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(A revised version of this article appears in The Construction Lawyer, Volume 21, No. 3, July 2001, published by the American Bar Association's Forum on the Construction Industry.)

By John W. Ralls

The Texas Supreme Court granted petitions for review in two breach of contract actions brought by contractors against the State of Texas. The issues presented in both cases centered on sovereign immunity.

The trial courts in both cases dismissed on the ground that the state had not waived immunity from suit. Both Courts of Appeals reversed, one on the ground that the state's acceptance of the benefits of performance constituted a waiver of immunity; the other to allow the contractor to discover information concerning such a waiver. The Texas Supreme Court held that the trial courts' dismissals were proper.

The Supreme Court previously had held that the state does not waive its immunity from suit for breach of contract simply by entering into a contract. Federal Sign v. Texas S. Univ., 951 S.W.2d 401, 408 (Tex. 1997). However, prior Texas Court of Appeals decisions had held that by accepting the benefits of performance of the contract, the state waived immunity from suit. The contractors urged the Supreme Court to adopt the position of the Courts of Appeals. The contractors "contend[ed] that once the State has accepted benefits under a contract, it is unfair to allow the state to shield itself from suit by evoking sovereign immunity."

The state took the position that express legislative consent to sue is necessary. The Supreme Court rejected the contractors' argument and accepted the state's position. General Services Commission v. Little-Tex Insulation Co., Inc., 39 S.W.3d 591 (Tex. 2001)

The court relied on the 1999 enactment of Chapter 2260 of the Texas Government Code. Under it, the state retained sovereign immunity from suit in breach of contract cases. Chapter 2260 provides an administrative process to resolve such claims.

Chapter 2260 provides that a contracting party may request a contested case hearing before the state Office of Administrative Hearings. If the administrative judge determines that the party has a valid claim for less than $250,000, the state must pay the claim, if possible, with money previously appropriated for breach of contract claims. If the administrative judge determines that the party has a valid claim for more than $250,000, the administrative judge issues a written report recommending that the Legislature appropriate funds. The Legislature then may accept or reject this recommendation after weighing appropriate policy concerns.

Under Chapter 107 of the Texas Civil Practice and Remedies Code, parties may petition the Legislature for consent to sue the state. The court concluded that Chapter 2260 contemplates no means to sue the state for breach of contract other than pursuing an administrative claim and then petitioning the Legislature for consent to sue under Chapter 107. Section 2260.005 provides, "The procedures contained in this chapter [2260] are exclusive and required prerequisites to suit in accordance with chapter 107, Civil Practice and Remedies Code."

The Supreme Court held: "Consequently, we conclude there is but one route to the courthouse for breach-of-contract claims against the state, and that route is through the Legislature."

Both contractors also raised constitutional claims. One contractor mounted a takings challenge, claiming that the state had taken its labor and materials without due compensation. The court held that the takings challenge failed because the state does not have the requisite intent under constitutional-takings jurisprudence when it withholds money in a contract dispute. "Rather, the State is acting within a color of right under the contract and not under its eminent domain powers."

The other contractor argued that the administrative claim procedure violated the separation of powers doctrine by providing that the Legislature would resolve breach of contract claims through administrative hearings without permitting any review power by the judiciary. The court rejected this argument as well. Although the legislation expressly precluded judicial review of the administrative judge's findings, the court found that the legislation did not vest any inherent judicial power in the executive or legislative branches. "The administrative judge's written report is not an order; it is simply a recommendation that the Legislature may accept or reject. In determining which course to follow, the Legislature is faced with policy concerns not presented to the administrative judge. Because the Legislature is not reviewing the administrative judge's decision on the merits, it is not exercising a power inherently or historically belonging to the judiciary."

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