Texas Supreme Court Issues Important Winning Sovereign Immunity Ruling For Texas Contractors

On May 19, 2023, in Pepper Lawson Horizon International Group v. Texas Southern University, the Texas Supreme Court issued a per curium opinion which clarified the burden for contractors to avoid sovereign immunity jurisdictional defenses on construction contract claims against state agencies covered under Tex. Civ. Prac. & Rem. Code §114.003. This was the first time the sovereign immunity issues under §114.003 had been squarely addressed by the Court. In short, the Court, reversing and remanding the Houston 1st Court of Appeal’s ruling, held that the contractor need only show that Chapter 114, not the parties’ contract, applied to unambiguously waive immunity for the construction contract claims for the case to proceed.

In 2014, Pepper Lawson Horizon International Group, LLC entered into a contract with Texas Southern University to construct student housing for TSC. After running into disputes on project completion delays, liquidated damages, additional direct costs, and requests for time for excusable project delays, TSU refused to equitably extend the project completion or pay the claimed additional direct costs and the contract’s final balance. After the parties failed to settle through ADR, Pepper Lawson sued TSU for breach of contract for the amounts claimed owed, as well as for interest and attorneys’ fees under the Prompt Payment Act. Pepper Lawson specifically pleaded the sovereign immunity waiver under §114.003, but TSU filed a plea to the jurisdiction alleging that §114.003 did not apply because Pepper Lawson failed to establish a claim covered by the waiver provision.

The trial court denied TSU’s jurisdictional plea, but the Court of Appeals reversed and rendered dismissing the suit. The Court of Appeals held that Pepper Lawson failed to show that Chapter 114 waived immunity because no express contract provision required TSU to perform as Pepper Lawson alleged. The Court of Appeals further held that TSU was immune from the claims for interest and attorneys’ fees under the PPA because the PPA contains no sovereign immunity waiver. Pepper Lawson appealed the decision to the Texas Supreme Court.

The Supreme Court recognized that §114.003 clearly and unambiguously waives sovereign immunity from suit for breach of contract claims against a state agency, including a state university, for contracts to provide construction services and materials. The Supreme Court also recognized the §114.003 waiver is for a claim for breach of an express provision of the contract and falls within the parameters of recovery under the statute. In other words, it was not whether a clear and unambiguous immunity waiver exists under Chapter 114, but whether the breach of contract allegations and damages claim falls within the scope of the express statutory waiver statute.

The Supreme Court recognized that examining a plea to the jurisdiction does not require an inquiry so far into the substance of the claims that plaintiff would be required to put on its case just to establish jurisdiction. Under that rubric, the Supreme Court acknowledged that Pepper Lawson pleaded that it entered into the construction contract with TSU and that TSU did not timely pay the balance owed under the contract, and pleaded the contract provisions alleged to have been breached. TSU, on the other hand, pleaded that Pepper Lawson could not prevail on its claims under the construction contract, and sovereign immunity applied. The Supreme Court criticized the Court of Appeals’ ruling as conflating statutory construction rules with contract interpretation, improperly requiring Pepper Lawson to show that the construction contract unambiguously waived sovereign immunity and to show a breach of an express provision of the contract. The Supreme Court stated that Pepper Lawson was not required to prove that the contract unambiguously waived immunity from suit for its breach of contract claim, but only had to establish that Chapter 114, not the contract, unambiguously waived immunity. The Supreme Court went on to state that because sovereign immunity is unambiguously waived for Chapter 114 claims, Pepper Lawson was only required to plead facts affirmatively demonstrating the court’s jurisdiction to hear the claims, which it did. The Supreme Court went on to hold that because the contract expressly incorporated and required compliance with the PPA and the categories of damages sought under the PPA are included in allowable damages under Chapter 114, which provides for a clear and unambiguous waiver of immunity as to the allowable damages, the PPA claims could also be considered. The Supreme Court reversed and remanded the case for further proceedings in the trial court.

There are several other statutes that expressly provide for waiver of sovereign immunity when claims are based on breach of construction contracts and damages allowable under such statute, and the High Court’s ruling provides clarity on the standard for waiver of sovereign immunity under Chapter 114 for claims for breach of contract with state government entities subject to the legislation and should serve as a guide for contractors asserting such claims.

If you have any questions about the information in this alert, please contact Brett Schouest (bschouest@dykema.com or 210-554-5269) or your Dykema relationship attorney.