A Texas Court of Appeals recently rejected a retail electric provider’s attempt to sue a Texas public school district for breach of contract—holding that the then-effective supply contract at issue was void and that the school district was therefore immune from suit under state sovereign immunity grounds after finding that the contract’s purported extension violated Texas statutory competitive bidding requirements.
On October 31, 2016, the Texas 12th Court of Appeals upheld a trial court order dismissing TXU Energy Retail Company, LLC’s (“TXU”) breach of contract suit against the Fort Bend Independent School District (the “District”).1 The underlying suit stemmed from a retail electric supply arrangement between TXU and the District that was competitively bid in 2010. The 2010 bid process involved bids for one- and two-year supply contracts covering the period from June 2011 through May 2013. TXU won the bid, and the parties entered into a one-year contract that contained (i) a “blend and extend” provision and (ii) a rollover provision that increased the District’s energy price to a default level if the contract terminated and the District did not switch its locations to a new provider. The contract also provided TXU a one-year unilateral extension option, if written notice were provided to the District at least 90 days prior to contract expiration.
Partway through the first term, the parties triggered the blend and extend provision and negotiated a second contract that included (i) a reduced rate, (ii) a term that ended one year beyond that contemplated by the 2010 competitive bid process, and (iii) a provision expressing that the second contract superseded the first contract. The District subsequently determined that such extension violated Texas statutory competitive bidding requirements, and determined that the second contract was void as a result of such violation (and therefore a nullity). Upon that determination, the District notified TXU that it considered the second contract void. The District initiated a new competitive bid process during which TXU continued to supply it with electricity. TXU was not selected as a part of that process.
In its suit, TXU asserted that the second contract terminated the first contract, after which the District did not switch its service to another provider. According to TXU, those events triggered the rollover provision in the first contract that increased the District’s energy price to a default level. Accordingly, TXU recalculated the District’s invoices for the relevant period to account for the difference between that default rate and the rate it previously invoiced, and it claimed that the District owed it more than $3 million.
The Court of Appeals agreed with the District, and held that the second contract was void as violative of Texas competitive bidding procedures. Since a Texas governmental entity does not waive sovereign immunity in the absence of a valid written contract, the court held that claims stemming from the second contract were barred. Likewise, the court found that the first contract could not have been superseded by the second, void contract. Moreover, the court held that the blend and extend provision does not obviate the need for a competitive bidding process, where the resulting contractual arrangement would exceed the scope of the original bid constraints. It further reasoned that the rollover provision could also not trump the competitive bidding requirements; if taken to an extreme, such reasoning would permit the contract to extend indefinitely—a result the court characterized as surely violative of the intent underpinning statutory competitive bid requirements. Accordingly, the first contract expired in accordance with its terms after its express one-year term expired. While factually oriented to the blend and extend and rollover provisions, the court’s reasoning seems equally applicable to instances where parties may attempt to end-run the competitive bidding requirements through the use of evergreen contracts.
Parties engaged with Texas governmental entities should review the case and the Court of Appeals’ opinion. Contracting with governmental entities can, at times, be complicated and fraught with additional considerations that require thoughtful planning. In particular, parties need to pay attention to extension provisions that could extend such agreement beyond the term considered in the bidding process. The authors recently presented on the topic of "Contracting with Government Entities" at the 2016 University of Texas CLE Gas & Power Institute in Houston. A copy of the paper accompanying that presentation is available here.