Construction and the Law in Texas

To say public ownership of horizontal construction projects is commonplace would be an understatement in our industry. While private developers and owners do construct infrastructure projects or improvements, public ownership of highway, water, wastewater and roadway projects is the norm. When claims arise on these projects due to problems with design, quantities, changes or owner interference, for example, the type of owner and statutory framework applicable to the projects makes a difference in what types of damages might be recoverable.

On projects owned by the Texas Department of Transportation (TxDOT), claims are governed by TxDOT’s rules. These rules are published in the Texas Administrative Code. I’ve previously written, in this publication, about the administrative claims process applicable to TxDOT jobs. In that article, I described the process TxDOT has outlined in Rules 9.1 and 9.2 of the Texas Administrative Code. 43 T.A.C. §9.1-9.2. Section 9.2 does not place any limitations on the types of damages that are recoverable for any claim against TxDOT. That section allows claims “for compensation, for time-extensions, or for any other remedy.” 43 T.A.C. §9.2(a)(2). Rather than limiting the categories of damages as a jurisdictional issue, the hurdle in claims against TxDOT is more procedural, as the previous article discussed.

When, on the other hand, a project is owned by a municipality, a county, a special utility district, or any other local governmental entity, sovereign immunity laws affect the recoverability of damages. The legislature has waived sovereign immunity for contract claims against local governmental entities, so contractors may sue governmental owners for breach of contract when claims arise. TEX. LOC. GOV’T CODE §271.152. However, the legislature has placed limitations on the types of damages that are recoverable in such suits. TEX. LOC. GOV’T CODE §271.153.

Section 271.153 limits both the size of the claim and the types of recoverable damages. As to size, the claim is limited to the balance due and owed under the contract, including base contract amount and any authorized change order along with the amount owed for any changes or extra work that was directed to be performed by the owner. TEX. LOC. GOV’T CODE §271.153(a)(1),(2). Keep in mind that the second limitation is going to be most commonly used when there is a discrepancy in the plans and specifications or extra work performed as a result of design errors or directives given by the owner.

Section 271.153 does limit the categories of allowable damages. Damages sought against a local governmental owner cannot include consequential damages, exemplary damages, or unabsorbed home office overhead. TEX. LOC. GOV’T CODE §271.153(b). There is an exception to the prohibition against consequential damages – damages directly attributable to owner-caused delays or acceleration are allowed. TEX. LOC. GOV’T CODE §271.153(a)(1).

Depending on how creative your claims staff or attorneys may be, there are ways to limit the application of the consequential damages prohibition. Some courts have disagreed about the direct or consequential character of certain types of damages. For example, while not specifically excepted from the prohibition, lost-productivity and efficiency claims could be claimed as direct damages resulting from owner directives relating to performance. Some courts might view these categories of damages as direct while others might characterize them as consequential. In order to prevent the disqualification of certain damage categories, careful claim preparation and pleading is required.

Having chapter 271 apply to claims against local governmental entities may limit certain types of damages, but it does provide a reliable framework upon which a claim can be judged. Once a claim has been presented, it proceeds directly to litigation or arbitration. There is no discretionary review of claims against local governments like there is for claims against TxDOT.

As I have stated in the previous article, while TxDOT’s executive director is supposed to review and certify claims based on certain criteria, there is a high degree of discretion retained by the executive director to limit or reduce recommended payments of claims. This discretion can seem arbitrary if you are a claimant and your damages could be limited based on a disagreement or different view of the dispute held by officials at TxDOT.

When litigating against a local governmental owner under chapter 271, at least claimants know going into the contract what risks they are accepting in having certain damages disallowed as a matter of law. This knowledge should allow for consideration and proper pricing based on that accepted risk at the outset of a project.

– As seen in the June 2012 Issue of Texas Contractor.