Canterbury, Gooch, Surratt, Shapiro, Stein, Gaswirth & Jones

A loophole in Texas law prevents contractors from disputing a governmental entity’s failure to pay.

A recent decision by the Austin Court of Appeals has pointed out a loophole in Texas law that prevents contractors from disputing a governmental entity’s failure to pay for goods or services, where the goods or services were provided to a governmental entity pursuant to a contract executed by a separate governmental entity acting as a “conduit for funding” for the governmental entity that actually received the goods or services.

In North Central Texas Council of Governments v. MRSW Management, LLC, North Central Texas Council of Governments (NCTCG) entered into a “procurement agreement” with the Texas Sate Administration Agency (SAA), which is a subdivision of the Departments of Public Safety (collectively DPS). Pursuant to the procurement agreement, NCTCG was to procure planning services for DPS and act as a “conduit for funding” for DPS. One of the contractors that DPS selected and NCTCG hired to provide services to DPS was MRSW. The funds to pay for the services were to flow from DPS to NCTCG to MRSW. Pursuant to the procurement agreement, NCTCG issued purchase orders to MRSW and MRSW provided the services to DPS and invoiced NCTCG for those services. After DPS terminated the procurement agreement and did not release funds to NCTCG to pay MRSW, NCTCG did not pay invoiced amounts to MRSW.

Seeking to recover these amounts owed, MRSW brought suit against NCTCG. However, MRSW was unable to assert claims against NCTCG due to its governmental immunity and lack of waiver pursuant to Chapter 271 of the Local Government Code. The Austin Court of Appeals held that NCTCG did not waive its immunity because a contract subject to waiver in section 271.152 is defined to mean “a written contract…for providing goods or services to the local governmental entity that is properly executed on behalf of the governmental entity”, and pursuant to the purchase orders, MRSW provided services to DPS, not NCTCG—therefore, the purchase order was not a contract subject to waiver within the meaning of section 271.152.

Unable to recover from NCTCG, MRSW also brought claims directly against DPS and requested that the dispute be referred to the State Office of Administrative Hearings (SOAH) under Chapter 2260 of the Government Code—however, the SOAH judge concluded that the matter should be dismissed because MRSW did not have a direct contract with DPS and therefore did not have a “contract” within the meaning of Chapter 2260. The San Antonio court of Appeals affirmed.

Thus, MRSW was left without a remedy due to a “catch 22” that shielded both NCTCG and DPS. Now it is up to the Texas Supreme Court or the Texas Legislature address this loophole.

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