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Texas Supreme Court Holds that Proprietary-Governmental Function Analysis Applies to Immunity Questions in Breach-of-Contract Suits

By: Kyle Burke

Governmental immunity generally shields political subdivisions of the state—such as counties, municipalities, and school districts—from lawsuits.  This immunity is not inherent, but derived from the state.  But Texas courts have long recognized that acts performed as part of a municipality’s proprietary function do not implicate the state’s immunity for the simple reason that they are not performed under the authority, or for the benefit, of the sovereign.  Proprietary functions are those functions performed by a city, in its discretion, primarily for the benefit of those within the corporate limits of the municipality.  Thus, when the basis of a suit against a city is a proprietary function, the city enjoys no immunity.  This governmental-proprietary dichotomy had long been recognized by Texas courts in tort claims, but the Texas Supreme Court had never clearly adopted this doctrine in breach-of-contract cases, and the courts of appeals were split on the issue.  The Texas Supreme Court finally resolved this issue in Wasson Interests, Ltd. v. City of Jacksonville, No. 14-0645, 2016 WL 1267697 (Tex. Apr. 1, 2016).

Wasson Interests, Limited (Wasson) sued the City of Jacksonville (City), seeking injunctive and declaratory relief after the City sent Wasson an eviction notice for violating the terms of a lease agreement for lakefront property owned by the City.  The City filed a summary judgment motion on several grounds, including governmental immunity. The trial court granted the motion without comment. Wasson appealed, and the court of appeals affirmed based on governmental immunity, rejecting Wasson’s argument that the proprietary-governmental dichotomy applied in the contract-claims context.  The Texas Supreme Court reversed.

The high court first reasoned that Texas courts have long recognized the governmental-proprietary dichotomy in tort cases, and while the supreme court had never expressly recognized it in contract cases, Texas courts of appeals had.  And whether the claim is tort or contract based, the basis for applying the dichotomy is rooted in the fact that a city is cloaked in the state’s immunity only when it acts as a branch of the state, not when it is exercising a proprietary function.

The court also concluded that Chapter 271 of the Local Government Code—which waives immunity of municipalities in certain breach of contract cases—does not abrogate the common-law dichotomy because the dichotomy is applied to determine whether there is immunity in the first place, while Chapter 271 acts to waive already existing immunity in certain circumstances.  And Chapter 271’s failure to mention the common-law dichotomy could not reasonably be read as disapproving of its application in the contract-claims context.

The court also rejected the argument that application of the governmental-proprietary test is unworkable, noting that Texas courts have long applied the test and that the Legislature has provided some guidance in the Texas Tort Claims Act’s definitions of governmental and proprietary functions.

Ultimately, the supreme court concluded that sovereign immunity does not imbue a city with derivative immunity when it performs proprietary functions. This is true whether a city commits a tort or breaches a contract, so long as in each situation the city acts of its own volition for its own benefit and not as a branch of the state. Therefore the common-law distinction between governmental and proprietary acts applies in the contract-claims context just as it does in the tort-claims context.  The court remanded the case to the court of appeals to determine whether the lease contract between the City and Wasson was proprietary or governmental.

Moving forward then, Texas litigants involved in claims against cities or other local governments must be cognizant of the governmental-propriety dichotomy and its analysis, whether such claims arise in tort or contract.