Texas state agencies are immune from liability and suit with respect to most causes of action against it under the doctrine of sovereign immunity, including for construction contracts. This immunity applies unless expressly waived by Texas statute. The Texas Supreme Court recently addressed one of these waivers in Pepper Lawson Horizon International Group, LLC v. Texas Southern University involving a contractor asserting a state agency failed to make payment per their construction contract. The Court’s ruling in Pepper Lawson has major implications for Texas contractors doing work with Texas state agencies.

Texas Southern University (“TSU”) entered into a written contract with Pepper Lawson Horizon International Group, LLC (“Contractor”) related to construction of new student housing (the “Project”). Over the course of the Project, disputes arose related to delays, liquidated damages, Contractor’s additional costs, and the validity of Contractor’s requests for time for excusable delay (for example, after the work began, Contractor encountered “undisclosed underground obstructions” from a previous building, including a pool, basement walls, and piers, which remained buried under the jobsite). TSU refused to extend the Project completion date or pay for the additional costs. Contractor final invoiced TSU for the amount claimed it was due, but TSU refused to pay.

Ultimately, Contractor sued TSU for breach of contract for the amounts claimed owed, as well as for interest and attorneys’ fees under the Texas Prompt Pay Act. Importantly, Contractor specifically asserted in its lawsuit that TSU waived its sovereign immunity and was subject to liability and suit pursuant to Section 114.003 of the Texas Civil Practice and Remedies Code. TSU responded by asserting that Section 114.003 did not apply because Contractor did not file a lawsuit that was covered by Section 114.003, seeking to dismiss the case.

Section 114.003 waives immunity to lawsuits against a state agency that “enters into a contract subject to [Chapter 114]” but only “for the purpose of adjudicating a claim for breach of an express provision of the contract.” Chapter 114 “applies only to a claim for breach” of certain contracts, including “a contract for . . . construction services or for materials related . . . construction services brought by a party to the written contract.” Section 114.002. Additionally, the amount in controversy must be at least $250,000.

While seemingly applicable to Contractor’s claims against TSU, TSU argued sovereign immunity had not been waived for the Contractor’s claims, Contractor failed to point to a specific contractual provision it breached, and the Prompt Pay Act does not expressly waive sovereign immunity. The trial court denied rejected TSU’s argument, but the Court of Appeals reversed, dismissing the suit. Contractor appealed the decision to the Supreme Court which reversed the Court of Appeals ruling, remanding the case back to the trial court.

The Supreme Court ruled that where there is a claim for breach of an express provision of that contract that falls within the Section 114.003 requirements, Section 114.003 unambiguously waives sovereign immunity from suit on breach of contract claims against a state agency for contracts to provide construction services and materials. More simply, the Court ruled that the question was not whether a clear and unambiguous waiver existed under Section 114.003, but whether the breach of contract allegations and damages claim falls within the scope of that express statutory waiver.

Additionally, the Supreme Court held that because contract expressly incorporated and required compliance with the Texas Prompt Pay Act, and the categories of damages under the Texas Prompt Pay Act are recoverable damages listed in Section 114.003, the Texas Prompt Pay Act claims could also be considered by the trial court, which included Contractor’s attorney’s fees and interest.

Why is clarifying the applicability of an immunity waiver such a big deal? Because the cost Pepper Lawson incurred to have the dispute heard by the Texas Supreme Court was large.  Many contractors would have walked away after the owed amounts after the appellate court found immunity. Contractors can be hopeful this will add clarity and streamline the litigation process.

This case is another example of the complex landscape of construction law and the developing cases impacting your risk management processes and, ultimately, your bottom. Our attorneys in Dallas and Austin are available to answer any questions you may have and to help you and your company understand the litigation process. Contact us at info@gstexlaw.com if you have any questions.

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