Though less than six-months old, 2016 is already a momentous year in Texas governmental immunity jurisprudence. In April, the Texas Supreme Court released three significant governmental immunity decisions that suggest the court is pivoting toward the protection of private interests in dealings with municipalities in some circumstances. In Wasson Interests v. City of Jacksonville1 and Wheelabrator Air Pollution Control v. City of San Antonio,2 the court squarely addressed the applicability of the proprietary- governmental dichotomy in breach of contract claims for the first time, concluding that a municipality does not have governmental immunity when it performs proprietary functions.3 In Houston Belt & Terminal Railway et al v. City of Houston,4 the court clarified the breadth of sovereign immunity for ultra vires actions of government officials, holding that while governmental immunity bars suits complaining of an exercise of absolute discretion, it “does not bar suits complaining of either an officer’s failure to perform a ministerial act or an officer’s exercise of judgment or limited discretion without reference to or in conflict with the constraints of the law authorizing the official to act.”5
Applying the Proprietary-Governmental Dichotomy in the Breach of Contract Context
Sovereign immunity is inherent in statehood and generally protects the state from suits for money damages.6 Political subdivisions of the state share in the state’s inherent immunity, which is referred to as governmental immunity when applied to political subdivisions.7 The practical purpose of governmental immunity is to shield the public from the costs and consequences of the improvident actions of their government, and a political subdivision’s immunity extends only as far as the state’s immunity.8 As a result, the courts have distinguished between those acts performed by a municipality as a branch of the state and those undertaken in the performance of its proprietary, or non-governmental, functions.9 In the tort claims context, the courts have long held that a municipality is not immune from torts committed in its proprietary capacity.10
Prior to its decisions in Wasson and Wheelabrator, the Court had only briefly analyzed the applicability of the proprietary- governmental dichotomy in the breach of contract context. In Tooke vs. City of Mexia,11 the Court concluded that the actions of the city at issue were undertaken in the performance of the city’s governmental functions and refused to determine whether the dichotomy should be extended to breach of contract claims.12 The Tooke decision did, however, establish that when governmental immunity does apply it is only waived by clear and unambiguous language.13 Following Tooke, several courts concluded that a municipality was never subject to suit in a breach of contract claim absent a legislative waiver of immunity.14
In Wasson, the Court rejected that view, explaining that “the state generally enjoys immunity for its lawful functions, which are undertaken on behalf of the ‘the people[,]’”15 and political subdivisions of the state share in the state’s immunity “when acting as the state’s agent and performing governmental functions for the public’s benefit.”16 However, municipal acts that are proprietary in nature are not done as a branch of the state, but rather “for the advantage and benefit of the locality and its inhabitants.”17 As a result, such actions do not implicate the state’s immunity because “they are not performed under the authority or for the benefit of the sovereign.”18 In other words, it is not necessary to look for a legislative waiver of immunity in breach of contract actions when a municipality is acting in its proprietary capacity because those actions are not protected by governmental immunity.
The court acknowledged that the distinction between governmental and proprietary acts is not always clear.19 However, the Court noted that Article XI, section 13(a) of the Texas Constitution authorizes the legislature to “define for all purposes those functions of a municipality that are to be considered governmental and those that are proprietary, including reclassifying a function’s classification assigned under prior statute or common law.”20 In the tort-claims context, the legislature has undertaken to define specific functions as governmental or proprietary through the Tort Claims Act.21
Having decided in Wasson that municipalities do not have immunity from suit for breach of contract claims where the municipality is performing a proprietary function, the Wheelabrator case presented the Court with the question of whether (i) a contract to install pollution control equipment at a power plant was proprietary or governmental in nature and (ii) a claim for attorney’s fees arising from a breach of that contract implicated governmental immunity.22 The Court endorsed the use of the Tort Claims Act as a guide in classifying municipal actions as proprietary or governmental in nature – and thus the boundaries of immunity – in a breach of contract action.23 Relying on guidance from the Tort Claims Act and the common law, the Court determined that the operation of a public utility, in this case a municipally-owned electric and gas utility, was a proprietary function.24 As a result, the public utility was not shielded by governmental immunity, and the claim for attorney’s fees arising from a contract undertaken in a proprietary capacity was not barred by governmental immunity.
Taken together, Wasson and Wheelebrator significantly change the landscape for entities contracting with municipalities when the municipality is acting in a proprietary capacity. Where an action arises out of a municipality’s performance of a proprietary function, a municipality is subject to suit in the same manner as any private person. Municipalities and the entities with whom they contract are then left with the question of when a municipality is acting in its proprietary capacity. The Tort Claims Act defines the proprietary functions of a municipality as those functions that a municipality may, in its discretion, perform in the interest of the inhabitants of the municipality, including but not limited to:
- the operation and maintenance of a public utility;
- amusements owned and operated by the municipality; and
- any activity that is abnormally dangerous or ultrahazardous.25
The Tort Claims Act makes clear that the proprietary functions of a municipality do not include the 36 categories of governmental activities listed under Section 101.0215(a).26 Those 36 categories include a significant portion of the activities undertaken by municipalities, including the operation of water and sewer systems, transportation systems, parks and recreational facilities and parking facilities.27 As a result, it appears that the most immediate impact of recent decisions will be felt in contracts with municipally-owned electric and gas utilities.
The Ultra Vires Exception to Governmental Immunity
Texas law recognizes that governmental immunity protects certain exercises of discretion by governmental officials. However, Texas courts “have long recognized that governmental immunity does not bar claims alleging that a governmental officer acted ultra vires, or without legal authority, in carrying out his duties.”28
Houston Belt & Terminal Railway et al. v. City of Houston clarified the breadth of governmental immunity for ultra vires actions of government officials. The case involved the administration of a city’s drainage-fee ordinance. The ordinance gave the city’s Director of Public Works and Engineering (the “Director”) the authority to administer the provisions of the ordinance, subject to the provisions of the ordinance. Under the ordinance, drainage fees were to be assessed based on whether or not a property was “benefitted” or contained “impervious surface,” and provided guidance in how to assess whether property was benefitted or impervious. At issue was whether the Director, in allegedly improperly following the guidance of the ordinance when assessing the drainage fee, was subject to ultra vires claims. The city argued that the Director’s determinations could not be ultra vires if he had some discretion to make them under the ordinance.
The Court clarified while governmental immunity bars suits complaining of an exercise of absolute discretion, it “does not bar suits complaining of either an officer’s failure to perform a ministerial act or an officer’s exercise of judgment or limited discretion without reference to or in conflict with the constraints of the law authorizing the official to act.”²9 In other words, governmental immunity extends only to those government officers acting in a manner that is consistent with the law. The Court explained that “prohibiting ultra vires suits when an officer acts outside of his the bounds of his granted authority would run counter to the purpose of immunity.”30
While seemingly expanding the ultra vires exception, the Court cautioned against treating the decision as “a new vehicle for suits against the state to masquerade as ultra vires claims.”31 The court noted that while only the exercise of absolute discretion is absolutely protected, the breadth of the grant of authority in issue in a particular case will govern whether a suit attacking the exercise of discretion would be barred by governmental immunity. The more discretion given to a governmental official by the law, the more likely it is that the officials’ actions would be protected.
There are several important takeaways from the Court’s holdings in Wasson, Wheelabrator and Houston Belt & Terminal Railway. The first is the clear understanding that acts performed in the exercise of a municipality’s proprietary functions are not afforded the protection of governmental immunity. For private entities contracting with municipalities in contexts such as electric or gas utilities, these decisions remove some significant complications related to their ability to enforce contractual arrangements. The second is the recognition of the legislature’s ability to classify – and reclassify – municipal functions as governmental or proprietary. While long recognized in the tort-claims context, the application of the proprietary governmental dichotomy in the breach of contract context is likely to open new legislative battles and create legal questions regarding the impact of future legislative changes on existing contracts. Finally, the expansion of the ultra vires exception would appear to give private entities greater opportunities to challenge the administrative implementation or application of laws.