Businesses contracting with a governmental entity such as a city, a school district, or a public transit service, need to understand what kind of relief they may get if that entity breaches the contract. Governmental entities are immune from suit unless they have expressly waived that immunity by statute. Section 271.153 of the Texas Local Government Code contains a limited waiver of immunity for suits by a party that contracted with the entity, but the party cannot recover all types of damages traditionally available for a breach of contract. Some types of actual damages you might incur upon a breach by the entity are expressly prohibited by the statute and case law.
A party whose contract with a governmental entity has been breached by that entity may recover:
- “the balance due and owed by the local governmental entity,”
- Amounts owed for change orders or additional work the contractor is directed to perform,
- Damages for increased costs caused by the entity’s delays, or
- Acceleration of the project, attorney’s fees (yea!), and interest.
What is “Balance Due and Owed?”
Texas law is somewhat sparse on what “the balance due and owed” actually means. At first blush, it seems to say that is only the monetary amount the entity promised to pay but has not yet paid. However, there is often not a direct monetary arrangement, so the statute seems to limit damages. In recent years, governmental entities have been contracting with companies to provide the entity valuable materials and services, but paying the contractor in non-monetary ways, such as long-term use of governmental property without paying normally-required fees. That saves the taxpayers money, but it makes recovery for withholding that non-monetary consideration after the valuable materials services have been provided more difficult than a direct money-for-services arrangement.
There are now Texas cases that interpret “due and owed” as meaning actual contractual damages, so non-monetary consideration for the contract can be valued. You may need expert testimony for that, and such costs are not recoverable. However, there are limits on the types of those actual damages imposed by the statute. The wronged party may not recover any other consequential damages that are a logical consequence of the breach, such as lost profits, injury to property or persons, or damage to credit reputation. It is important to understand the limits on what you could recover if the contract is breached before you sign a contract with a governmental entity.
You may be excited about landing a government contract because it will bring more public awareness of your business and perhaps lead to further business with that governmental entity. You need to stop and think of the limitation on damages before you sign that contract.
Cowles and Thompson represents and advises contractors who provide various services to a range of governmental entities.