The existence of a contract with the government,
in and of itself, does not give a contractor the right to sue
if the government causes the contractor to incur additional costs.
The government must waive its sovereign immunity from suit (i.e.,
agree to be sued) in order to be subject to legal action. Entering
into a contract does not always constitute a waiver of sovereign
immunity. But Congress and some states have enacted laws waiving
immunity in certain circumstances. Also, some state courts have
eliminated, or enacted exceptions to, sovereign immunity.
If immunity always prevented lawsuits against the government
for breach of contract, contractors would have to increase their
bids to cover the risk of the government causing unrecoverable
damages. To avoid this result, most states have altered immunity
in some fashion. Immunity typically is not an issue when contracting
with the federal government, since Congress has enacted the Contract
Disputes Act, created administrative procedures, and created
the Federal Claims Court to handle most contractor claims. Some
states and local governments have followed the federal government’s
example in some form.
Is Misrepresentation In The Construction Context Fraud or
a Breach of Contract?
But the laws regarding immunity vary state to state, and some
governmental entities continue to claim sovereign immunity in
response to breach-of-contract claims by contractors. This is
especially true when the governmental entity’s conduct
is fraudulent. Recently in Colorado, for example, Jefferson County
(the “County”) argued that governmental immunity
prohibited a contractor from suing for additional compensation
when the government provides defective project drawings, and
makes misrepresentations of the site conditions in bidding documents
that cause the contractor to incur additional costs. Camas Colorado,
Inc. v. Board of County Commissioners, 36 P.3d 135 (Colo. App.
2001). The contract was for roadway construction. The bidders
were concerned about utility relocations. So in an addendum to
the contract, the county stated that it:
is working with the utility companies on the schedule and
location of relocated utility lines. [The County] does not
feel that utility relocation work will conflict with the
roadway construction and should not have a negative impact
on the construction schedule.
But utility relocation work did conflict with roadway construction,
and negatively impacted the construction schedule. The contractor,
in suing to recover its increased costs, alleged that the County
knew that utility relocation work would conflict with its work
and impact the schedule. In Colorado, a contractor can sue the
government for breach of contract, but not for torts such as
fraud or negligent misrepresentation. The County argued that
its conduct, as alleged, was so egregious that it constituted
fraud or negligent misrepresentation, not a breach of contract.
The trial court agreed, and dismissed the contractor’s
lawsuit, ruling that sovereign immunity protected the County
from lawsuits based on misrepresentations.
The Colorado Court of Appeals reversed the trial court’s
decision, and held that the contractor may maintain a breach-of-contract
claim against the County, even if the County’s conduct
would support a claim for fraud or negligent misrepresentation.
The Court of Appeals recognized that the addendum itself was
a part of the contract, and that the contract contained specific
provisions for payment of additional costs resulting from delays
caused by action or inaction by the County. Therefore, the contractor
could sue for breach of contract, despite the fraudulent nature
of the County’s alleged conduct.
The Colorado Court of Appeals previously explored the distinction
between contract and tort claims in the context of a failure
to disclose in Grimm Construction Co., Inc. v. Denver Board of
Water Commissioners, 835 P.2d 599 (Colo. App. 1992). There the
Denver Board of Water Commissioners (“Board”) contracted
with Grimm for the replacement of two underground conduits. During
the project, the City of Denver (“City”) imposed
certain traffic restrictions that interfered with Grimm’s
performance of the contract and increased its costs. Grimm sued
both the Board and the City for interference. Grimm also sued
the Board for failure to disclose key information to prospective
bidders before awarding the contract. The trial court dismissed
all of Grimm’s claims, concluding that they all could be
tort claims.
While affirming the dismissal of the claims against the City,
with whom Grimm did not have a contract, the Colorado Court of
Appeals held that the trial court erred in dismissing the claims
against the Board. The same claims that were properly dismissed
as tort claims against the City should not have been dismissed
against the Board, because the Board’s duty regarding its
disclosures to bidders was contractual.
Other states have also addressed the applicability of sovereign
immunity in cases where the owner of a public-works project breaches
its contractual duties by misrepresenting site conditions. In
California, Souza sought to bring claims against the City of
Salinas based on a misrepresentation in bidding documents. Souza & McCue
Construction Co., Inc. v. Superior Court, 57 Cal. 2d 508, 370
P.2d 338 (1962). Souza alleged that the City knew prior to entering
into the construction contract that the soil at the site was
unstable, that the City failed to inform Souza, that the City
represented in the plans that the soil was stable with the intent
of inducing Souza to make a low bid, that Souza relied on the
misrepresentation, and that, because of the unstable soils, the
cost of doing the work was much higher than it otherwise would
have been. The City alleged that the claim was barred by governmental
immunity. According to the Court:
A contractor of public works who, acting reasonably, is
misled by incorrect plans and specifications issued by the
public authorities as the basis for bids and who, as a result,
submits a bid which is lower than he would have otherwise
made may recover in a contract action for extra work or expenses
necessitated by the conditions being other than represented.
. . . This rule is mainly based on the theory that the furnishing
of misleading plans and specifications by the public body
constitutes a breach of an implied warranty of their correctness.
The fact that a breach is fraudulent does not make the rule
inapplicable.
Thus, although based on fraudulent activity, Souza’s claim
was for a breach of a “contractual duty.” The Court
held that governmental immunity did not bar Souza’s claims,
reasoning that:
When the state makes a contract with an individual, it
is liable for a breach of its agreement in like manner as
an individual, and the doctrine of governmental immunity
does not apply.
For several years claims by contractors against the federal
government based on misrepresentations have been allowed on the
theory that the misrepresentation constitutes a breach of warranty.
In Hollerbach v. U.S., 233 U.S. 165, 34 S.Ct. 553 (1914), the
government made specific representations regarding the type of
material to be excavated from behind a dam. The contract documents
also contained a cautionary provision, warning bidders to inform
themselves of the conditions of the site. When the contractor
undertook the work, it discovered that the material was not as
the government represented. The nature of the conditions actually
encountered made it much more expensive to do the work than if
the conditions had been as represented. Despite the cautionary
provision in the contract documents, the Supreme Court of the
United States held that the contractor was entitled to additional
compensation from the government due to the misrepresentation.
According to the Court:
[T]he specifications assured them of the character of the
material,--a matter concerning which the government might
be presumed to speak with knowledge and authority. We think
this positive statement of the specifications must be taken
as true and binding upon the government, and that upon it,
rather than upon the claimants, must fall the loss resulting
from such mistaken representations.
Similar claims have been allowed even when the misrepresentations
were willful. See, e.g., Christie v. U.S., 237 U.S. 234, 35 S.
Ct. 565 (1915). And today many of these problems are addressed
by changed-conditions clauses in government contracts. But sovereign
immunity can still bar breach-of-contract actions in some contexts.
What Waives Immunity In One State May Not Waive Immunity
In Another
First, it is not safe to assume that all governmental entitles
have waived immunity for breach-of-contract suits. In 1997, the
Supreme Court of Texas held that the State, by entering into
a contract, waives immunity from liability, but not immunity
from suit. Federal Sign v. Texas Southern University, 951 S.W.2d
401 (Tex. 1997). Texas Southern University (“TSU”)
hired Federal Sign to construct a basketball scoreboard. Federal
Sign later sued TSU for breach of the contract. TSU argued that
its sovereign immunity barred the suit because Federal Sign had
not obtained legislative consent to sue TSU.
The trial court disagreed, and entered judgment in Federal
Sign’s favor. TSU appealed, eventually taking the case
to the Supreme Court of Texas. In Texas, the state and all of
its agencies and officials are immune from suit and immune from
liability. Waiver of one does not constitute a waiver of the
other. So a waiver of immunity from liability is not enough.
Without a waiver of immunity from suit, there is no remedy to
enforce the liability. The Supreme Court of Texas held that Federal
Sign had no recourse to enforce its contract with TSU, unless
the legislature independently gives permission to Federal Sign
to sue TSU.
According to the Court, it is up to the legislature, on a case-by-case
basis, to waive immunity from suit. Under this rule, Texas and
its agencies can avoid contractual responsibility simply by refusing
to give permission to be sued, unless perhaps its conduct somehow
evidences a waiver of immunity from suit. After Federal Sign,
the Texas legislature established an administrative procedure
for certain breach-of-contract claims against the Texas. See
General Service Commission v. Little-Tex Insulation Company,
Inc., 39 S.W.2d 591 (Tex. 2001). But there is nothing stopping
the legislature from repealing this law.
Indian Tribes Also Enjoy Immunity
Second, many contractors do not realize that federal and state
governments and municipalities are not the only entities with
sovereign immunity in the United States. Indian tribes also enjoy
sovereign immunity. An Indian tribe is not subject to suit in
a state court, even for breach of contract involving off-reservation
commercial conduct, unless Congress has authorized the suit or
the tribe has waived its immunity. So, if a tribe contracts for
construction of a project, even on non-reservation land, it enjoys
immunity from suit in state courts absent a waiver or authorization
from Congress.
The United States Supreme Court recently addressed whether
the arbitration provision in a standard AIA contract is sufficient
to constitute a waiver of tribal immunity. C&L Enterprises,
Inc. v. Citizen Band of Potawatomi Indian Tribe of Oklahoma,
532 U.S. 411, 121 S.Ct. 1589, 149 L.Ed.2d 623 (2001). C&L
entered into a contract for construction at an off-reservation
building with the Citizen Band of Potawatomi Nation (the “Tribe”).
C&L later filed a demand for arbitration, arguing that the
Tribe breached its contract. The Tribe refused to participate
in the arbitration, asserting sovereign immunity.
The arbitrator entered an award for C&S. C&L later
filed suit in an Oklahoma court to enforce the arbitration award.
The Tribe filed a motion to dismiss the lawsuit, again asserting
sovereign immunity. The key question was whether the contract
constituted a waiver of the Tribe’s immunity. The contract,
a standard AIA form, required that all disputes between the parties
related to the contract be arbitrated according to the rules
of the American Arbitration Association. Pursuant to the applicable
rules of the American Arbitration Association, the parties to
such a contract consent that a judgment upon an arbitration award
may be entered in any federal or state court having jurisdiction.
The contract was governed by Oklahoma law, which states that
entering into an agreement providing for arbitration in Oklahoma
confers jurisdiction on Oklahoma courts to enforce the agreement
and to enter judgment on an arbitration award.
The trial court held that the Tribe waived its sovereign immunity,
and entered judgment confirming the award. Later, the court of
appeals reversed the trial court, holding that the contract language
above did not constitute a clear waiver of sovereign immunity.
But the United States Supreme Court disagreed. According to the
Court, the Tribe agreed to adhere to certain dispute-resolution
procedures. This included submitting all disputes to arbitration,
being bound by an arbitration award, and agreeing to enforcement
of an arbitration award by a court with jurisdiction. The Tribe
argued that the parties agreed to arbitrate, but that no court,
federal, state or tribal, has jurisdiction to enforce an arbitration
award. The Court was not impressed with this argument, stating
that the arbitration agreed to “has a real world objective;
it is not designed for regulation of a game lacking practical
consequences.”
Conclusion
Despite the holding in C&L Enterprises, Inc., it is too
risky to assume that an arbitration clause will be a clear waiver
of an Indian tribe’s sovereign immunity. Instead, the parties
should negotiate the issue of sovereign immunity, and include
specific language in the contract dealing with the issue. This
will avoid ambiguity and future arguments regarding whether or
not the tribe waived sovereign immunity.
The cases above demonstrate that special care must be taken
when contracting with an entity that has sovereign immunity.
States can have dramatically different laws regarding sovereign
immunity, and what constitutes a waiver of that immunity in one
state does not necessarily constitute a waiver in another. Contractors
must know their rights in order to properly access the risk of
non-performance or breach by the owner. This includes whether
sovereign immunity applies, how that immunity can be waived,
whether there is any administrative claims procedure for disputes
arising out of the contract, and whether such procedure is exclusive.
Timothy
W. Gordon, Esq. is an associate in Holland & Hart LLP's Construction and Real Estate Litigation Group. |
