the school district asserted that the Local Government Contract Claims Act did not apply because the parties’ contract lacked an essential term because it did not identify the scope of work.

As in SARA v. Austin Bridge & Road, L.P., the court concluded that the school district’s immunity was a question to be resolved by the court, not the arbitrator.

Evaluating that question, the court observed that immunity is only waived for suits on contracts that are in writing and “state the essential terms of the agreement.” There is no statutory definition of “essential terms,” and each contract must be reviewed on a case-by-case basis.

In this case, the contract described the parties’ basic obligations: restoration services and related removal and disposal services in exchange for valuable consideration. The agreement afforded Cotton significant discretion to identify tasks necessary to restore and reopen the school facilities. Under these circumstances, the court concluded that the agreement contained enough detail to enable it to determine the parties’ obligations, and hence contained the essential functions. Accordingly, the court found the agreement to be within the scope of the Contract Claims Act, and the school district’s immunity to therefore be waived.

The SARA and CCISD cases underscore some longstanding concerns about arbitration agreements with public entities. Two of the primary purposes of arbitration are speed and confidentiality. But as these two cases reflect, arbitration involving claims against a public entity will often not be speedy because the public entity always retains the ability to assert its immunity in court. Moreover, because of the Texas Public Information Act, the objective of confidentiality of arbitration awards can never be fulfilled when one party is a public entity.

We would thus counsel caution in entering into an arbitration agreement when one party is a public entity, as it may lead to more problems than it solves.

Kilgore Indep. Sch. Dist. v. Axberg, —S.W.3d —, 2017 WL 4542865 (Tex. App.—Texarkana Oct. 12, 2017, no pet. hist.).

Governmental immunity can turn lawyers into contortionists—requiring them to shape their claim to fit the scope of the court’s limited jurisdiction over public entities. But as Kilgore ISD demonstrates, the right suit to challenge an unconstitutional action is a simple suit against the public entity itself.

The Kilgore ISD voted to repeal the local option homestead exemption in 2015. A subsequent constitutional amendment prohibited any local taxing authority from repealing a homestead exemption that was in place in 2014 before 2020. Nonetheless, Kilgore ISD continued collecting taxes based on the repeal of the homestead exemption. Three taxpayers sued seeking declaratory judgment, a permanent injunction, and a tax refund alleging that Kilgore ISD’s board of trustees and superintendent had acted ultra vires in the continued assessment and collection of taxes that would have been avoided by the homestead exemption.

Governmental entities are generally immune from suit in the absence of a legislative waiver. But immunity does not prohibit suits against a state official in his/her official capacity who acts outside his/her authority (i.e., ultra vires).

Applying those concepts, the court held that the actions of the board and superintendent were not ultra vires. With respect to the superintendent, the court held that an ultra vires claim against a government actor must be confined to that defendant’s conduct. In other words, a plaintiff cannot bring an ultra vires suit against an apex representative who had nothing personally to do with the allegedly ultra vires action. The superintendent did nothing more than follow board directives, which was within the scope of her authority. Accordingly, the court dismissed the claims against the superintendent.

With respect to the board, the court observed that the core responsibility of a trustee is to vote on propositions that come before the board. A vote or nonvote of a trustee, by definition, cannot be an ultra vires act. And when acting as a body, the actions of the board are the actions of the school district, which is immune to suit. Thus, the trustees could not be sued for an ultra vires act.

Notwithstanding the dismissal of the ultra vires claims, the suit against the school district itself could go forward, because immunity does not apply when a suit challenges the constitutionality or validity of a statute and seeks only equitable relief. In this case, the taxpayers allege that the repeal of the homestead exemption was unconstitutional. Their suit for refund of overpaid taxes paid under duress, moreover, did not seek monetary damages, but rather constituted equitable relief.