By a 5-4 majority, the Texas Supreme Court has held that a clause in a construction contract between a governmental entity and a private contractor that requires binding arbitration of disputes is enforceable. San Antonio River Authority v. Austin Bridge & Road, LP and Hayward Baker, Inc. (17-0905; decided May 1, 2020) involved a contract for repair of the Medina Lake Dam. Four governmental entities–Bexar County, the Bexar County Metropolitan Water District, the San Antonio River Authority, and the Edwards Aquifer Authority–entered into a cooperative agreement to fund the repairs and designated the River Authority as the project manager. The River Authority contracted with Austin Bridge for the work, and Austin Bridge subcontracted part of the work to Hayward Baker. Inevitably, the project suffered cost overruns, which the contractors alleged resulted from faulty design and specifications provided by the River Authority. When the River Authority refused to pay, the contractors invoked the contract’s binding arbitration provision. The River Authority appeared before the arbitrator and moved to dismiss the proceeding, claiming it had governmental immunity. When the arbitrator denied the motion, the River Authority brought suit in district court. Both parties moved for summary judgment on the immunity issue. The trial court ruled in favor of the contractors and enforced the arbitration provision. The River Authority appealed; the San Antonio Court of Appeals reversed in part, upholding the authority of the governmental entity to enter into a binding arbitration agreement but striking down the trial court’s determination that the arbitrator had the power to determine whether the River Authority had immunity. The River Authority appealed to SCOTX.
In a opinion by Justice Bland, joined by Justices Green, Lehrmann, Blacklock, and Busby, SCOTX affirmed the appellate court’s decision. After a close analysis of the pertinent sections of Chapter 271, Local Government Code, which waives immunity for certain contract claims between governmental entities and private vendors, Justice Bland concluded that the statute authorizes both binding arbitration as a means of resolving contract disputes and a governmental entity to make an agreement mandating binding arbitration. In the second part of the opinion, Justice Bland agreed with the Court of Appeals that only a court, not an arbitrator, may determine matters of governmental immunity, holding that “parties cannot contractually agree to define a court’s jurisdiction.” A third issue in the case involved whether the contractor’s damage claims constituted “consequential damages,” which are generally not recoverable under Chapter 271. Here the Court held that the contractors could pursue their claim for the additional materials and labor costs caused by the faulty specifications provided by the River Authority, since they may constitute direct damages flowing “naturally and necessarily” from the alleged breach.
Four justices disagreed. In an opinion by Justice Boyd, joined by Chief Justice Hecht and Justices Guzman and Devine, the dissenters argued that the Government Dispute Resolution Act (Chapter 2009, Government Code) and Alternative Dispute Resolution Act (Chapter 154, CPRC) do not authorize a governmental entity to enter into an agreement requiring binding arbitration, only nonbinding arbitration or mediation. In response to the majority’s holding that Chapter 271 creates an exception to the general rule laid down by those statutes, Justice Boyd parses the language of the statute (§271.154) to show that it does not in fact make binding arbitration proceedings enforceable against governmental entities, but only arbitration procedures already authorized under the GDR and ADR acts. Justice Boyd further found no implied authority in Chapter 271 that would mandate enforcement of a binding arbitration provision as in this case.
While it is unclear what practical effect this decision will have beyond the parties in the case, it does seem to reveal different viewpoints on the court regarding the scope of binding arbitration, particularly where publicly funded entities are involved. Both the majority and the dissenters agree that private parties may pick their poison under federal and state arbitration acts, but they vehemently disagree over whether the Legislature has explicitly authorized governmental entities to contract away adjudication by the constitutionally constituted arbiters of justice chosen by the people.