Sharyland Water Supply Corp. v. City of Alton

• Decision Date: 16 December 2011
• Docket Number: No. 09–0223.,09–0223.
• Citation: 55 Tex. Sup. Ct. J. 46,354 S.W.3d 407
• Parties: SHARYLAND WATER SUPPLY CORPORATION, Petitioner, v. CITY OF ALTON, Carter & Burgess, Inc., Cris Equipment Company, and Turner, Collie & Braden, Inc., Respondents.
• Court: Texas Supreme Court

354 S.W.3d 407

55 Tex. Sup. Ct. J. 46

SHARYLAND WATER SUPPLY CORPORATION, Petitioner,

v.CITY OF ALTON, Carter & Burgess, Inc., Cris Equipment Company, and Turner, Collie & Braden, Inc., Respondents.

No. 09–0223.

Supreme Court of Texas.

Argued March 24, 2010.Decided Oct. 21, 2011.Rehearing Denied Dec. 16, 2011.

J.W. Dyer, Sharon Almaguer, Dyer & Associates, McAllen, for Petitioner.

Eileen Marie Leeds, Willette & Guerra LLP, Jeffrey D. Roerig, Rene O. Oliveira, Roerig Oliveria & Fisher, Brownsville, TX, Stephen L. Tatum, Tolbert L. Greenwood, Stephanie Smith Harrison, Andrew Derald Keetch, Cantey Hanger LLP, Fort Worth, TX, John B. Wallace, Berker Lymann, P.C., Houston, TX, Marcus Montalvo, Montalvo & Ramirez, Christopher Allen Funk, Walker & Twenhafel, LLP, Walter J. Passmore, The Passmore Law Firm, McAllen, TX, for Respondents.

R. Carson Fisk, Ford Nassen & Baldwin P.C., Austin, TX, pro se.Shalla Elaine Faria Santos, Allensworth & Porter, LLP, Austin, TX, for Amicus Curiae Texas Council of Engineering Companies, Inc.Yvonne Roselyn Castillo, Austin, TX, for Amicus Curiae Texas Society of Architects, A State Component of the.Chief Justice JEFFERSON delivered the opinion of the Court.

A water supply corporation sued a city and the city's contractors after the contractors installed sewer lines above portions of the corporation's water system. A jury found that the city breached its contract with the water supply corporation and that the contractors were negligent. The court of appeals disagreed, rendering a take-nothing judgment against the water supply corporation, except as to its claim against the city for attorney's fees related to its declaratory judgment action. We agree that the water supply corporation cannot recover against the city, but we disagree that attorney's fees may be awarded. Thus, we affirm in part and reverse in part the judgment as to the city. Because we conclude that the economic loss rule does not preclude a negligence claim against the contractors, however, we affirm in part and reverse in part the court of appeals' judgment with respect to the contractors. We remand this case to the court of appeals to consider issues it did not reach.

I. Factual and Procedural Background

Alton is a municipality located in Hidalgo County. Sharyland Water Supply Corporation is a non-profit rural water supply corporation with offices in Mission, which is also in Hidalgo County. In the early 1980s, Alton constructed a potable water distribution system for its residents.¹ Alton and Sharyland entered into a Water Supply Agreement under which Alton conveyed its water system to Sharyland. In exchange, Sharyland provided potable water to Alton residents and maintained the system. The Water Supply Agreement gave Sharyland a ten-foot easement and required Sharyland to set rates and regulate the water distribution system's operation. After an initial one-year period, Sharyland was responsible for repairing the system and maintaining the lines in conformity with current or future state agency ² rules and regulations.

In 1994, Alton received federal and local grants to install a sanitary sewer system,³ consisting of main sewer lines, residential service connections, and yard lines. 277 S.W.3d at 139–40. A portion of the sewer system was built in the public right-of-way, while another portion connected the sewer system from the public right-of-way to residences. Alton contracted with Carter & Burgess, Inc.; Turner, Collie & Braden, Inc.; and Cris Equipment Company, Inc. (collectively, the contractors) to build the sanitary sewer system. In some locations, Alton's sewer main was installed parallel to Sharyland's water main, so that connecting the sewer main to the residential service line (or “stub-out”) required that the sewer line cross the water main. Construction was completed in 1999.

A year later, Sharyland sued Alton for breaching the Water Supply Agreement, alleging that Sharyland suffered significant injury because Alton's sanitary sewer residential service connections were negligently installed in violation of state regulations and industry standards. Id. at 140. In particular, Sharyland claimed that the location and proximity of the sewer lines to the water system threatened to contaminate Sharyland's potable water supply. Id. Alton counterclaimed, seeking a declaration that the Water Supply Agreement was void. Sharyland also sued the contractors for negligence and breach of contract, contending it was a third party beneficiary of the contractors' agreement with Alton.

Alton filed a jurisdictional plea asserting immunity from suit. The trial court denied the plea, and the court of appeals affirmed in a pre- Tooke decision holding that Local Government Code section 51.013's “sue and be sued” language waived immunity. City of Alton v. Sharyland Water Supply Corp., 145 S.W.3d 673, 681 (Tex.App.-Corpus Christi 2004, no pet.); see also Tex. Loc. Gov't CodeE § 51.013; Tooke v. City of Mexia, 197 S.W.3d 325, 328–29 (Tex.2006) (holding that “sue and be sued” and “plead and be impleaded” did not clearly and unambiguously waive immunity). Alton did not petition this Court for review of that decision.

Back in the trial court, Sharyland successfully moved for summary judgment on Alton's counterclaim. The trial court also granted Sharyland's motion seeking a judgment declaring that Chapter 30, section 317.13 of the Texas Administrative Code (requiring, among other things, certain minimum distances between potable water and sanitary sewer lines) governed the sewer lines at issue in this case. 277 S.W.3d at 141.

The remaining claims were tried to a jury, which found that Alton breached the Water Supply Agreement, that each of the three contractors breached their contracts with Alton, and that Sharyland was a third party beneficiary of those contracts. The jury also found that the contractors' negligence injured Sharyland. The jury awarded identical damages for each of the three claims: $14,000 in past damages and $1,125,000 in future damages. The jury also found that Sharyland had incurred reasonable attorney's fees for trial and appeal. The trial court rendered judgment for Sharyland against Alton and the contractors, jointly and severally, and denied Sharyland's request for injunctive relief to compel Alton to bring the sewer system into compliance with Administrative Code section 317.13.

As to Alton, the court of appeals held that Chapter 271 of the Local Government Code waived immunity on Sharyland's contract claim. 277 S.W.3d at 144; see also Tex. Loc. Gov't CodeE § 271.152 (waiving immunity for certain contract claims against local government entities). Nonetheless, the court held that the damages awarded were not for a “balance due and owed” nor for “change orders or additional work,” and thus were not within the scope of damages allowed by statute. 277 S.W.3d at 146 (citing Tex. Loc. Gov'T CodeE § 271.153). The appellate court rejected Sharyland's arguments that an equitable waiver-by-conduct exception to immunity applied or that Alton's counterclaim negated immunity. Id. at 143. Although the court of appeals concluded that Sharyland could not recover attorney's fees on its contract claim against Alton, the court held that Sharyland could, on remand, segregate and attempt to recover fees attributable to its declaratory judgment on the applicability of Administrative Code section 317.13. Id. at 147–48.

As to the contractors, the court of appeals held that the economic loss rule barred Sharyland's negligence claim. Id. at 155. The court concluded that Sharyland was not a third party beneficiary of Alton's agreement with the contractors, and therefore could not recover either damages or attorney's fees for the contractor's breach. Id. The court affirmed the trial court's denial of Sharyland's request for equitable relief but reversed the remainder of the judgment, rendering judgment that Sharyland take nothing as to everything but its attorney's fees claim for the declaratory judgment. Id. at 158. We granted Sharyland's petition for review.⁴ 53 Tex.Sup.Ct.J. 285 (Feb. 12, 2010).

II. Sharyland's claims against Alton

Alton asserts that it is immune from Sharyland's claims. For several reasons, Sharyland disagrees. First, Sharyland argues, Local Government Code chapter 271 waives Alton's immunity from suit. Second, even if chapter 271 is inapplicable, Alton is not entitled to immunity on claims that are germane to, connected with, and properly defensive to its counterclaim. See Reata Constr. Corp. v. City of Dall., 197 S.W.3d 371 (Tex.2006). Finally, Sharyland asks us to recognize an equitable waiver of immunity, given the extent of Alton's purported misconduct and the threat to public health.

A. Waiver of immunity under Local Government Code section 271.152

Local Government Code section 271.152 provides a limited waiver of immunity for local governmental entities that enter into certain contracts. Tex. Loc. Gov't CodeE § 271.152. To come within the waiver, the contract must be in writing, properly executed, and must state “the essential terms of the agreement for providing goods or services to the local governmental entity.” Id. § 271.151. As the court of appeals noted, no one disputes that the agreements in this case involve services. 277 S.W.3d at 144. Nor does Alton dispute that section 271.152 applies to its contract with Sharyland. Therefore, the court of appeals correctly concluded that section 271.152 waived Alton's immunity. Id.

B. Damages under Local Government Code section 271.153

We next determine whether Sharyland may recover under Local Government Code section 271.153, which limits damage awards against local governmental entities. See Tex. Loc. Gov't CodeE § 271.153(a). Sharyland sought to recover the costs to repair its system, and the court of appeals held that section 271.153(a) prohibits the recovery of money damages for these alleged injuries. 277 S.W.3d at 146. Id. We agree.

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